3. REVENUE

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (the “new revenue standard”) using the modified retrospective method. The Company applied the new revenue standard to all contracts that were not completed as of January 1, 2018. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods.

Application of practical expedients and exemptions

The Company reflected the aggregate effect of all modifications that occurred prior to the date of adoption.

The Company expensed commissions related to advertising and player sales when incurred because the amortization period is less than one year. Sales commissions are included in “Sales and marketing” expenses in the condensed consolidated statements of operations.

Impact on beginning balances

The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows (in thousands):

Revenue recognition

The Company enters into contracts that may include various combinations of products and services, which are generally both capable of being distinct and distinct in the context of each contract and therefore are accounted for as separate performance obligations.

Revenue is recognized when control of promised products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services. This is achieved by applying the following five-step approach:

Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue. Revenue is recorded net of taxes collected or accrued. Sales taxes are recorded as current liabilities until remitted to the relevant government authority.

The Company does not have any capitalized costs associated with contract acquisition because most direct contract acquisition costs relate to contracts that are recognized over a period of one year or less.

Arrangements with multiple performance obligations

The Company’s contracts may contain multiple distinct performance obligations. The computed transaction price of each contract is allocated to each performance obligation based on a relative stand-alone selling price, or SSP. For performance obligations routinely sold separately, the SSP is determined by evaluating such stand-alone sales. For those performance obligations that are not routinely sold separately, the Company maximizes the use of observable inputs and determines SSP based on a market assessment approach, or on an expected cost-plus margin approach.

Nature of products and services

Platform segment:

The Company’s platform segment generates revenue from advertising sales, and content distribution and audience development activities like subscription and transaction based revenue shares, sale of branded channel buttons on remote controls and licensing arrangements with TV brands and service operators.

The Company’s advertising revenue is mostly generated through video and display advertising delivered through advertising impressions. The Company enters into advertising arrangements directly with the advertiser or with their agency which purchases advertising on their behalf. Advertising is typically sold on a cost-per-thousand basis as evidenced by an Insertion Order, or IO, that specifies the terms of the arrangement including the type of ad product, pricing, insertion dates, and the number of impressions over a stated period. Revenue is recognized as the number of impressions are delivered. IOs may include multiple performance obligations as they contain distinct advertising products or services. For such arrangements, the Company allocates revenue to each performance obligation based on their relative SSPs. In addition, advertising revenue is also recognized from distinct performance obligations included in distribution arrangements with content publishers.

The Company earns revenue shares from content publishers based on user subscriptions activated or billed through the Company’s platform and from purchases or rental of publishers’ media. The Company’s revenue share is generally equal to a fixed percentage of the price charged by the content publisher or a contractual flat fee.

The Company sells branded channel buttons on player and TV remote controls that provide one-touch access to a publishers’ content. The Company typically receives a fixed fee per button for each player or TV unit sold over a defined distribution period.

The Company licenses its technology and proprietary operating system to TV brands and service operators. Arrangements with TV brands commonly include a license to the Company’s technology and proprietary operating system over a specified term including updates and upgrades. Licensing revenues from TV brands are generated on a flat fee basis or from per unit licensing fees. Arrangements may also include marketing development funds paid to TV brands. Marketing development funds are reflected as a reduction to the estimated transaction price.

Arrangements with service operators generally include performance obligations comprised of a license to the technology and proprietary operating system, unspecified upgrades or enhancements, hosting of a branded channel store, and engineering and support services. The Company has determined that the license for the technology and the operating system is one performance obligation. Licensing fees from service operators are mostly generated from unit activations or flat fees and from ongoing maintenance.

Player segment:

The Company sells the majority of its players through retail distribution channels, including brick and mortar and online retailers, and through the Company’s website. The Company’s player revenue includes allowances for returns and sales incentives in the estimated transaction price. These estimates are based on historical experience and anticipated performance.

The Company’s player revenue includes two performance obligations:

The Company has determined that its hardware and embedded software be considered as one performance obligation because the customer cannot benefit from the hardware or the embedded software either on its own or together with other resources that are readily available to the customer.

Revenue disaggregation

The Company’s disaggregated revenues are represented by the two reportable segments discussed in Note 15. The disaggregation is based on the evaluations that are regularly performed by the chief operating decision maker, or CODM, for purposes of allocating resources and evaluating financial performance. The Company’s CODM is its Chief Executive Officer.

Transaction price allocated to future performance obligations

As of December 31, 2018, the Company had $117.0 million of estimated future revenue related to outstanding performance obligations. The Company expects to recognize approximately 76% of this future revenue over the next twelve months and the remainder thereafter through 2024. This estimated future revenue excludes contracts with original durations of one year or less, amounts relating to invoicing practical expedient and variable consideration amounts attributable to royalties related to sales and usage-based revenues. The amount of revenue recognized for the three months ended December 31, 2018 from performance obligations satisfied, or partially satisfied in previous periods is $7.2 million, which mainly relates to platform revenues.

Contract balances

Contract balances include accounts receivable, contract assets and contract liabilities or deferred revenues. Accounts receivable are recorded at the amount invoiced, net of an allowance for doubtful accounts. The payment terms with customers vary by contract. Contract assets are created when the timing of revenue recognition differs from the timing of invoicing to a customer. Contract asset is created when billing occurs subsequent to revenue recognition. Contract assets are transferred to accounts receivable when the rights to bill becomes unconditional. The Company’s contract assets are current in nature and are included in “Prepaid expenses and other current assets”. The Company did not have any impairments relating to contract assets.

Contract liabilities are recorded as deferred revenue and primarily relate to the advance consideration received from customers. Revenue is recognized when the performance obligation is completed and delivered or transfer of control occurs.

The table below reflects the contract balances of the Company (in thousands):

Revenue recognized during the year ended December 31, 2018 from amounts included in deferred revenue at January 1, 2018 was $38.5 million. For the year ended December 31, 2018, $12.4 million related to the delivery of intellectual property that occurred during the quarter ended March 31, 2018 and also resulted in a decrease to contract assets of $2.8 million as of December 31, 2018.

Impact of adoption for the year ended December 31, 2018

The most significant aspects of adopting the new revenue standard related to the Company’s platform revenues. The removal of vendor-specific objective evidence requirement and the application of variable consideration in the content publisher arrangements resulted in earlier recognition of revenues as compared to periods before adoption.

The impact of adoption of the new revenue standard on the condensed consolidated balance sheet as of December 31, 2018 and statements of operations for the year ended December 31, 2018 is reflected in the table below (in thousands):