Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (the
Quarterly Report)
contains forward-looking statements about Spindle Inc.s (
"SPDL
," "
we
," "
us
," or the "
Company
") business, financial condition and prospects that reflect managements assumptions and beliefs based on information currently available. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of our managements assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, Spindles actual results may differ materially from those indicated by the forward-looking statements. You should not place undue reliance on these forward-looking statements.
The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, whether our services are accepted in the marketplace, our ability to expand our customer base, managements ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.
There may be other risks and circumstances that management may be unable to predict. When used in this Quarterly Report, words such as,
believes,"
"expects," "intends,"
"plans,"
"anticipates,"
"estimates"
and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.
Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. The forward- looking statements are made as of the date of this report and we undertake no obligations to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time.
Overview
Spindle, Inc. is an emerging provider of innovative marketing and commerce solutions delivered through the Catalyst brand. The Catalyst Marketing System is a proprietary, integrated marketing and commerce solution to assist merchants increase customer acquisition, enhance the customer experience, and enhance transactional growth. The Catalyst Marketing System is primarily focused on Small to Medium-sized Businesses (SMBs).
Spindle also owns payments-related technology, including a secure payments gateway, mobile payments technology and security software. We generate payment processing revenue through our Catalyst Gateway payment process. Gateway services are also bundled with the Catalyst Marketing System. We believe that our secure payments process as well as our Catalyst Marketing System will drive consumer transactions with our merchants, creating loyalty and recurring revenues for Spindle.
Spindle has grown its business through acquisitions in the past, and expects to add accretive technologies to expand in the future from time-to-time. However, our main focus is now on deploying strategic initiatives to leverage our own internal marketing and sales capabilities, along with distribution channels, to increase merchant conversions to our platform and transactional growth for our merchants customers.
Because our operating expenses exceed our revenues, we have relied primarily on sales of our securities and loans from related parties to fund our operations. We will continue to require substantial funds to support our operations and carry out our business plan. Our working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms with our partners. We may not be successful in raising additional funds as needed or if successful we may not be able to raise funds on terms that are favorable to us. We cannot guarantee that we will ever be profitable. As a result, our independent registered accounting firm has expressed doubt about our ability to continue as a going concern.
19
Our potential revenue streams are relatively new and not yet begun to contribute materially to our operations. Thus, we are unable to accurately forecast future revenue. Our management is hopeful that as our base of operations continues to grow, we will see a corresponding increase in licensing and transactional revenue.
On June 6, 2017, Glenn Bancroft resigned as a member of the Company's board of directors (the Board) for personal reasons. Mr. Bancroft's resignation was not due to any dispute with the Company and Mr. Bancroft agreed to a one-year lockup period for all of the shares he beneficially owns.
On February 14, 2017, the Company sold a patent license revenue stream pursuant to a License Agreement with goEmerchant, LLC (goEmerchant). The patents which were the subject of the revenue stream expired on or about February 5, 2016. On February 20, 2017, goEmerchant contacted the Company asking for repayment of $54,784.43 (the Repayment Amount). The Company disputes the amount owed and believes there are additional payment obligations owed from goEmerchant to the Company which more than offsets the Repayment Amount. The Company intends to enforce all its rights under the License Agreement and collect any obligations owed to it.
Results of Operations
Revenues and Cost of Sales
Revenues from ongoing operations are derived from our patented conversion and networked payment processes under the Spindle product line and licensing of our intellectual property. During the three and six months ended June 30, 2017, we generated $39,042 and $71,264 in revenues, respectively, and incurred $20,984 and $37,478 in cost of sales, respectively, which produced gross profits of $18,058 and $33,786, respectively. This compares to revenues during the three and six months ended June 30, 2016 of $257,442 and $472,415, respectively, and cost of sales of $13,349 and $24,364, respectively, which produced gross profits of $244,093 and $448,051, respectively.
The period-over-period decrease in revenues and gross profit is due to managements decision to focus most resources over the past months on platform integration and development at the expense of short-term revenue generation, realizing that it was more important to bring a full-featured comprehensive platform to the market, rather than trying to sell a piecemeal solution.
