Item
4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Internal Review
.
During
the preparation of the Company’s Form 10-Q for the nine months ended March 31, 2017, misstatements were identified in the
previous financial statements relating to the recording of revenue in the proper period. The Company determined that the Company’s
quarterly financial statements for the quarters ended September 30, 2015, December 31, 2015, September 31, 2016 and December 31,
2016 should no longer be relied upon.
On
August 31, 2015, the Company signed a consulting services agreement by which the Company would provide a model office at the customer’s
data center which would include a base installation of the Company’s NFS Ascent product, along with certain agreed upon
services. The Company received €1,800,000, approximately $2,024,000, as a non-refundable fee, which was received in two equal
payments. The Company then entered into a 10-year contract with the same customer on December 21, 2015. The Company recorded the
revenue for the model office in the periods that the cash was received. However, since the two contracts were with the same customer
and signed within a short period of time, and both contracts stipulate an offset of payments made for services provided for the
model office, the two contracts should have been combined and accounted for as a single contract. Revenue was recognized on the
percentage-of-completion method in accordance with Accounting Standards Codification (“ASC”) 605-35 for this arrangement.
As a result, for the quarter ended September 30, 2015, license revenue was overstated by $591,119 and for the quarter ended December
31, 2015 license revenue was understated by $406,146.
On
December 21, 2015, the Company signed a 10-year contract for a 12 country installation of its NFS Ascent product which included
a perpetual license, continued maintenance on the existing product and then maintenance on NFS Ascent upon installation. The Company
did not appropriately apply the percentage-of-completion method for this arrangement in accordance with ASC 605-35. As a result,
for quarter ended September 30, 2016, license revenue was understated by $1,953,935 and for the quarter ended December 31, 2016,
license revenue was overstated by $1,580,529.
The
Company charges maintenance revenue on the license value plus any additional customization that the customer may require. For
one customer, the Company did not increase the maintenance fee for the additional customization that was performed during the
year. This resulted in an understatement of maintenance revenue of $88,888, $96,085, and $120,976 for the quarters ended September
30, 2015, December 31, 2015, and September 30, 2016, respectively. Maintenance revenue was overstated by $198,797 for the quarter
ended December 31, 2016.
The
need for the restatement was determined on or about May 19, 2016 and management together with the Company’s audit committee
determined to address this change as soon as possible.
The
Chief Financial Officer, after consultation with the audit committee, has discussed the matters disclosed in this Current Report
on Form 8-K with its independent accountant, Squar Milner. The corrected financial information for the quarters ended September
30, 2015, December 31, 2015, September 30, 2016 and December 31, 2016 have been amended and restated in the 10Q for the period
ending March 31, 2017 which is being filed concurrently herewith. The necessary amended 10-Q’s will be filed as soon as
practicable.
A
copy of this disclosure was provided to Squar Milner. The Company undertakes to amend this 8-K to include Squar Milner’s
letter to the Commission regarding its position on the statements contained herein.