You should read the following discussion and analysis along with our
consolidated financial statements and the related notes included elsewhere in
this quarterly report on Form 10-Q. The statements in this discussion regarding
our expectations of our future performance, liquidity and capital resources, and
other non-historical statements are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described under "Risk
Factors" in our Annual Report on Form 10-K for the fiscal year ended
In the third quarter of fiscal 2020 we completed the acquisition of
Sources of Revenues We derive a significant portion of our total revenues from sales of licenses of our software applications and products. We do not customize our software for a specific end-user customer. We sell our software applications and products to end-user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers. Our software and products revenue was 41% and 43% of our total revenues for the nine months endedDecember 31, 2019 and 2018, respectively. In recent fiscal periods, we have generated approximately three-quarters of our software and products revenue from our existing customer base and approximately one-quarter of our software and products revenue from new customers. In addition, our total software and products revenue in any particular period is, to a certain extent, dependent upon our ability to generate revenues from large customer software and products deals, which we refer to as enterprise transactions. Enterprise transactions (transactions greater than$0.1 million ) represented 64% and 63% of our total software and products revenue in the nine months endedDecember 31, 2019 and 2018, respectively. Software and products revenue generated through indirect distribution channels was 93% of total software and products revenue in the nine months endedDecember 31, 2019 and was 90% of total software revenue in the nine months endedDecember 31, 2018 . Software and products revenue generated through direct distribution channels was 7% of total software and products revenue in the nine months endedDecember 31, 2019 and was 10% of total software revenue in the nine months endedDecember 31, 2018 . The dollar value of software and products revenue generated through indirect distribution channels decreased$13.6 million in the nine months endedDecember 31, 2019 compared to the nine months endedDecember 31, 2018 . The dollar value of software and products revenue generated through direct distribution channels decreased$6.6 million in the nine months endedDecember 31, 2019 compared to the nine months endedDecember 31, 2018 . Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements, which are not always in our control and can cause this overall percentage split to vary from period-to-period. As such, there may be fluctuations in the dollars and percentage of software and products revenue generated through our direct distribution channels from time-to-time. We believe that the growth of our software and products revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We will continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our software applications could have a material adverse effect on our revenues and results of operations. Our primary original equipment manufacturer agreement is with Hitachi Vantara (formerlyHitachi Data Systems ) ("Hitachi") and allows them to market, sell and support our software applications and services on a stand-alone basis and/or incorporate our software applications into their own hardware products. Our original equipment manufacturer partners, including Hitachi, have no obligation to recommend or offer our software applications exclusively or at all, and they have no 19
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minimum sales requirements and can terminate our relationship at any time. Sales through our original equipment manufacturer agreement, accounted for 11% of our total revenues for the nine months ended months endedDecember 31, 2019 . We also have a non-exclusive distribution agreement covering our North American commercial markets and ourU.S. Federal Government market withArrow Enterprise Computing Solutions, Inc. ("Arrow"), a subsidiary of Arrow Electronics, Inc. Pursuant to this distribution agreement, Arrow's primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. We generated 37% of our total revenues through Arrow in both the nine months endedDecember 31, 2019 and 2018. If Arrow were to discontinue or reduce the sales of our products or if our agreement with Arrow was terminated, and if we were unable to take back the management of our reseller channel or find another North American distributor to replace Arrow, then it would have a material adverse effect on our future business. Our services revenue was 59% of our total revenues for the nine months endedDecember 31, 2019 and 57% of our total revenues for the nine months endedDecember 31, 2018 . Our services revenue is made up of fees from the delivery of customer support and other professional services, which are typically sold in connection with the sale of our software applications. Customer support agreements provide technical support and unspecified software updates on a when-and-if-available basis for an annual fee based on licenses purchased and the level of service subscribed. Other professional services include consulting, assessment and design services, installation services and customer education. Most of our customer support agreements are priced as a percentage of the related net software purchased and are for a one year term. As the end of the annual period approaches, we pursue the renewal of the agreement with the customer. Historically, customer support renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, if our customers choose not to renew their support agreements with us on beneficial terms, or at all, our business, operating results and financial condition could be harmed. Foreign Currency Exchange Rates' Impact on Results of Operations Sales outsidethe United States were 49% of our total revenue for the nine months endedDecember 31, 2019 and 47% of our total revenue for the nine months endedDecember 31, 2018 . The results of our non-U.S. operations are translated intoU.S. dollars at the average exchange rates for each applicable month in a period. To the extent theU.