Note

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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.

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract. In accordance with ASC 985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses for the three and six months ended June 30, 2016 and 2015 were $33,751 and $0 and $61,501 and $0, respectively. At June 30, 2016 and December 31, 2015, deferred revenues amounted to $30,000 and $24,000, respectively.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of June 30, 2016 and December 31, 2015, the Company had unbilled revenues of $122,342 and $60,857, respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2016 and December 31, 2015, there were $0 and $125,157, respectively, of 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, 2016 and 2015, the Company recognized warranty (benefit) expense of $0 and $(23,300), respectively, and for the six months ended June 30, 2016 and 2015, the Company recognized warranty expense (benefit) of $(20,801) and $6,600, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 189 ADEPT units. As of June 30, 2016, there are 64 ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of June 30, 2016 and December 31, 2015:

	June 30, 2016			December 31, 2015
Beginning balance	$	359,654		$	33,500
Provision for product warranty		-			400,500
Product warranty expirations		(20,801	)		-
Product warranty costs paid		(14,278	)		(74,346	)
Ending balance	$	324,575		$	359,654

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs of $24,359 and $8,191 for the three months ended June 30, 2016 and 2015, respectively, and $45,256 and $9,735 for the six months ended June 30, 2016 and 2015, respectively.

Intangible Assets

The majority of the Company’s intangible assets is a license acquired during 2015. In July 2015, the Company purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.

Licenses are amortized using a straight-line method over their estimated life of six years. For the three months ended June 30, 2016 and 2015, amortization expense related to the Company’s license amounted to $5,250 and $0, respectively, and $10,500 and $0 for the six months ended June 30, 2016 and 2015, respectively, and are included in general and administrative expenses on the Statements of Operations and Comprehensive Income.