REVENUE RECOGNITION - Note 3

3 Months Ended

Mar. 31, 2018

Revenue from Contract with Customer [Abstract]

REVENUE RECOGNITION - Note 3

3. REVENUE RECOGNITION

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606), an updated standard on revenue recognition. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. We implemented ASU 2014-09 as of January 1, 2018 using the full retrospective approach, meaning we will restate each prior reporting period presented.

We performed a review of our revenue generating contracts with customers subject to ASU 2014-09, and implementation of this standard has the following material impacts on our financial statements:

i. Timing of revenue recognition under the PicoP® scanning technology license agreement we signed with Sony in March 2015. Under previous guidance, we had been recognizing the upfront license fee payment of $8.0 million on a straight-line basis over a period of eight years. Under the new guidance, the entire $8.0 million upfront license fee payment was recognized in the first quarter of 2015. The result of this change in timing resulted in a decrease of $7.2 million in our beginning 2016 accumulated deficit balance and a reduction in our short- term deferred revenue balance of $1.0 million and long-term deferred revenue balance of $6.1 million. Royalty revenue for each of the years ended December 31, 2016 and 2017 was reduced by approximately $1.0 million.

ii. Timing of revenue recognition on product sales. Previously, we recognized revenue after expiration of the contractual acceptance period. Under the new guidance, we recognize revenue when control of the product transfers to the buyer, which may occur before the expiration of the contractual acceptance period. The result of this change was a net decrease in our beginning 2016 accumulated deficit of $527,000, as well as a shift in revenue and cost recognition to earlier quarters in 2016 and 2017.

Accounting policy as a result of adopting Topic 606

The following is a description of principal activities from which we generate revenue. Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers.

We evaluate contracts based on the 5-step model as stated in Topic 606 as follows: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price, and (v) recognize revenue when (or as) performance obligations are satisfied.

A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct, as defined in the revenue standard.

The transaction price is the amount of consideration an entity expects to be entitled to from a customer in exchange for providing the goods or services. A number of factors should be considered to determine the transaction price, including whether there is variable consideration, a significant financing component, noncash consideration, or amounts payable to the customer. The determination of variable consideration will require a significant amount of judgment. In estimating the transaction price we will use either the expected value method or the most likely amount method.

The transaction price is allocated to the separate performance obligations in the contract based on relative standalone selling prices. Determining the relative standalone selling price can be challenging when goods or services are not sold on a standalone basis. The revenue standard sets out several methods that can be used to estimate a standalone selling price when one is not directly observable. Allocating discounts and variable consideration must also be considered. Allocating the transaction price can require significant judgement on our part.

Revenue is recognized when (or as) the customer obtains control of the good or service/performance obligations are satisfied. Topic 606 provides guidance to help determine if a performance obligation is satisfied at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also recognized over time.

Product revenue

We sell our products to customers under a contract or by purchase order. We consider the sale of each individual item to be one performance obligation. The transaction price is generally either at stated product price per quantity or at a fixed amount at contract inception. Revenue is recognized under Topic 606 when the product is shipped to the customer because control passes to the customer at the point of shipment. Our product sales generally include acceptance provisions, however, because we generally can objectively determine that we have met agreed-upon customer specifications prior to shipment, control of the item passes at the time of shipment.

Royalty revenue

We recognize revenue on upfront license fees at a point in time if the nature of the license granted is a right-to-use license, representing functional intellectual property with significant standalone functionality. If the nature of the license granted is a right-to-access license, representing symbolic intellectual property, which excludes significant standalone functionality, we recognize revenue over the period of time we have ongoing obligations under the agreement. We will recognize revenue from sales-based royalties on the basis of the quarterly reports provided by our customer as to the number of royalty-bearing products sold or otherwise distributed. In the event that reports are not received, we will estimate the number of royalty-bearing products sold by our customers.

Contract revenue

Our contract revenue in a particular period is dependent upon when we enter into a contract, the value of the contracts we have entered into, and the availability of technical resources to perform work on the contracts. We recognize contract revenue either at a point in time, or over time, depending upon the characteristics of the individual contract. If control of the deliverable(s) occur over time, the revenue is recognized in proportion to the transfer of control. If control passes to the customer only upon completion and transfer of the asset, revenue is recognized at the completion of the contract. In contracts that include significant customer acceptance provisions, we recognize revenue only upon acceptance of the deliverable(s).

We identify each performance obligation in our development contracts at contract inception. The contracts generally include product development and customization specified by the customer. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the contract. Performance obligations that are not distinct at contract inception are combined.