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions generally results in increased revenue, operating expenses and income from operations for our non-U.S. operations. Similarly, our revenue, operating expenses and net income will generally decrease for our non-U.S. operations if theU.S. dollar strengthens against foreign currencies. Using the average foreign currency exchange rates from the three months endedDecember 31, 2018 our software and products revenue would have been higher by$0.4 million , our services revenue would have been higher by$0.8 million , our cost of sales would have been higher by$0.2 million and our operating expenses would have been higher by$0.3 million from non-U.S. operations for the three months endedDecember 31, 2019 . Using the average foreign currency rates from the nine months endedDecember 31, 2018 our software revenue would have been higher by$3.4 million , our services revenue would have been higher by$4.8 million , our cost of sales would have been higher by$1.2 million and our operating expenses would have been higher by$4.6 million from non-U.S. operations for the nine months endedDecember 31, 2019 . In addition, we are exposed to risks of foreign currency fluctuation primarily from cash balances, accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses, which are recorded as a component of general and administrative expenses. We recognized a net foreign currency transaction loss of$0.1 million and$0.2 million three and nine months endedDecember 31, 2019 . We recognized net foreign currency transaction gains of$0.1 million and$0.8 million in the three and nine months endedDecember 31, 2018 , respectively. 20
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Critical Accounting Policies Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, significant judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We consider these policies requiring significant management judgment to be critical accounting policies. These critical accounting policies are: •Revenue Recognition; •Accounting for Income Taxes •Goodwill and Purchased Intangible Assets As a result of the acquisition ofHedvig , the Company acquired goodwill and intangible assets. Determining the fair value of intangible assets requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. Refer to Note 4 of Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on goodwill and intangible assets. Other than the addition of goodwill and purchased intangible assets, there have been no significant changes in our critical accounting policies during the nine months endedDecember 31, 2019 as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" included in our Annual Report on Form 10-K for the year endedMarch 31, 2019 . In addition, please see Note 2 of Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 2 of the Notes to Consolidated Financial Statements included in our fiscal 2019 Annual Report on Form 10-K filed for a description of our accounting policies. Results of Operations Three months endedDecember 31, 2019 compared to three months endedDecember 31, 2018 Revenues Total revenues decreased$7.9 million , or 4%, from$184.3 million in the three months endedDecember 31, 2018 to$176.4 million in the three months endedDecember 31, 2019 . Software and Products Revenue. Software and products revenue decreased$7.9 million , or 9%, from$84.5 million in the three months endedDecember 31, 2018 to$76.6 million in the three months endedDecember 31, 2019 . Software and products revenue represented 43% and 46% of our total revenues in the three months endedDecember 31, 2019 and 2018, respectively. We track software and products revenue on a geographic basis. The geographic regions that are tracked are theAmericas (United States ,Canada ,Latin America ), EMEA (Europe ,Middle East ,Africa ) and APAC (Australia ,New Zealand ,Southeast Asia ,China ,Japan ).Americas , EMEA and APAC represented 53%, 38% and 9% of total software and products revenue, respectively, for the three months endedDecember 31, 2019 . The year over year decline of software and products revenue was 4% in theAmericas , 6% in EMEA and 38% in APAC. ? The decrease inAmericas software and products revenue was primarily the result of a decrease in non-enterprise revenue. ? EMEA software and products revenue decreased primarily as a result of a decrease in enterprise revenue transactions. ? The decrease in APAC software and products revenue was primarily the result of a decrease in enterprise revenue transactions partially offset by an increase in the average enterprise selling price. 21
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Software and products revenue derived from enterprise transactions (transactions greater than$0.1 million ) represented 66% of our software and products revenue in the three months endedDecember 31, 2019 and 65% of our software and products revenue in the three months endedDecember 31, 2018 . Enterprise transaction revenue decreased by$4.2 million , or 8%, in the three months endedDecember 31, 2019 compared to the three months endedDecember 31, 2018 . This was driven by an 11% decrease in the number of enterprise transactions. The average dollar amount of such transactions was approximately$279 thousand in the three months endedDecember 31, 2019 and approximately$268 thousand in the three months endedDecember 31, 2018 . Services Revenue. Services revenue decreased less than$0.1 million , from$99.8 million in the three months endedDecember 31, 2018 to$99.7 million the three months endedDecember 31, 2019 . Services revenue represented 57% of our total revenues in three months endedDecember 31, 2019 and 54% in the three months endedDecember 31, 2018 . Cost of Software and Products Revenues. Total cost of software and products revenues increased$2.0 million , from$6.1 million in the three months endedDecember 31, 2018 to$8.1 million in the three months endedDecember 31, 2019 . Cost of software and product revenue represented 