| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | (a)
Basis of Presentation and Use of Estimates The consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP). All significant intercompany balances and transactions have been eliminated in the consolidation. The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management 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 consolidated
financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from
those estimates. Significant estimates made by the Company include: 1) allowance for doubtful accounts for accounts receivable
(collectability, sales returns, and other variable considerations); 2) asset valuation allowance for deferred income tax assets;
3) write-downs of inventory for slow-moving and obsolete items, and market valuations; 4) stock based compensation; 5) management’s
assessment of going concern; 6) and estimated life of certification costs. (b) Cash
and Cash Equivalents All highly liquid
investments with original maturities of less than 90 days from the date of purchase are classified as cash equivalents. Cash equivalents
consist exclusively of money market funds. The Company has deposits at a limited number of financial institutions with federally
insured limits. Balances of cash and cash equivalents at these institutions can be in excess of the insured limits. However, the
Company believes that the institutions are financially sound and there is only nominal risk of loss. (c)
Inventories Inventories are
stated at the lower of cost, determined using the first-in, first-out method, or net realizable value. Consigned inventory is held
at third-party locations. The Company retains title to the inventory until purchased by the third-party. Consigned inventory, consisting
of finished goods, was approximately $1,537,300 and $958,500 at December 31, 2018 and 2017, respectively. (d)
Equipment Equipment is stated
at cost, less accumulated depreciation. Depreciation of equipment is provided using the straight-line method over the estimated
useful lives of the assets. (e)
Impairment of Long-Lived Assets Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to undiscounted future
net cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to sell. (f)
Other Assets Other assets are
stated at cost, less accumulated amortization. Certain certification costs incurred that are necessary to market and sell products
are capitalized and reported as “other assets” in the accompanying consolidated balance sheets when the costs are measurable,
significant, and relating to products that are projected to generate revenue beyond twelve months. These costs are amortized over
an eighteen-month period, beginning when the related products are available to be sold. Total certification costs capitalized during
the year ended December 31, 2018 were $93,000, with related amortization expense of $208,068 in 2018. Total certification costs
capitalized during the year ended December 31, 2017 were $150,000, with related amortization expense of $386,119 in 2017. (g) Income
Taxes Deferred income
taxes are provided on the differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and on net operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is provided for that portion of deferred tax assets not expected
to be realized. (h) Sales
Tax The Company recorded
a sales tax accrual in 2017 after the Company became aware that a state sales tax liability was both probable and estimable as
of December 31, 2017. The state sales tax liability stems from the Company’s ‘Fulfilled By Amazon’ sales agreement
which allows Amazon to warehouse the Company’s inventory throughout a number of states. As a result, the Company recorded
an expense of approximately $831 thousand in during the year ended December 31, 2017. During the year 2018, the Company settled
its obligations with most of the states, and re-assessed its liability on the last couple of states which resulted in a reduction
of approximately $203 thousand in the sales tax liability. As of December 31, 2018, approximately $86 thousand of the original
state sales tax liability remains and $133 thousand relates to sales tax that has been collected and not yet remitted to the respective
states. (i)
Earnings (Loss) Per Common Share Basic earnings
(loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number
of common shares, except for periods with a loss from operations. Diluted earnings (loss) per share reflects additional common
shares that would have been outstanding if dilutive potential shares of common stock had been issued. Potential shares of common
stock that may be issued by the Company include shares of common stock that may be issued upon exercise of outstanding stock options.
Under the treasury stock method, the unexercised options are assumed to be exercised at the beginning of the period or at issuance,
if later. The assumed proceeds are then used to purchase shares of common stock at the average market price during the period. Diluted earnings
(loss) per common share for the years ended December 31, 2018 and 2017 exclude the effects of 732,772 and 1,268,295 common share
equivalents, respectively, since such inclusion would be anti-dilutive. The common share equivlents consist of common shares issuable
upon exercise of outstanding stock options. (j)
Revenue Recognition The Company primarily
sells hardware products to its customers. The hardware products include dial-up modems, DSL modems, cable modems, mobile broadband
modems, and wireless and wired networking equipment. The Company does not sell software. The Company derives
its net sales primarily from the sales of hardware products to computer peripherals retailers, computer product distributors,
OEMs, and direct to consumers and other channel partners via the Internet. The Company accounts for point-of-sale taxes on a net
basis. In May 2014, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue
from Contracts with Customers The Company adopted
Accounting Standards Codification (“ASC”) Topic 606 using the modified retrospective method provision of this standard
effective January 1, 2018, January 1, 2018 January 1, 2018 Revenue recognition
is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification
of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction
price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. ● Identification of the
contract, or contracts, with a customer — ● Identification of the performance
obligations in the contract — ● Determination of the transaction
price ● Allocation of the transaction
price to the performance obligations in the contract ● Recognition of revenue when,
or as, the Company satisfies a performance obligation ● The Company has a present right
to payment ● The customer has legal title
to the goods ● The Company has transferred
physical possession of the goods ● The customer has the significant
risks and rewards of ownership of the goods ● The customer has accepted the
goods The Company has concluded that transfer
of control substantively transfers to the customer upon shipment or delivery, depending on the delivery terms of the purchase agreement. Other considerations of Topic 606 include the following: ● Warranties ● Returned Goods ● Price protection ● Volume Rebates and Promotion
