| Significant Accounting Policies | 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. These estimates include: the amount of stock-based compensation expense; the allowance for
doubtful accounts; the estimated lives, valuation, and amortization of intangible assets (including capitalized software); depreciation
of long-lived assets; valuation of warrants; post-employment benefits, and accruals for liabilities. While we believe that such
estimates are fair, actual results could differ materially from those estimates. Revenue Recognition We market and license our products indirectly
through channel distributors, independent software vendors (“ISVs”), value-added resellers (“VARs”) (collectively,
“resellers”) and directly to hosting service providers, corporate enterprises, governmental and educational institutions
and others. Our product licenses are perpetual. We also separately sell intellectual property licenses, maintenance contracts,
which are comprised of license updates and customer service access, as well as other products and services. Effective January 1, 2018, the Company adopted
guidance ASC 606. For further details, see below “Recently Adopted Accounting Pronouncements”. For the year ended December 31, 2017 including
interim periods therein, the Company recognized revenue under ASC 605. Under ASC 605 software license revenues were recognized
when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, as
typically evidenced in a signed non-cancellable contract, or a customer’s purchase order, and collectability is probable.
For additional detail on the Company’s revenue recognition policies in prior periods, please see Note 2 of Notes to Consolidated
Financial Statements in the 2017 10-K Report. The impact of the adoption of ASC 606 is the
effect on revenue treatment of certain resellers (“stocking resellers”) who purchase product licenses that they hold
in inventory until they are resold to the ultimate end user (an “inventory stocking order”). At the time that a stocking
reseller places an inventory stocking order, no product licenses are shipped by us to the stocking reseller; rather, the stocking
reseller’s inventory is credited with the number of licenses purchased and the stocking reseller can resell (issue) any number
of licenses from their inventory at any time. Upon receipt of an order to issue a license(s) from a stocking reseller’s inventory
(a “draw down order”), we will ship the license(s) in accordance with the draw down order’s instructions. Under ASC 605, we would defer recognition of
revenue from inventory stocking orders until the underlying licenses were sold and shipped to the end user, as evidenced by the
receipt and fulfillment of the stocking reseller’s draw down order, assuming all other revenue recognition criteria have
been met. Under ASC 606, we recognize revenue at the time that the stocking reseller places an inventory stocking order and their
account is credited with available licenses because at that time control over the licenses has been transferred to the reseller
and there are no remaining performance obligations for the Company other than the administrative task of electronic transfer of
license keys. There are no rights of return granted to resellers
or other purchasers of our software products. Revenue from maintenance contracts is recognized
ratably over the related contract period, which generally ranges from one to five years. All of our software licenses are denominated
in U.S. dollars. Long-Lived Assets Long-lived assets are assessed for possible
impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have
committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used,
measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals,
current market value, comparable sales value, and discounted future cash flows, among other variables, as appropriate. Assets to
be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their new carrying amount over
their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization.
No such impairment charge was recorded during either of the three or six-month periods ended June 30, 2018 or 2017. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts
that reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on assessments of the collectability
of specific customer accounts and the general aging and size of the accounts receivable. We regularly review the adequacy of our
allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and current economic conditions
that may affect a customer’s ability to pay. We specifically reserve for those accounts deemed uncollectible. We also establish,
and adjust, a general allowance for doubtful accounts based on our review of the aging and size of our accounts receivable. The following table sets forth the details of the Allowance for
Doubtful Accounts for the three-month periods ended June 30, 2018 and 2017:
Beginning Balance Charge Offs Recoveries Provision Ending Balance
2018 $ 3,400 $ — $ — $ 700 $ 4,100
2017 5,000 — — 10,300 15,300 The following table sets forth the details
of the Allowance for Doubtful Accounts for the six-month periods ended June 30, 2018 and 2017:
Beginning Balance Charge Offs Recoveries Provision Ending Balance
2018 $ 7,800 $ — $ — $ (3,700 ) $ 4,100
2017 7,700 — — 7,600 15,300 Concentration of Credit Risk For the three and six-month periods ended June
30, 2018 and 2017, respectively, we considered the customers listed in the following tables to be our most significant customers.
The tables set forth the percentage of sales attributable to each customer during the periods presented, and the respective customer’s
ending accounts receivable balance as a percentage of reported accounts receivable, net, as of June 30, 2018 and 2017.
