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 impact as a result of applying Topic 606 was a net increase to net sales of $5.0 million for the twelve months ended December 31, 2018, and a net decrease to sales, general and administrative expenses of approximately $3.6 million 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

Nature of Products and Services

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



	Year Ended December 31, 2018						Year Ended December 31, 2017 ⁽¹⁾
	TASER		Software and Sensors		Total		TASER		Software and Sensors		Total
TASER 7	$	7,358	$	—	$	7,358	$	—	$	—	$	—
TASER X26P	70,638		—		70,638		64,426		—		64,426
TASER X2	78,837		—		78,837		81,417		—		81,417
TASER Pulse and Bolt	5,182		—		5,182		4,340		—		4,340
Cartridges	68,258		—		68,258		63,203		—		63,203
Axon Body	—		21,883		21,883		—		15,184		15,184
Axon Flex	—		6,509		6,509		—		10,083		10,083
Axon Fleet	—		12,527		12,527		—		2,954		2,954
Axon Dock	—		10,706		10,706		—		9,736		9,736
Axon Evidence and cloud services	—		90,291		90,291		—		57,841		57,841
TASER Cam	—		3,871		3,871		—		3,358		3,358
Extended warranties	15,753		11,860		27,613		12,426		7,110		19,536
Other	7,089		9,306		16,395		8,700		3,020		11,720
Total	$	253,115	$	166,953	$	420,068	$	234,512	$	109,286	$	343,798

⁽¹⁾ Amounts for the year ended 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.

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. Unbilled accounts receivable expected to be invoiced and collected within twelve months was $17.3 million as of December 31, 2018, and was included in accounts receivable on our consolidated balance sheet.

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 year ended December 31, 2018 (in thousands):



	December 31, 2018
Contract assets, net	$	13,960
Contract liabilities (deferred revenue)	181,433
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):



	December 31, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	12,797	$	16,847	$	29,644	$	12,501	$	18,619	$	31,120
Software and Sensors	8,273		6,516		14,789		6,293		4,195		10,488
	21,070		23,363		44,433		18,794		22,814		41,608
Hardware:
TASER	9,355		15,598		24,953		4,164		11,401		15,565
Software and Sensors	20,878		24,685		45,563		16,956		14,781		31,737
	30,233		40,283		70,516		21,120		26,182		47,302
Software and Sensors Services	55,713		10,771		66,484		30,487		5,885		36,372
Total	$	107,016	$	74,417	$	181,433	$	70,401	$	54,881	$	125,282



	December 31, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	22,152	$	32,445	$	54,597	$	16,665	$	30,020	$	46,685
Software and Sensors	84,864		41,972		126,836		53,736		24,861		78,597
Total	$	107,016	$	74,417	$	181,433	$	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 December 31, 2018, we had approximately $900 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 December 31, 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 consolidated statements of operations and comprehensive income.

As of December 31, 2018, our assets for costs to obtain contracts were as follows (in thousands):



	December 31, 2018
Current deferred commissions ⁽¹⁾	$	7,062
Deferred commissions, net of current portion ⁽²⁾	15,530
	$	22,592

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

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

During the year ended December 31, 2018, we recognized $5.3 million of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying consolidated statements 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 year ended December 31, 2018, we recorded revenue of $48.2 million, including $1.3 million of interest income, under our TASER 60 plan. For the year ended December 31, 2017, we recorded revenue of $40.7 million including $0.7 million of interest income under our TASER 60 plan. Amounts for the year ended December 31, 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.