Management also reviewed the profitability of our sub-merchant and reseller relationships, which resulted in the strategic cancellation of contracts that did not generate positive cash flow to the Company. Management believes that the full technology platform has now reached the stage where the Company can begin to sell its solutions to the market in the third quarter of 2017, and do so more aggressively in the fourth quarter of 2017 and beyond. We expect to see increases in licensing and transactional revenue in future periods by bringing the full platform to market in a methodical and strategic manner.
As stated previously, our potential revenue streams are relatively new and have not yet begun to contribute materially to our operations. As a result, we are unable to accurately forecast future revenue.
EBITDA
We define Adjusted EBITDA as operating income before depreciation, amortization of intangible assets, stock-based compensation, and special charges. We use Adjusted EBITDA to evaluate the underlying performance of our business, and a summary of Adjusted EBITDA, reconciling GAAP amounts (i.e., items reported in accordance with GAAP) to Adjusted EBITDA amounts (i.e., items included within Adjusted EBITDA as defined directly above) for the fiscal quarters and six months ended June 30, 2017 and 2016 follows:
20
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|
For the Three Months Ended June 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
GAAP Change
|
Adjusted
EBITDA Change
|
|
GAAP
|
Adjustments
|
Adjusted
EBITDA
|
|
GAAP
|
Adjustments
|
Adjusted
EBITDA
|
|
$
|
%
|
$
|
%
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales income
|
$ 39,042
|
$ -
|
$ 39,042
|
|
$ 257,442
|
$ -
|
$ 257,442
|
|
$(218,400)
|
-85%
|
$(218,400)
|
-85%
|
Cost of sales
|
20,984
|
-
|
20,984
|
|
13,349
|
-
|
13,349
|
|
7,635
|
57%
|
7,635
|
57%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
18,058
|
-
|
18,058
|
|
244,093
|
-
|
244,093
|
|
(226,035)
|
-93%
|
(226,035)
|
-93%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
8,721
|
(8,721)
|
-
|
|
114,871
|
(114,871)
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-
|
|
(106,150)
|
-92%
|
-
|
0%
|
Promotional and marketing
|
2,830
|
-
|
2,830
|
|
11,174
|
-
|
11,174
|
|
(8,344)
|
#
|
(8,344)
|
-75%
|
Consulting
|
139,953
|
(130,953)
|
9,000
|
|
149,212
|
(139,812)
|
9,400
|
|
(9,259)
|
-6%
|
(400)
|
-4%
|
Salaries and wages
(including equity compensation)
|
127,618
|
(7,658)
|
119,960
|
|
395,467
|
(179,698)
|
215,769
|
|
(267,849)
|
-68%
|
(95,809)
|
-44%
|
Directors fees
|
41,003
|
(41,003)
|
-
|
|
40,905
|
(40,905)
|
-
|
|
98
|
0%
|
-
|
0%
|
Professional fees
|
138,102
|
-
|
138,102
|
|
99,636
|
(11,245)
|
88,391
|
|
38,466
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39%
|
49,711
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56%
|
General and administrative
|
88,472
|
-
|
88,472
|
|
221,777
|
(36,550)
|
185,227
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|
(133,305)
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-60%
|
(96,755)
|
-52%
|
Loss on Impairment of long-lived asset
|
-
|
-
|
-
|
|
43,657
|
-
|
43,657
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|
(43,657)
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-100%
|
(43,657)
|
-100%
|
Total operating expenses
|
546,699
|
(188,335)
|
358,364
|
|
1,076,699
|
(523,081)
|
553,618
|
|
(530,000)
|
-49%
|
(195,254)
|
-35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss / Adjusted EBITDA
|
$(528,641)
|
$ 188,335
|
$(340,306)
|
|
$(832,606)
|
$ 523,081
|
$(309,525)
|
|
$ 303,965
|
-37%
|
$ (30,781)
|
10%
|
|
|
|
|
|
|
|
|
|
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|
For the Six Months Ended June 30,
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|
|
|
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2017
|
|
2016
|
|
GAAP Change
|
Adjusted
EBITDA Change
|
|
GAAP
|
Adjustments
|
Adjusted
EBITDA
|
|
GAAP
|
Adjustments
|
Adjusted
EBITDA
|
|
$
|
%
|
$
|
%
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales income
|
$ 71,264
|
$ -
|
$ 71,264
|
|
$ 472,415
|
$ -
|
$ 472,415
|
|
$(401,151)
|
-85%
|
$(401,151)
|
-85%
|
Cost of sales
|
37,478
|
-
|
37,478
|
|
24,364
|
-
|
24,364
|
|
13,114
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54%
|
13,114
|
54%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
33,786
|
-
|
33,786
|
|
448,051
|
-
|
448,051
|
|
(414,265)
|
-92%
|
(414,265)
|
-92%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
16,234
|
(16,234)
|
-
|
|
224,567
|
(224,567)
|
-
|
|
(208,333)
|
-93%
|
-
|
0%
|
Promotional and marketing
|
9,763
|
-
|
9,763
|
|
12,700
|
-
|
12,700
|
|
(2,937)
|
#
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(2,937)
