Note

–

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 Accounting Standards Codification Topic

985

605

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 and maintenance for the

three

months ended

March

31,

2017

and

2016

were

$7,500

and

$27,750,

respectively. At

March

31,

2017

and

December

31,

2016,

deferred revenues amounted to

and

$7,500,

respectively.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of

March

31,

2017

and

December

31,

2016,

the Company had unbilled revenues of

$218,261

and

$235,421,

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

March

31,

2017

and

December

31,

2016,

there were 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

March

31,

2017

and

2016,

the Company recognized a net warranty (recovery) expense, which is a component of the Company’s cost of sales of

$(141,300)

and

$(20,801),

respectively. Since the inception of the ADEPT IDIQ contract in

March

2010,

the Company has delivered

189

ADEPT units. As of

March

31,

2017,

there are

ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of

March

31,

2017

and

December

31,

2016:

	March 31, 2017			December 31, 2016
Beginning balance	$	240,980		$	359,654
Provision for product warranty		-			1,800
Product warranty expirations		(141,300	)		(86,301	)
Product warranty costs paid		(1,590	)		(34,173	)
Ending balance	$	98,090		$	240,980

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 as follows:

	Three months ended March 31,
	2017		2016

Salaries	$	39,606	$	19,552
Other costs		2,189		1,345
	$	41,795	$	20,897

Intangible Assets

The majority of the Company’s intangible assets is a license acquired during

2015.

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

March

31,

2017

and

2016,

amortization expense related to the Company’s license amounted to

$5,250

and

$5,250,

respectively, and are included in general and administrative expenses on the Condensed Statements of Operations and Comprehensive Income.