Programs Impact of adoption of new revenue
guidance on financial statement line items: Accounts receivable,
net:
December 31, 2018
December 31, 2017
Gross accounts receivable $ 2,774,619 $ 2,811,638
Allowance for doubtful accounts (14,013 ) (15,094 )
Allowance for marketing distribution funds * –– (127,821 )
Allowance for returns * –– (439,211 )
Allowance for price protection, promotions * –– ––
Total allowances (14,013 ) (582,126 )
Total accounts receivable, net $ 2,760,606 $ 2,229,512 Accrued other
expenses:
December 31, 2018
December 31, 2017
Audit, legal, payroll $ 234,119 $ 314,504
Trademark licensing costs 875,000 750,000
Reserve for returns and contract
liabilities* 611,719 ––
Other 289,437 108,480
Total accrued other expenses $ 2,010,275 $ 1,172,984 ------------------------------------------------------------------------------------------------------------------------------------------------------------ * Upon adoption of ASC 606 on January
1, 2018, certain accounts receivable allowances totaling $611,719 as of December 31, 2018 were reported as accrued other expenses
as payable to the Company's customers and settled in cash or by credit on account. Had the Company adopted ASC 606 in 2017, $567,032
would have been recorded as accrued other expenses instead of a reduction to gross accounts receivable. Company revenues
are primarily from the selling of products that are shipped and billed. Consistent with the revenue recognition accounting standard,
revenues are recognized when control is transferred to customers, in an amount that reflects the consideration the Company expects
to be entitled to in exchange for those goods and services. Sales are earned at a point in time through ship-and-bill performance
obligations. The
amount of revenue recognized during the year that was in contract liabilities at January 1, 2018 and the revenue recognized in
current year for performance obligations met in the prior year was immaterial. Regarding disaggregated
revenue disclosures, as previously noted, the Company’s business is controlled as a single operating segment that consists
of the manufacture and sale of Internet access and other communications-related products. Most of the Company’s transactions
are very similar in nature, contract, terms, timing, and transfer of control of goods. Disaggregated revenue by distribution
channel:
Year 2018 Year 2017 Change $ Change %
Retailers $ 29,166,422 $ 27,862,870 $ 1,303,552 4.7 %
Distributors 1,730,702 731,246 999,456 136.7 %
Other 1,426,359 823,875 602,484 73.1 %
Total $ 32,323,483 $ 29,417,991 $ 2,905,492 9.9 % Disaggregated
revenue by product:
Year 2018 Year 2017 Change $ Change %
Cable Modems & gateways $ 29,135,155 $ 28,289,194 $ 845,961 3.0 %
Other 3,188,328 1,128,796 2,059,532 182.5 %
Total $ 32,323,483 $ 29,417,990 $ 2,905,493 9.9 % Revenue is recognized
when obligations under the terms of a contract with customers are satisfied. Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring the products. Based on the nature of the Company’s products and
customer contracts, the Company has not recorded any deferred revenue. Any agreements with customers that could impact revenue
such as rebates or promotions are recognized in the period of agreement. (k) Fair
Value of Financial Instruments The fair value hierarchy prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels:
● Level 1
● Level 2
● Level 3 Financial instruments
consist of cash and cash equivalents, accounts receivable, bank debt, and accounts payable. Due to the short-term nature and payment
terms associated with these instruments, their carrying amounts approximate fair value. (l)
Stock-Based Compensation Compensation cost
for awards is generally recognized over the required service period based on the estimated fair value of the awards on their grant
date. Fair value is determined using the Black-Scholes option-pricing model wherein the discount rate is based on published daily
treasury interest rates for zero-coupon bonds available from the US Treasury. Volatility is based on the historical volatility
over a period that is commensurate with the expected life of the option granted. (m)
Advertising Costs Advertising costs
are expensed as incurred and reported in selling expense in the accompanying consolidated statements of operations, and include
costs of advertising, production, trade shows, and other activities designed to enhance demand for the Company's products. The
Company reported advertising costs of approximately $2.76 million in 2018 and $2.23 million in 2017. (n) Foreign
Currencies The Company generates
a portion of its revenues in markets outside North America principally in transactions denominated in foreign currencies, which
exposes the Company to risks of foreign currency fluctuations. Foreign currency transaction gains and losses are reflected in operations
and were not material for any period presented. The Company does not use derivative financial instruments for hedging
purposes. (o)
Warranty Costs The Company provides
for the estimated costs that may be incurred under its standard warranty obligations, based on actual historical repair costs.
The reserve for the provision for warranty costs was $31,852 and $27,789 at December 31, 2018 and 2017, respectively. (p) Shipping
and Freight Costs The Company records
the expense associated with customer-delivery shipping and freight costs in selling expense. The Company reported shipping and
freight costs of $356.6 thousand in 2018 and $563.1 thousand in 2017. (q)
Recently Issued Accounting Standards In June 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13,
"Financial Instruments Credit Losses —Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires
a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to
be collected. ASU 2016-13 is effective for public business entities that are SEC filers for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim or annual period for
fiscal years beginning after December 15, 2018. An entity should apply the amendments in ASU 2016-13 through a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective
approach). The Company is currently evaluating the potential impact that the adoption of ASU 2016-13 may have on its consolidated
financial statements. In June 2018,
the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) — Improvements to Nonemployee Share-Based
Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods
and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific
guidance on inputs to an option pricing model and the attribution of cost. ASU 2018-07 specifies that Topic 718 applies to all
share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations
by issuing share-based payment awards, and that Topic 718 does not apply to share-based payments used to effectively provide (1)
financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606, Revenue from Contracts with Customers. ASU 2018-07 is effective for public business entities for
fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018-07
is not expected to have a significant impact on our consolidated financial statements. In July 2018,
the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases Targeted Improvements
to Topic 842, Leases Leases (Topic 842) Leases January 1, 2019, January 1, 2019 January 1, 2018 |