11% of software and product revenue in the three months endedDecember 31, 2019 compared to 7% in the three months endedDecember 31, 2018 . The increase in cost of software and products revenue is related to additional hardware and software royalty costs associated with our appliance and hyperscale product offerings. As sales of our appliances and hyperscale products continue to ramp, we expect the cost of software and products as a percentage of software and products revenue will also increase. Cost of Services Revenues. Total cost of services revenues decreased$0.3 million , or 1%, from$22.8 million in the three months endedDecember 31, 2018 to$22.4 million in the three months endedDecember 31, 2019 . The gross margin of our services revenue was 77% for both the three months endedDecember 31, 2019 and 2018. Operating Expenses Sales and Marketing. Sales and marketing expenses decreased$9.8 million , or 10%, from$94.4 million in the three months endedDecember 31, 2018 to$84.6 million in the three months endedDecember 31, 2019 . The decrease is due to an$8.8 million decrease in employee compensation and related expenses mainly attributable to our restructuring and reorganization initiatives. Sales and marketing expenses as a percentage of total revenues was 48% and 51% in the three months endedDecember 31, 2019 and 2018, respectively. Research and Development. Research and development expenses increased$8.5 million , or 39%, from$22.0 million in the three months endedDecember 31, 2018 to$30.5 million in the three months endedDecember 31, 2019 . The increase is primarily due to an increase in employee-related costs resulting from additional headcount due to the acquisition ofHedvig . Approximately$3.2 million of the increase in employee-related costs is related to noncash stock-based compensation. Additionally, certainHedvig shareholders will receive cash payments totaling$14,100 over the course of the 30 months following the date of acquisition, contingent on their continued employment with the Company. While these payments are proportionate to these shareholders' ownership ofHedvig , under GAAP they are accounted for as compensation expense over the course of the 30 month service period. Research and development expenses for the three months endedDecember 31, 2019 include$1.4 million of expense related to this arrangement. Research and development expenses as a percentage of total revenues was 17% and 12% in the three months endedDecember 31, 2019 and 2018, respectively. General and Administrative. General and administrative expenses increased$3.0 million , or 14%, from$20.9 million in the three months endedDecember 31, 2018 to$23.9 million in the three months endedDecember 31, 2019 . General and administrative expenses in the three months endedDecember 31, 2019 includes$4.4 million of non-routine acquisition costs related to the Company's acquisition ofHedvig inOctober 2019 . General and administrative expenses as a percentage of total revenues was 14% and 11% in the three months endedDecember 31, 2019 and 2018, respectively. Restructuring. In fiscal 2019 we initiated a restructuring plan to increase efficiency in our sales, marketing and distribution functions as well as reduce costs across all functional areas. Restructuring expenses were$2.0 million in the three months endedDecember 31, 2019 . These restructuring charges relate primarily to severance and related costs associated with headcount reductions as well as lease abandonment charges related to the closure of two offices. These charges include$0.7 million of stock-based compensation related to modifications of existing awards granted to certain employees included in the restructuring. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business. 22
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Income Tax Expense Income tax expense was$1.0 million in the three months endedDecember 31, 2019 compared to a benefit of$1.2 million in the three months endedDecember 31, 2018 . The income tax expense for the three months endedDecember 31, 2019 relates primarily to current foreign taxes. In fiscal 2018 the Company determined that it was more likely than not that it will not realize the benefits of its gross deferred tax assets and therefore recorded a valuation allowance to reduce the carrying value of these gross deferred tax assets, net of the impact of the reversal of taxable temporary differences, to zero. The Company's position remains unchanged as of the period endedDecember 31, 2019 . Nine months endedDecember 31, 2019 compared to nine months endedDecember 31, 2018 Revenues Total revenues decreased$23.4 million , or 4%, from$529.5 million in the nine months endedDecember 31, 2018 to$506.1 million in the nine months endedDecember 31, 2019 . Software and Products Revenue. Software and products revenue decreased$20.2 million , or 9%, from$229.1 million in the nine months endedDecember 31, 2018 to$208.9 million in the nine months endedDecember 31, 2019 . Software and products revenue represented 41% of our total revenues in the nine months endedDecember 31, 2019 and 43% in the nine months endedDecember 31, 2018 . We track software and products revenue on a geographic basis. The geographic regions that are tracked are theAmericas (United States ,Canada ,Latin America ), EMEA (Europe ,Middle East ,Africa ) and APAC (Australia ,New Zealand ,Southeast Asia ,China ,Japan ).Americas , EMEA and APAC represented 51%, 35% and 14% of total software and products revenue, respectively, for the nine months endedDecember 31, 2019 . The year over year decline of software and products revenue was 14% in theAmericas and 11% in APAC, while EMEA increased 2%. ? The decrease inAmericas software and products revenue was the result of a decrease in enterprise revenue transactions partially offset by an increase in the average enterprise transaction selling price. ? EMEA software and products revenue increased primarily as a result of an increase in both the amount and average selling price of enterprise revenue transactions. ? The decrease in APAC software and products revenue was primarily due to a decrease in non-enterprise revenue.
