Revenues

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

On January 1, 2018, the Company 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. The Company 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 was a net increase to revenue of $1.7 million and a net decrease to selling, general and administrative expenses of approximately $0.5 million related to the costs of obtaining contracts for the three months ended March 31, 2018 as compared to what would have been recognized under ASC 605. See the impacts to reported results below for the impact of adoption of the Topic 606 on our consolidated financial statements (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, net of current portion	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 the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, each of which are generally distinct and accounted for as separate performance obligations. 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, the Company allocates the contract transaction price to each performance obligation using the Company's estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, Axon cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time the Company ships 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 are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

The Company has elected to recognize shipping costs when the control of hardware products or accessories have transferred to the customer as an expense in Cost of product sales.

Nature of Products and Services

The following table presents the Company's revenues by primary product and service offering (in thousands):



	Three Months Ended March 31, 2018						Three Months Ended March 31, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	16,474	$	—	$	16,474	$	15,668	$	—	$	15,668
TASER X2	23,932		—		23,932		18,986		—		18,986
TASER Pulse and Bolt	1,346		—		1,346		1,022		—		1,022
Single cartridges	16,114		—		16,114		16,664		—		16,664
Axon Body	—		5,558		5,558		—		3,446		3,446
Axon Flex	—		1,669		1,669		—		1,475		1,475
Axon Dock	—		3,035		3,035		—		1,987		1,987
Axon Fleet	—		2,116		2,116		—		—		—
Evidence.com	—		20,241		20,241		—		11,742		11,742
TASER Cam	—		1,360		1,360		—		719		719
Extended warranties	3,706		2,490		6,196		2,843		1,418		4,261
Other	1,952		1,222		3,174		2,488		784		3,272
Total	$	63,524	$	37,691	$	101,215	$	57,671	$	21,571	$	79,242

⁽¹⁾ Amounts for the three months ended March 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.

The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon 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 the Company's Evidence.com digital evidence management SaaS (including secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes revenue from training, professional services and revenue related to other software and SaaS services.

Many of the Company's products and services are sold on a standalone basis. The Company also bundles its hardware products and services together and sells them to its 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 the Company at a future date. Additionally, the Company offers customers the ability to purchase CEW cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of the arrangement whereby the Company is obligated to deliver unlimited products at the customer’s request, the Company accounts for these arrangements as stand-ready obligations, and recognizes revenue ratably over the contract period. Cost of product sales is recognized as the products are delivered to the customer.

The following table presents the Company's revenues disaggregated by geography (in thousands):



	Three Months Ended March 31,
	2018				2017 ⁽¹⁾
United States	$	77,950	77	%	$	64,752	82	%
Other countries	23,265		23		14,490		18
Total	$	101,215	100	%	$	79,242	100	%

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when it invoices its customers and records a receivable. The Company records a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue is recognized subsequent to invoicing.

Contract assets generally result from the Company's subscription programs where the Company satisfies 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 the Company’s future performance of a SaaS service obligation under the contract. The Company recognizes a portion the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and records the remaining allocated value as a contract asset as the Company has generally fulfilled its hardware performance obligation upon shipment.

Contract liabilities generally consist of deferred revenue on the Company’s subscription programs where the Company generally invoices customers at the beginning of each annual period and records 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 the Company's Evidence.com 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 Evidence.com 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 the Company's contract assets, contract liabilities and certain information related to these balances as of and for the three months ended March 31, 2018 (in thousands):



	March 31, 2018
Contract assets	$	9,278
Contract liabilities (deferred revenue)	134,144
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	24,269

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



	March 31, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER Weapons	$	11,601	$	17,058	$	28,659	$	12,501	$	18,619	$	31,120
Software and Sensors	6,941		5,660		12,601		6,293		4,195		10,488
	18,542		22,718		41,260		18,794		22,814		41,608
Hardware:
TASER Weapons	4,283		12,440		16,723		4,164		11,401		15,565
Software and Sensors	14,152		15,197		29,349		16,956		14,781		31,737
	18,435		27,637		46,072		21,120		26,182		47,302
Software and Sensors Services	39,164		7,648		46,812		30,487		5,885		36,372
Total	$	76,141	$	58,003	$	134,144	$	70,401	$	54,881	$	125,282



	March 31, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
TASER Weapons	$	15,884	$	29,498	$	45,382	$	16,665	$	30,020	$	46,685
Software and Sensors	60,257		28,505		88,762		53,736		24,861		78,597
Total	$	76,141	$	58,003	$	134,144	$	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 March 31, 2018, the Company had approximately $650 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 March 31, 2018. The Company expects to recognize between 15% - 20% of this balance over the next twelve months and expects 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

The Company recognizes 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, the Company applies the practical expedient to expense these sales commissions when incurred. These costs are recorded as incurred within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.

As of March 31, 2018, the Company's assets for costs to obtain contracts were as follows (in thousands):



	March 31, 2018
Current deferred commissions ⁽¹⁾	$	5,526
Deferred commissions, net of current portion ⁽²⁾	12,881
	$	18,407

⁽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 months ended March 31, 2018, the Company recognized $1.1 million 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

The Company’s 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. Contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue will be made accordingly.

The Company's 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 versus together may require significant judgment. The Company considers 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 Evidence.com.

In contracts where there are timing differences between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service, the Company has determined that, with the exception of its TASER 60 installment purchase arrangements, its contracts generally do not include a significant financing component. For the three months ended March 31, 2018, the Company recorded revenue of $14.0 million, including $0.3 million of interest income, under the Company’s TASER 60 plan, and recorded $8.1 million, including $0.1 million of interest income, for the same period in 2017. Amounts for the three months ended March 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. The Company analyzes separate sales of its products and services as a basis for estimating the SSP of its products and services and then uses that SSP as the basis for allocating the transaction price when its 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 the Company does not sell the product or service separately, it determines the SSP using information that may include market conditions, time value of money and other observable inputs. The Company typically has 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, the Company may use information such 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.