Note

Revenue recognition

The Company adopted ASC Topic

606,

"Revenue from Contracts with Customers," on

January 1, 2018,

applying the modified retrospective method to all contract agreements that 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 under the accounting standards in effect for the prior period. A cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under Topic

606.

Upon adoption of the Topic

606,

the Company recorded an increase to retained earnings, net of deferred tax liability of

$3.8

million (Note

) for contracts still in force as of

January 1, 2018

for the following items in the

first

and

second

quarters of

2018:

●	$237,000 reduction in deferred revenue balances for the differences in the amount of revenue recognition for the Company’s revenue streams as a result of allocation of revenue based on standalone selling prices to the Company’s various performance obligations.

●

$151,000

increase in deferred revenue balances, related to the accretion of financing costs for multi-year post-warranty service contracts for customers who pay more than

one

year in advance of receiving the service. The Company estimated interest expense for such advance payments under the new revenue standard.

●	$210,000 for variable consideration on sale transactions.

●	$4.7 million for the capitalization of the incremental contract acquisition costs, such as sales commissions paid in connection with system sales. These contract acquisition costs were capitalized and will be amortized over the period of anticipated support renewals. The Company expensed such costs when incurred under the prior guidance.
●	$1.2 million deferred tax liability related to the direct tax effect of the ASC 606 adoption.

The Company’s revenue consists of product and service revenue resulting from the sale of systems, training on the systems, extended service contracts, consumables and other accessories. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

The Company's system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include a combination of the following performance obligations: The System and software license (considered as

one

performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts and marketing services. For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services (which are satisfied over time), the Company generally satisfies all of the performance obligations at a point in time. Systems, system accessories (hand pieces), training, and time and material services are also sold on a stand-alone basis.

The following table summarizes the effects of adopting Topic

606

on the Company’s condensed consolidated balance sheet as of

June 30, 2018:

	As reported under Topic 606		Adjustments		Balances under Prior GAAP
	(In thousands)

Other long-term assets	$	5,807	$	5,325	$	482
Deferred tax asset		21,219		(1,160)		22,379
Accrued liabilities		22,756		(111)		22,867
Deferred revenue		11,807		(255)		11,552
Retained earnings (deficit)		3,156		5,690		(2,534)

The following table summarizes the effects of adopting Topic

606

on the Company’s condensed consolidated income statement for the

three

months ended

June 30, 2018:

	As reported under Topic 606		Adjustments		Balances under Prior GAAP

	(In thousands)
Products revenue	$	37,650	$	55	$	37,595
Service revenue		4,903		69		4,834
Sales and marketing		15,535		(463)		15,998
Interest and other income, net*		(129)		(64)		(65)

The following table summarizes the effects of adopting Topic

606

on Company’s condensed consolidated income statement for the

six

months ended

June 30, 2018:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP

	(In thousands)
Products revenue	$	66,914		$	65		$	66,849
Service revenue		9,764			133			9,631
Sales and marketing		28,623			(648	)		29,271
Interest and other income, net*		(31	)		(129	)		98

Included in interest and other income, net, is the estimated interest expense for advance payment related to service contracts under the new revenue standard.

Adoption of the standard had

impact on total net cash from or used in operating, investing, or financing activities within the condensed consolidated statements of cash flows.

As part of the Company's adoption of ASC

606,

the Company elected to use the following practical expedients: (i)

not

to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be

one

year or less; (ii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been

one

year or less; (iii)

not

to recast revenue for contracts that begin and end in the same fiscal year; and (iv)

not

to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.