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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and
on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. We have identified our most critical accounting policies and estimates
to be those related to the following:
Revenue Recognition.
We recognize revenue according to the guidance in the Accounting Standards Update (“ASU”) 2009-14
(ASC topic 985) “Certain Revenue Arrangements That Include Software Elements” and the ASU 2009-13 (ASC topic 605) “Revenue
Recognition — Multiple Deliverable Revenue Arrangements”. We recognize revenue when all of the following criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) the fee is
probable of collection.
Revenue is reported as described below:
Services Revenue.
Revenue from hosted and subscriber services consists of monthly recurring service fees and is recognized in
the month earned. Maintenance fees are generally collected in advance and recognized ratably over the maintenance period. Services
revenue for consulting, training and the design, development, deployment, field support and maintenance of communication systems is
generated under time and materials contracts, cost plus fee contracts, or fixed price contracts. Revenue is recognized under time and
materials contracts and cost plus fee contracts as billable costs are incurred. Fixed-price service contracts are accounted for using the
proportional performance method. These contracts generally allow for monthly billing or billing upon achieving certain specified
milestones.
Systems Revenue.
We design, develop, and deploy custom communications products, components, and systems. Custom systems
typically contain multiple elements, which may include hardware, installation, integration, and product licenses, which are either
incidental or provide essential functionality.
We allocate the fees in a multi-element arrangement to each element based on the relative fair value of each element, using
vendor-specific objective evidence (“VSOE”) of the fair value of each of the elements, if available. VSOE is generally determined
based on the price charged when an element is sold separately. In the absence of VSOE of fair value, the fee is allocated among each
element based on third-party evidence (“TPE”) of fair value, which is determined based on competitor pricing for similar deliverables
when sold separately. When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling
price (“ESP”) to allocate value to each element. The objective of ESP is to determine the price at which the Company would transact a
sale if the product or service were sold separately. The Company determines ESP for deliverables by considering multiple factors
including, but not limited to, prices it charges for similar offerings, market conditions, competitive landscape, and pricing practices.
Fees from the development and implementation of custom systems are generally performed under time and materials and fixed
fee contracts. Revenue is recognized under time and materials contracts and cost plus fee contracts as billable costs are incurred.
Fixed-price product delivery contracts are accounted for using the percentage-of-completion or proportional performance method,
measured either by total costs incurred as a percentage of total estimated costs at the completion of the contract, or direct labor costs
incurred compared to estimated total direct labor costs for projects for which third-party hardware represents a significant portion of
the total estimated costs. These contracts generally allow for monthly billing or billing upon achieving certain specified milestones.
Any estimated losses under long-term contracts are recognized in their entirety at the date that it becomes probable of occurring.
Revenue from hardware sales to monthly subscriber customers is recognized as systems revenue. The Company has contracts and
purchase orders where revenue is recognized at the time products or services are delivered, or when the product is shipped and the risk
of the loss is transferred to the buyer, net of discounts.
Software licenses are generally perpetual licenses for a specified number of users that allow for the purchase of annual
maintenance at a specified rate. All fees are recognized as revenue when the four criteria described above are met. For multiple
element arrangements that contain only software and software-related elements, we allocate the fees to each element based on the
VSOE of fair value of each element. Systems containing software licenses include a 90-day warranty for defects. We have not
incurred significant warranty costs on any software product to date, and no costs are currently accrued upon recording the related
revenue.
