Note

– Significant Accounting Policies

Revenue Recognition

We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does

not

vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether

two

or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having

one

or more performance obligations. The products and services in our contracts are typically

not

distinct from

one

another due to their complex relationships and the significant contract management functions required to perform under the contract.

Accordingly, our contracts are typically accounted for as

one

performance obligation. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our statements of income based on the predominant attributes of the performance obligations.

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. Our contracts do

not

include variable consideration. At the inception of a contract we estimate the transaction price based on our current rights and do

not

contemplate future modifications. Contracts are often subsequently modified to include changes in specifications, requirements or price, which

may

create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts or delivery orders are distinct and will be accounted for as a separate contract.

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. This continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process.

For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred as our customer receives and consumes the benefits.

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has

not

yet transferred to the customer. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract. Periodically, we review these risks and

may

increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers

may

be reduced, resulting in a reduction of backlog without a corresponding recognition of revenue. As of

September 30, 2019,

our ending backlog was

$1.9

million. For arrangements with the Department of Defense, we generally do

not

begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.

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

September 30, 2019

and

2018,

the Company recognized a warranty expense of

and

$75,000,

respectively, and for the

nine

months ended

September 30, 2019

and

2018,

the Company recognized a warranty (benefit) expense of (

$40,400

) and

$115,000,

respectively. Since the inception of the ADEPT IDIQ contract in

March 2010,

the Company has delivered

226

ADEPT units. As of

September 30, 2019,

there were

ADEPT units remaining under the limited warranty coverage.

The following table reflects the reserve for product warranty activity for:

	September 30, 2019			December 31, 2018
Balance, beginning of the period	$	153,723		$	40,000
Provision for product warranty		-			142,000
Product warranty expirations		(40,400	)		-
Product warranty costs paid		(12,488	)		(28,277	)
Balance, end of the period	$	100,835		$	153,723

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 September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Salaries	$	15,841	$	7,047	$	33,482	$	69,727
Other costs		4,584		14,000		17,038		38,401
	$	20,425	$	21,047	$	50,520	$	108,128

Intangible Assets

The Company’s intangible assets include 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 and Diagnostic Profiler 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

nine

years. For the

three

and

nine

months ended

September 30, 2019

and

2018,

amortization expense related to the Company’s license amounted to

$5,250

and

$5,250

and

$15,750

and

$15,750,

respectively, and is included in general and administrative expenses on the Statements of Income.