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-23%
|
Consulting
|
196,187
|
(182,520)
|
13,667
|
|
280,174
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(267,574)
|
12,600
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(83,987)
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-30%
|
1,067
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8%
|
Salaries and wages
(including equity compensation)
|
317,571
|
(45,951)
|
271,620
|
|
936,977
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(566,206)
|
370,771
|
|
(619,406)
|
-66%
|
(99,151)
|
-27%
|
Directors fees
|
78,503
|
(78,503)
|
-
|
|
93,145
|
(93,145)
|
-
|
|
(14,642)
|
-16%
|
-
|
0%
|
Professional fees
|
242,568
|
-
|
242,568
|
|
219,356
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(21,452)
|
197,904
|
|
23,212
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11%
|
44,664
|
23%
|
General and administrative
|
188,158
|
-
|
188,158
|
|
326,422
|
(48,100)
|
278,322
|
|
(138,264)
|
-42%
|
(90,164)
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-32%
|
Loss on Impairment of long-lived asset
|
-
|
-
|
-
|
|
43,657
|
-
|
43,657
|
|
(43,657)
|
-100%
|
(43,657)
|
-100%
|
Total operating expenses
|
1,048,984
|
(323,208)
|
725,776
|
|
2,136,998
|
(1,221,044)
|
915,954
|
|
(1,088,014)
|
-51%
|
(190,178)
|
-21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss / Adjusted EBITDA
|
$(1,015,198)
|
$ 323,208
|
$(691,990)
|
|
$(1,688,947)
|
$1,221,044
|
$(467,903)
|
|
$ 673,749
|
-40%
|
$(224,087)
|
48%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# - represents a value greater than 100% change
|
|
|
|
We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following and believe that:
·
Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, and other non-operating expenses as well as depreciation and amortization which are non-cash expenses;
·
It is useful to provide investors with a standard operating metric used by management to evaluate our operating performance; and
·
The use of Adjusted EBITDA is helpful to compare our results to other companies.
21
Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:
·
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
·
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
·
Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
·
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
·
Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and
·
Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.
Operating Expenses
In the course of our operations, we incur operating expenses composed largely of general and administrative costs and professional fees. General and administrative expenses are essentially the cost of doing business, and encompass, without limitation, the following: research and development; licenses; taxes; general office expenses, such as postage, supplies and printing; rent; utilities; bank charges; website costs; and other miscellaneous expenditures not otherwise classified. Accounting fees include: auditing by our independent registered public accountants, bookkeeping, tax preparation fees for filing Federal and State income tax returns and other accounting-specific consulting services. Professional fees include: transfer agent fees for printing stock certificates; consulting costs for marketing and advertising; general business development; legal fees; and costs related to the preparation and submission of reports and information statements with the SEC.
For the three and six months ended June 30, 2017, we incurred operating expenses in the amount of $546,699 and $1,048,984, respectively, as compared to $1,076,699 and $2,136,998 for the three and six months ended June 30, 2016, respectively. The amounts for the three and six months ended June 30, 2017 are comprised of $8,721 and $16,234 in depreciation and amortization expense related to our fixed assets; $2,830 and $9,763 in promotional and marketing expenses; $139,953 and $196,187 in consulting fees; $127,618 and $317,571 in salaries and wages; $41,003 and $78,503 in directors fees; $138,102 and $242,568 in professional fees; and $88,472 and $188,158 in general and administrative expenses. The amounts for the three and six months ended June 30, 2016 are comprised of $114,871 and $224,567 in depreciation and amortization expense related to our intellectual property and fixed assets; $11,174 and $12,700 in promotional and marketing expenses; $149,212 and $280,174 in consulting fees; $395,467 and $936,977 in salaries and wages; $40,905 and $93,145 in directors fees; $99,636 and $219,356 in professional fees; $221,777 and $326,422 in general and administrative expenses; and $43,657 as a loss on the impairment of long-lived assets in the second quarter of 2016.