Software and products revenue derived from enterprise transactions (transactions
greater than
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Operating Expenses Sales and Marketing. Sales and marketing expenses decreased$28.6 million , or 10%, from$281.5 million in the nine months endedDecember 31, 2018 to$252.9 million in the nine months endedDecember 31, 2019 . The decrease is due to a$30.9 million decrease in employee compensation and related expenses mainly attributable to our restructuring and reorganization initiatives. Sales and marketing expenses as a percentage of total revenues was 50% and 53% in the nine months endedDecember 31, 2019 and 2018, respectively. Research and Development. Research and development expenses increased$7.6 million , or 11%, from$69.8 million in the nine months endedDecember 31, 2018 to$77.3 million in the nine months endedDecember 31, 2019 . The increase is an increase in employee-related costs resulting from additional headcount due to the acquisition ofHedvig . Approximately$2.7 million of the increase in employee-related costs is related to noncash stock-based compensation. Additionally, certainHedvig shareholders will receive cash payments totaling$14,100 over the course of the 30 months following the date of acquisition, contingent on their continued employment with the Company. While these payments are proportionate to these shareholders' ownership ofHedvig , under GAAP they are accounted for as compensation expense over the course of the 30 month service period. Research and development expenses for the nine months endedDecember 31, 2019 include$1.4 million of expense related to this arrangement. Research and development expenses as a percentage of total revenues was 15% and 13% in the nine months endedDecember 31, 2019 and 2018, respectively. General and Administrative. General and administrative expenses increased$2.1 million , or 3%, from$69.0 million in the nine months endedDecember 31, 2018 to$71.1 million in the nine months endedDecember 31, 2019 . General and administrative expenses in the nine months endedDecember 31, 2019 includes$4.4 million of non-routine acquisition costs related to the Company's acquisition ofHedvig partially offset by a decrease in employee related costs. General and administrative expenses as a percentage of total revenues was 14% and 13% in the nine months endedDecember 31, 2019 and 2018, respectively. Restructuring. In fiscal 2019 we initiated a restructuring plan to increase efficiency in our sales, marketing and distribution functions as well as reduce costs across all functional areas. Restructuring expenses were$19.0 million in the nine months endedDecember 31, 2019 . These restructuring charges relate primarily to severance and related costs associated with headcount reductions as well as lease abandonment charges related to the closure of five offices. These charges include$1.7 million of stock-based compensation related to modifications of existing awards granted to certain employees included in the restructuring. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business. Income Tax Expense Income tax expense was$3.5 million in the nine months endedDecember 31, 2019 compared to expense of$2.7 million in the nine months endedDecember 31, 2018 . The income tax expense for the nine months endedDecember 31, 2019 relates primarily to current foreign taxes. In fiscal 2018 the Company determined that it was more likely than not that it will not realize the benefits of its gross deferred tax assets and therefore recorded a valuation allowance to reduce the carrying value of these gross deferred tax assets, net of the impact of the reversal of taxable temporary differences, to zero. The Company's position remains unchanged as of the period endingDecember 31, 2019 . Liquidity and Capital Resources As ofDecember 31, 2019 , our cash and cash equivalents balance of$272.0 million primarily consisted of cash and cash equivalents in the form of money market funds. In addition, as ofDecember 31, 2019 we have restricted cash of$8.0 million held in an escrow account that relates to theHedvig acquisition and short-term investments invested inU.S. Treasury Bills totaling$65.0 million . In recent fiscal years, our principal source of liquidity has been cash provided by operations. As ofDecember 31, 2019 , the amount of cash and cash equivalents held outside ofthe United States by our foreign legal entities was approximately$161.0 million . These balances are dispersed across many international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In the event we needed to repatriate funds from outside ofthe United States , such repatriation would likely be subject to restrictions by local laws and/or tax consequences including foreign withholding taxes. 24
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During the nine months ended
