REVENUE RECOGNITION

The Company adopted ASU

2014

and its amendments on

October 1, 2018,

using the full retrospective approach.

Topic

606

outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a

five

-step analysis in determining when and how revenue is recognized:

	1.	Identify the contract(s) with customers
	2.	Identify the performance obligations
	3.	Determine the transaction price
	4.	Allocate the transaction price to the performance obligations
	5.	Recognize revenue when the performance obligations have been satisfied

Topic

606

requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.

The Company derives its revenue from the sale of products to customers, contracts, license fees, other services and freight. The Company sells its products through its direct sales force and through authorized resellers and system integrators. The Company recognizes revenue for goods including software when all the significant risks and rewards have been transferred to the customer,

continuing managerial involvement usually associated with ownership of the goods is retained,

effective control over the goods sold is retained, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transactions will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Software license revenue, maintenance and/or software development service fees

may

be bundled in

one

arrangement or

may

be sold separately.

Product Revenue

Product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that our customer obtains control of the products. A smaller portion of product revenue is recognized when the customer receives delivery of the products. A portion of products are sold through resellers and system integrators based on firm commitments from an end user, and as a result, resellers and system integrators carry little or

inventory. Our customers do

not

have a right to return product unless the product is found defective and therefore our estimate for returns has historically been insignificant

Perpetual licensed software

The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of or has the ability to take immediate possession of the software and the software key. Perpetual software licenses can include

one

-year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.

Time-based licensed software

The time-based license agreements include the use of a software license for a fixed term, generally

one

-year, and maintenance and support services during the same period. The Company does

not

sell time-based licenses without maintenance and support services and therefore revenues for the entire arrangements are recognized on a straight-line basis over the term.

Warranty, maintenance and services

The Company offers extended warranty, maintenance and other services. Extended warranty and maintenance contracts are offered with terms ranging from

one

to several years, which provide repair and maintenance services after expiration of the original

one

-year warranty term. Revenues from separately priced extended warranty and maintenance contracts are recognized based on time elapsed over the service period, and classified as contract and other revenues. Revenue from other services such as training or installation is recognized when the service is completed.

Multiple element arrangements

The Company has entered into a number of multiple element arrangements, such as the sale of a product or perpetual licenses that

may

include maintenance and support (included in price of perpetual licenses) and time-based licenses (that include embedded maintenance and support, both of which

may

be sold with software development services, training, and other product sales). In some cases, the Company delivers software development services bundled with the sale of the software. In multiple element arrangements, the Company uses either the stand-alone selling price or an expected cost plus margin approach to determine the fair value of each element within the arrangement, including software and software-related services such as maintenance and support. In general, elements in such arrangements are also sold on a stand-alone basis and stand-alone selling prices are available.

Revenue is allocated to each deliverable based on the fair value of each individual element and is recognized when the revenue recognition criteria described above are met, except for time-based licenses which are

not

unbundled. When software development services are performed and are considered essential to the functionality of the software, the Company recognizes revenue from the software development services on a stage of completion basis, and the revenue from the software when the related development services have been completed.

The Company disaggregates revenue by reporting segment (LRAD and Genasys Spain) and geographically to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. Refer to Note

17,

Segment Information and Note

18,

Major Customers, Suppliers and Related Information for additional details of revenues by reporting segment and disaggregation of revenue.

Contract Assets and Liabilities

The Company enters into contracts to sell products and provide services and recognizes contract assets and liabilities that arise from these transactions. The Company recognizes revenue and corresponding accounts receivable according to ASC

606

and, at times, recognizes revenue in advance of the time when contracts gives us the right to invoice a customer. The Company

may

also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company

may

receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of

September 30, 2019

and

September 30, 2018,

including the change between the periods. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Consolidated Balance Sheets. Refer to Note

10,

Accrued Liabilities for additional details.

The Company’s contract assets are as follows:

	Prepaid maintenance
	agreement
Balance at September 30, 2018	$	93,750
New prepaid maintenance agreements		-
Recognition of expense as a result of performing services		(93,750	)
Balance at September 30, 2019	$	-

The Company’s contract liabilities are as follows:

	Customer deposits			Deferred revenue			Total contract liabilities
Balance at September 30, 2018	$	199,596		$	536,458		$	736,054
New performance obligations		7,241,768			1,627,331			8,869,099
Recognition of revenue as a result of satisfying performance obligations		(2,378,273	)		(1,083,261	)		(3,461,534	)
Effect of exchange rate on deferred revenue		-			(21,121	)		(21,121	)
Balance at September 30, 2019	$	5,063,091		$	1,059,407		$	6,122,498
Less: non-current portion		-			(550,885	)		(550,885	)
Current portion at September 30, 2019	$	5,063,091		$	508,522		$	5,571,613

Remaining Performance Obligations

Remaining performance obligations related to ASC

606

represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than

one

year which are fully or partially unsatisfied at the end of the period.

As of

September 30, 2019,

the aggregate amount of the transaction price allocated to remaining performance obligations was approximately

$6,122,498.

The Company expects to recognize revenue on approximately

$5,571,613

91%

of the remaining performance obligations over the next

months, and the remainder is expected to be recognized thereafter.

Practical Expedients

In cases where the Company is responsible for shipping after the customer has obtained control of the goods, the Company has elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, the Company has elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than

one

year. The Company only gives consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than

one

year. The Company also utilizes the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value provided to the customer.