Our development contracts are primarily fixed-fee contracts. If control of deliverables occurs over time, we recognize revenue on fixed fee contracts on the proportion of total cost expended (under Topic 606, the `input method') to the total cost expected to complete the contract performance obligation. For contracts that require the input method for revenue recognition, the determination of the total cost expected to complete the performance obligations on fixed fee contracts involves significant judgment. We incorporate revisions to hour and cost estimates when the causal facts become known.

Disaggregation of revenue

The following table provides information about disaggregated revenue by timing of revenue recognition, (in thousands):

		Three Months Ended March 31, 2018
		Product		Royalty		Contract
		revenue		revenue		revenue		Total
Timing of revenue recognition:
Products transferred at a point in time	$	-	$	11	$	99	$	110
Product and services transferred over time		-		-		2,078		2,078
Total	$	-	$	11	$	2,177	$	2,188

		Three Months Ended March 31, 2017
		Product		Royalty		Contract
		revenue		revenue		revenue		Total
Timing of revenue recognition:
Products transferred at a point in time	$	-	$	97	$	257	$	354
Product and services transferred over time		-		-		214		214
Total	$	-	$	97	$	471	$	568

Contract balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in thousands):

		March 31,		December 31,
		2018		2017
Accounts receivable, net	$	2,502	$	15
Costs and estimated earnings in excess of billings on uncompleted contracts		258		680
Other current assets		11		70
Billings on uncompleted contracts in excess of related costs		4		5
Other current liabilities		10,000		10,000

Under Topic 606, our rights to consideration are presented separately depending on whether those rights are conditional or unconditional. We will present our unconditional rights to consideration as "accounts receivable" in our Consolidated Balance Sheet.

Contract assets will represent rights to consideration that are subject to a condition other than the passage of time, and will be comprised primarily of costs and estimated profits in excess of billings on uncompleted contracts and estimated accrued sales-based royalty revenue.

Contract costs in excess of billing will be included in the "Costs and estimated earnings in excess of billings on uncompleted contracts" line of our Consolidated Balance Sheet, and sales-based royalties will be included in "Other current assets". This does not represent a change in presentation for contract fulfillment costs; however, for sales-based royalty revenue, this revenue was previously not recognized until quarterly royalty reporting had been received from our customer. Under Topic 606, once quarterly royalty reporting has been received, the related contract assets will be transferred to accounts receivable.

Significant changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands, except percentages):

		March 31,		December 31,
		2018		2017		$ Change	% Change
Contract assets	$	258	$	680	$	(422)	(62.1)
Contract liabilities		(4)		(5)		1	(20.0)
Net contract assets (liabilities)	$	254	$	675	$	(421)	(62.4)

In the first quarter of 2018, we recognized revenue of $2.1 million related to the contract with a major technology company we entered into in April 2017. Of this amount $680,000 was included in contract assets at January 1, 2018.

Contract acquisition costs

Regarding the adoption of Topic 606, we are required to capitalize certain contract acquisition costs consisting primarily of commissions paid when contracts are signed. We currently do not pay any commissions upon the signing of a contract; therefore, no commission cost has been incurred as of March 31, 2018.  

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The estimated revenue does not include the $10 million upfront payment received from a major technology company to develop an LBS display system due to uncertainty around the timing of recognition. Additionally, the estimated revenue does not include amounts of variable consideration attributable to royalties or unexercised contract renewals (in thousands):

		Remainder of 2018		2019
Product revenue	$	4,308	$	-
Contract revenue		6,358		884

Impacts to Previously Reported Results

In accordance with Topic 606, the disclosure of the impact of adoption to our condensed consolidated statements of operations and balance sheets was as follows (in thousands, except per share data):

		Three Months Ended March 31, 2017
		As previously		New revenue		As
		reported		standard adjustment		restated
Royalty revenue	$	535	$	(438)	$	97
Contract revenue		257		214		471
Cost of contract revenue		325		78		403
Net loss		(5,647)		(302)		(5,949)
Net loss per share - basic and diluted		(0.08)		(0.01)		(0.09)

		December 31, 2017
		As previously		New revenue		As
		reported		standard adjustment		restated
Costs and estimated earnings incurred on uncompleted contracts	$	680	$	-	$	680
Other current assets		945		70		1,015
Billings on uncompleted contracts		5		-		5
Deferred revenue - current		999		(999)		-
Deferred revenue - noncurrent		4,151		(4,151)		-
Shareholders' equity:
Accumulated deficit		(524,086)		5,220		(518,866)

Adoption of the standards related to revenue recognition had no impact to cash from or used in operating, investing, or financing activities on our consolidated cash flows statements.