Revenues

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted, and continue to be reported in accordance with our historic accounting under ASC 605. We recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606 on contracts that were not complete as of that date. The areas most significantly impacted were contracts with contingent hardware revenue and the treatment of incremental costs of obtaining contracts with customers.

The impacts as a result of applying Topic 606 were a net increase to net sales of $2.1 million and $4.4 million, respectively, for the three and nine months ended September 30, 2018, and a net decrease to sales, general and administrative expenses of approximately $0.4 million and $2.0 million, respectively, related to the costs of obtaining contracts for the same periods, as compared to what would have been recognized under ASC 605. The impacts to the December 31, 2017 balance sheet of adopting Topic 606 are presented below (in thousands):



	December 31, 2017 (As reported)		Impact of Adoption of Topic 606 on Opening Balance Sheet			January 1, 2018 (As adjusted)
Accounts and notes receivable, net	$	56,064	$	28,915		$	84,979
Contract assets, net	—		5,512			5,512
Prepaid expense and other current assets	21,696		2,003			23,699
Total impacted current assets	77,760		36,430			114,190
Deferred income tax assets, net	15,755		(5,158		)	10,597
Long-term notes receivable	36,877		(12,977		)	23,900
Other assets	15,366		5,323			20,689
Total impacted assets	145,758		23,618			169,376

Accrued liabilities	23,502		2,512			26,014
Current portion of deferred revenue	70,401		863			71,264
Total impacted current liabilities	93,903		3,375			97,278
Deferred revenue, net of current portion	54,881		1,249			56,130
Total impacted liabilities	148,784		4,624			153,408
Retained earnings	123,185		18,994			142,179
Total impacted stockholders' equity	123,185		18,994			142,179
Total impacted liabilities and stockholders' equity	271,969		23,618			295,587

Revenue Recognition

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our Software-as-a-Service (“SaaS”) offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.

Nature of Products and Services

The following table presents our revenues by primary product and service offering (in thousands):



	Three Months Ended September 30, 2018						Three Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	17,998	$	—	$	17,998	$	13,264	$	—	$	13,264
TASER X2	20,392		—		20,392		22,717		—		22,717
TASER Pulse and Bolt	1,402		—		1,402		1,069		—		1,069
Single cartridges	18,406		—		18,406		17,474		—		17,474
Axon Body	—		4,744		4,744		—		4,527		4,527
Axon Flex	—		1,325		1,325		—		2,563		2,563
Axon Fleet	—		1,809		1,809		—		1,113		1,113
Axon Dock	—		2,178		2,178		—		2,639		2,639
Axon Evidence and cloud services	—		23,915		23,915		—		16,200		16,200
TASER Cam	—		717		717		—		922		922
Extended warranties	4,123		3,161		7,284		3,086		1,945		5,031
Other	1,345		3,321		4,666		1,806		937		2,743
Total	$	63,666	$	41,170	$	104,836	$	59,416	$	30,846	$	90,262



	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	52,618	$	—	$	52,618	$	45,167	$	—	$	45,167
TASER X2	62,686		—		62,686		57,755		—		57,755
TASER Pulse and Bolt	3,849		—		3,849		2,892		—		2,892
Single cartridges	51,763		—		51,763		49,005		—		49,005
Axon Body	—		15,082		15,082		—		11,725		11,725
Axon Flex	—		4,529		4,529		—		7,889		7,889
Axon Fleet	—		6,640		6,640		—		1,113		1,113
Axon Dock	—		7,332		7,332		—		7,409		7,409
Axon Evidence and cloud services	—		64,513		64,513		—		40,698		40,698
TASER Cam	—		2,839		2,839		—		2,407		2,407
Extended warranties	11,567		8,521		20,088		8,920		4,982		13,902
Other	5,331		8,007		13,338		6,364		2,821		9,185
Total	$	187,814	$	117,463	$	305,277	$	170,103	$	79,044	$	249,147

⁽¹⁾ Amounts for the three and nine months ended September 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

We derive revenue from two primary sources: (1) the sale of physical products, including CEWs, cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to our Axon Evidence digital evidence management SaaS (including secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and revenue related to other software and cloud services.

Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date. Additionally, we offer customers the ability to purchase CEW cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized as the products are shipped to the customer.

The following table presents our revenues disaggregated by geography (in thousands):



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2017 ⁽¹⁾				2018				2017 ⁽¹⁾
United States	$	88,125	84	%	$	73,203	81	%	$	244,806	80	%	$	204,155	82	%
Other countries	16,711		16		17,059		19		60,471		20		44,992		18
Total	$	104,836	100	%	$	90,262	100	%	$	305,277	100	%	$	249,147	100	%

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.

Contract assets generally result from our subscription programs where we satisfy a hardware performance obligation upon shipment to the customer, and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on our future performance of a SaaS service obligation under the contract. We recognize a portion of the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment.

Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at the beginning of each annual period and record a receivable at the time of invoicing when there is an unconditional right to consideration.

Deferred revenue is comprised mainly of unearned revenue related to our Axon Evidence SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CEW, camera and related accessories hardware in our subscription programs. Revenue for Axon Evidence and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally recognized on a straight-line basis over the subscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.

Payment terms and conditions vary by contract type and geography, but our standard terms are that payments are due within 30 days from the date of invoice.

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the nine months ended September 30, 2018 (in thousands):



	September 30, 2018
Contract assets, net	$	13,263
Contract liabilities (deferred revenue)	159,019
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	63,475

Contract liabilities (deferred revenue) consisted of the following (in thousands):



	September 30, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER Weapons	$	11,256	$	18,085	$	29,341	$	12,501	$	18,619	$	31,120
Software and Sensors	8,525		5,195		13,720		6,293		4,195		10,488
	19,781		23,280		43,061		18,794		22,814		41,608
Hardware:
TASER Weapons	7,389		15,927		23,316		4,164		11,401		15,565
Software and Sensors	17,681		19,833		37,514		16,956		14,781		31,737
	25,070		35,760		60,830		21,120		26,182		47,302
Software and Sensors Services	44,786		10,342		55,128		30,487		5,885		36,372
Total	$	89,637	$	69,382	$	159,019	$	70,401	$	54,881	$	125,282



	September 30, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
TASER Weapons	$	18,645	$	34,012	$	52,657	$	16,665	$	30,020	$	46,685
Software and Sensors	70,992		35,370		106,362		53,736		24,861		78,597
Total	$	89,637	$	69,382	$	159,019	$	70,401	$	54,881	$	125,282

⁽¹⁾ Amounts as of December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Remaining Performance Obligations

As of September 30, 2018, we had approximately $820 million of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of September 30, 2018. We expect to recognize between 15% - 20% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Costs to Obtain a Contract

We recognize an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.

For contract costs related to performance obligations with an amortization period of one year or less, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.

As of September 30, 2018, our assets for costs to obtain contracts were as follows (in thousands):



	September 30, 2018
Current deferred commissions ⁽¹⁾	$	6,207
Deferred commissions, net of current portion ⁽²⁾	14,175
	$	20,382

⁽¹⁾ Current deferred commissions are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheet.

⁽²⁾Deferred commissions, net of current portion, are included in other assets on the accompanying condensed consolidated balance sheet.

During the three and nine months ended September 30, 2018, we recognized $1.5 million and $3.8 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.

Significant Judgments

Our contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations.

At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. We consider CEW devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.

In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the three and nine months ended September 30, 2018, we recorded revenue of $11.9 million and $36.1 million, respectively, including $0.4 million and $1.0 million, respectively, of interest income under our TASER 60 plan. For the three and nine months ended September 30, 2017, we recorded revenue of $7.5 million and $20.8 million, respectively, including $0.2 million and $0.5 million, respectively, of interest income under our TASER 60 plan. Amounts for the three and nine months ended September 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606.

Judgment is required to determine the SSP for each distinct performance obligation.We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as geographic region and distribution channel in determining the SSP.

Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. Uncollectible accounts are written off when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents our best estimate and is based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.