Nine Months Ended December 31, 2019 2018 Net cash provided by operating activities$ 56,008 $ 73,594 Net cash used in investing activities (94,056 ) (4,011 ) Net cash used in financing activities (9,082 ) (59,854 ) Effects of exchange rate-changes in cash (837 ) (13,115 ) Net decrease in cash, cash equivalents and restricted cash$ (47,967 ) $ (3,386 ) Net cash provided by operating activities was$56.0 million in the nine months endedDecember 31, 2019 and$73.6 million in the nine months endedDecember 31, 2018 . In the nine months endedDecember 31, 2019 , cash provided by operating activities was primarily due to net loss adjusted for the impact of non-cash charges and collection of accounts receivable, partially offset by decreases in deferred revenue and accrued expenses. Net cash used in investing activities was$94.1 million for the nine months endedDecember 31, 2019 and net cash used in investing activities was$4.0 million in the nine months endedDecember 31, 2018 . In the nine months endedDecember 31, 2019 , cash used in investing activities was related to the$157.5 million acquisition ofHedvig and$1.9 million of capital expenditures partially offset by net proceeds from the maturity of short-term investments of$65.4 million . Net cash used in financing activities was$9.1 million in the nine months endedDecember 31, 2019 and$59.9 million in the nine months endedDecember 31, 2018 . The cash used in financing activities in the nine months endedDecember 31, 2019 was the result of$40.0 million of repurchases of common shares partially offset by$30.9 million of proceeds from the exercise of stock options and purchases related to our employee stock purchase program. Working capital decreased$137.0 million from$328.7 million as ofMarch 31, 2019 to$191.6 million as ofDecember 31, 2019 . The net decrease in working capital is due primarily to our use of cash to acquireHedvig as well as the repurchase of common shares. We believe that our existing cash, cash equivalents and our cash from operations will be sufficient to meet our anticipated cash needs for working capital, income taxes, capital expenditures and potential stock repurchases for at least the next twelve months. We may seek additional funding through public or private financings or other arrangements during this period. Adequate funds may not be available when needed or may not be available on terms favorable to us, or at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. Off-Balance Sheet Arrangements As ofDecember 31, 2019 , we did not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. 25
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Indemnifications
Certain of our software licensing agreements contain certain provisions that indemnify our customers from any claim, suit or proceeding arising from alleged or actual intellectual property infringement. These provisions continue in perpetuity along with our software licensing agreements. We have never incurred a liability relating to one of these indemnification provisions in the past and we believe that the likelihood of any future payout relating to these provisions is remote. Therefore, we have not recorded a liability during any period related to these indemnification provisions. Impact of Recently Issued Accounting Standards
See Note 2 of the unaudited consolidated financial statements for a discussion of the impact of recently issued accounting standards. Item 3 - Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk As ofDecember 31, 2019 , our cash and cash equivalents and short-term investments consisted primarily of money market funds andU.S. Treasury Bills. Due to the short-term nature of these investments, we are not subject to any material interest rate risk on these balances. Foreign Currency Risk Economic Exposure As a global company, we face exposure to adverse movements in foreign currency exchange rates. Our international sales are generally denominated in foreign currencies and this revenue could be materially affected by currency fluctuations. Approximately 49% of our sales were outsidethe United States for the nine months endedDecember 31, 2019 . Our primary exposures are to fluctuations in exchange rates for theU.S. dollar versus the Euro, and to a lesser extent, the Australian dollar, British pound sterling, Canadian dollar, Chinese yuan, Indian rupee, Korean won andSingapore dollar. Changes in currency exchange rates could adversely affect our reported revenues and require us to reduce our prices to remain competitive in foreign markets, which could also have a material adverse effect on our results of operations. Historically, we have periodically reviewed and revised the pricing of our products available to our customers in foreign countries and we have not maintained excess cash balances in foreign accounts. Transaction Exposure Our exposure to foreign currency transaction gains and losses is primarily the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the functional currency of the subsidiary. Our foreign subsidiaries conduct their businesses in local currency and we generally do not maintain excessU.S. dollar cash balances in foreign accounts. Foreign currency transaction gains and losses are recorded in "General and administrative expenses" in the Consolidated Statements of Operations. We recognized a net foreign currency transaction loss of$0.1 million and$0.2 million in the three and nine months endedDecember 31, 2019 . We recognized net foreign currency transaction gains of$0.1 million and$0.8 million in the three and nine months endedDecember 31, 2018 . The net foreign currency transaction gains and losses recorded in "General and administrative" expenses include settlement gains and losses on forward contracts disclosed below. Item 4 - Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as ofDecember 31, 2019 . Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as ofDecember 31, 2019 . Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the third quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 26
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Inherent Limitations on Internal Controls Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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