Note 3 – Significant Accounting Policies

Revenue Recognition

The Company is engaged in research and development contracts with the federal government to develop certain technology to be utilized by the U.S. Department of Defense (“DoD”). The contracts are cost plus fixed fee contracts and revenue is recognized on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under the Company’s contracts may also be accrued as they are billable, under the terms of the agreements, unless such accrual is not reasonably related to the proportionate performance of the total work or services to be performed by the Company from inception to completion. Under the terms of certain contracts, fixed fees are not recognized until the receipt of full payment has become unconditional, that is, when the product has been delivered and accepted by the Federal government. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. The Company’s backlog includes future

Adaptive Diagnostic Electronic Portable Testset (“ADEPT”) units to be developed and delivered to the Federal government.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. The Company had unbilled revenues of $87,980 and $34,366 included in accounts receivable as of June 30, 2015 and December 31, 2014, respectively. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2015 and December 31, 2014, the Company had no advanced billings.

Warranty Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended June 30, 2015 and 2014, the Company recognized warranty (benefit) expense of $(23,300) and $5,600, respectively, and for the six months ended June 30, 2015 and 2014, the Company recognized warranty expense of $6,600 and $10,200, respectively. Since the inception of the IDIQ contract in March 2010, the Company has delivered 137 ADEPT units. As of June 30, 2015, there are 15 ADEPT units that remain under the limited warranty coverage. As of June 30, 2015 and December 31, 2014, the Company had an accrued warranty expense of $40,100 and $33,500, respectively.

The following table reflects the reserve for product warranty activity as of June 30, 2015 and December 31, 2014:

	2015			2014

Reserve for product warranty, beginning of period	$	33,500		$	35,190
Provision for product warranty		29,900			51,210
Product warranty expirations		(23,300	)		(52,900	)
Product warranty costs paid		-			-
Reserve for product warranty, end of period	$	40,100		$	33,500

Research and Development Costs

Research and Development expenditures are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs of $8,191 and $1,649 for the three months ended June 30, 2015 and 2014, respectively, and $9,735 and $3,297, for the six months ended June 30, 2015 and 2014, respectively.