Three Months Ended June 30, 2018 As of June 30, 2018 Three Months Ended June 30, 2017
Customer Sales Accounts Receivable Sales Accounts Receivable
Alcatel-Lucent 1.3 % 5.9 % 9.1 % 20.0 %
Centric 17.1 % 20.8 % 4.9 % 10.1 %
ESO Solutions 6.3 % 2.3 % 9.2 % 20.2 %
Elosoft 7.6 % 20.2 % 17.3 % 4.2 %
Siae microelettronica 3.8 % 13.6 % 2.8 % 6.2 %
Total 36.1 % 62.8 % 43.3 % 60.7 %
Six Months Ended June 30, 2018 As of June 30, 2018 Six Months Ended June 30, 2017
Customer Sales Accounts Receivable Sales Accounts Receivable
Alcatel-Lucent 0.8 % 5.9 % 5.5 % 20.0 %
Centric 15.7 % 20.8 % 4.9 % 10.1 %
ESO Solutions 4.5 % 2.3 % 5.1 % 20.2 %
Elosoft 5.9 % 20.2 % 13.8 % 4.2 %
Siae microelettronica 1.9 % 13.6 % 1.6 % 6.2 %
Total 28.8 % 62.8 % 30.9 % 60.7 % Recently Adopted Accounting Pronouncements Revenue In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers
(ASC 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the
transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for
those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (ASC 606): Deferral of
the Effective Date, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017, with
early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, FASB issued ASUs in 2016 containing
implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (ASC 606): Principal
versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability
of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (ASC
606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of ASC 606: identifying performance
obligations and the licensing implementation guidance; and ASU 2016-12, Revenue from Contracts with Customers (ASC 606): Narrow-Scope
Improvements and Practical Expedients, which contains certain practical expedients in response to identified implementation issues.
The Company elected to adopt ASC 606 under Modified Retrospective approach. Under the Modified Retrospective approach, only contracts
with customers for which there were remaining unsatisfied performance obligations (open contracts) at the beginning of initial
year of adoption must be restated to apply retrospectively the guidance under ASC 606. Any resulting impact for such contracts
prior to the beginning of the initial year of adoption are made as an adjustment to opening accumulated deficit for such year. On January 1, 2018, the Company adopted ASC
606 using the modified retrospective method. This method required retrospective application of the new accounting standard to those
contracts which were not completed as of January 1, 2018. Results for the reporting periods beginning after January 1, 2018 are
presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic
accounting under ASC 605. The change to the current revenue policy is
the timing of revenue recognition for software licenses purchased by stocking resellers. Under the guidance ASC 605, the Company
recognized revenue upon the delivery of licenses to end users when they were purchased from the stocking reseller. Under the guidance
ASC 606, license revenue is recognized upon placement of the stocking order by the stocking reseller. During the three-month period
ended March 31, 2018, this change in revenue policy resulted in lower license revenue of $96,400. This lower license revenue had
the same impact on gross profit, loss from operations and net loss. The Company recorded $1,391,900 to opening
accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to
reversal of deferred license revenue associated with stocking orders placed in prior periods which had not been sold through to
end users as of December 31, 2017. The cumulative effect of the changes made to
our condensed consolidated balance sheet as of January 1, 2018 under current assets, deferred revenue and accumulated deficit for
the adoption ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows:
Balance Sheet Balance at December 31, 2017 Adjustments due to ASC 606 Balance at January 1, 2018
Current Assets
Deferred COGS $ — $ 20,000 $ 20,000
Liabilities and Stockholders’ Equity
Accumulated Deficit $ (81,849,200 ) $ 1,391,900 $ (80,457,300 )
Current Liabilities
Deferred Revenue $ 1,845,100 $ (609,700 ) $ 1,235,400
Long Term Liabilities
Deferred Revenue $ 1,409,700 $ (802,200 ) $ 607,500 Income Taxes The Tax Cuts and Jobs Act (the “Act”)
was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies
to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new
taxes on certain foreign sourced earnings. Among these new taxes on certain foreign sourced earnings, the Act created a new category
of income inclusion: the global intangible low-taxed income (“GILTI”). The objective of GILTI is to deter U.S. corporations
from transferring intangible property to non-U.S. low-tax jurisdictions by subjecting the non-U.S. income to current U.S. taxation.
The Act also adds a provision for a deduction to offset the GILTI inclusion for C corporations only, which is 50 percent (37.5
percent after 2025) of the GILTI inclusion. The GILTI deduction is subject to limitation based mainly on the taxpayer’s taxable
income. In addition to GILTI, the Act also introduced
the foreign-derived intangible income (“FDII”) category. FDII is eligible income derived in connection with property
sold or services provided by the U.S. taxpayer to a non-U.S. person. The taxpayer must establish that the property is foreign use
property, and, in the case of services, the taxpayer must provide that the services are rendered to a non-U.S. person who is located
outside of the United States. C corporations receive a deduction equal to 37.5 percent (21.875 percent after 2025) of foreign-derived
intangible income (FDII). Similar to the GILTI deduction, the FDII deduction is subject to limitation. The Act significantly changes how the U.S.
taxes corporations. The Act requires complex computations to be performed that were not previously required in U.S. tax law, significant
judgments to be made in interpretation of the provisions of the Act, estimates in calculations, and preparation and analysis of
information not previously relevant or regularly produced. As of March 31, 2018, the Company has not completed the accounting for
all of the tax effects of the Act; however, preliminary calculations for the two new aforementioned provisions of the Act, GILTI
and FDII, provide that the impact of the provisions are immaterial to the provision for income taxes. As the Company completes its analysis of the
Act, collects and prepares necessary data, and interprets any additional guidance set forth by the U.S. Treasury Department, the
IRS, and other standard-setting bodies, the Company may alter its assessment if it determines that the Act has a material impact
on the provision for income taxes. |