Operating expenses are lower in 2017 compared to the three and six months ended June 30, 2016, due to Managements focus on controlling costs. The 2016 write-off of assets that no longer had value to the company resulted in a significant decrease in amortization and depreciation, and the departure of five employees in June of 2016, reduced salaries and wages. As we grow in 2017 and 2018 we expect these costs, especially payroll, to increase.
22
Other Income and Expense
During the three and six months ended June 30, 2017, we recognized loss on sale of assets of $13,344 and 195,244, respectively. During the period ended March 31, 2016, the loss on sale of assets was zero. On February 14, 2017, we sold our rights to future streams of income from several licensed patents to two buyers for a total of $150,000. We also sold 1.5 million shares of common restricted stock in the same agreements. We had assigned zero value to the future streams and consequently recorded a loss on sale of $150,000. On March 3, 2017, we also sold all the assets and rights associated to the Yowza!! brand. We received $25,000 in cash but also granted 250,000 shares of restricted stock and 50,000 warrants exercisable at $0.135. The loss associated with this sale of assets was $31,900. During the three months ended June 30, 2017, we wrote off approximately $24,000 of an uncollectible receivable balance related to the February sale of the future income stream, and collected an additional $10,000 related to the C& H transaction in December of 2016.
During the three and six months ended June 30, 2017, we recognized interest expense of $37,888 and $111,967, respectively. This compares to $17,072 and $17,662 in interest expense for the three and six months ended June 30, 2016, respectively. The increase in 2017 is mainly related to the recognition of interest expense from the beneficial conversion feature of convertible debt recorded in the three and six months ended June 30, 2017.
During the three and six months ended June 30, 2017, we recognized interest expense - related parties of $6,865 and $112,453, respectively. This compares to $6,024 in interest expense for both the three and six months ended June 30, 2016. The increase in 2017 is related to the recognition of interest expense from the beneficial conversion feature of convertible debt recorded in the three and six months ended June 30, 2017.
Net Losses
We have experienced net losses in all periods since our inception. Our net loss for the three and six months ended June 30, 2017 was $586,738 and $1,434,829, respectively. Net losses are attributable to the lower revenues in 2017 as described above and in the increase in interest expense. During the three and six months ended June 30, 2016, we incurred a net loss of $868,723 and $1,837,762, respectively, which was mainly attributable to the Companys increase in G&A costs and the result of a legal settlement.
We anticipate incurring ongoing operating losses and cannot predict when, if at all, we may expect these losses to narrow or cease.
Liquidity and Capital Resources
Cash used in operating activities during the six months ended June 30, 2017 was $508,688 compared to $577,357 of cash used in operations during the comparable period ended June 30, 2016. The decrease in the use of cash for operating activities in 2017 is mainly due to the collection of various receivable balances.
During the six months ended June 30, 2017, net cash provided by investing activities totaled $25,000, which was received in the sale of intangible assets related to the Yowza!! platform. During the six-month period ended June 30, 2016, net cash used in investing activities consisted of $204,691, mainly for labor costs related to additional software development costs.
During the six months ended June 30, 2017, net cash provided by financing activities totaled $506,990, comprised of $157,490 received from investors for purchases of our common stock and $376,500 in proceeds from advances to and notes payable issued by the Company, offset by $27,000 in repayments of advances and notes. In comparison, during the six months ended June 30, 2016, net cash provided by financing activities totaled $702,300, comprised of $822,800 received from investors for the purchase of our common stock, offset by $100,000 paid as part of a legal settlement to repurchase outstanding warrants and $20,500 in repayments of notes and advances to the Company. Also, in 2016, a previous advance to the Company was converted to a note payable, and is included in Notes payable - related party, net, on our balance sheet.
23
As of June 30, 2017, we had $26,944 of cash on hand, none of which is restricted. Our management believes this amount may not be sufficient to maintain our operations for at least the next 12 months. We are actively pursuing opportunities to raise additional capital through sales of our equity and/or debt securities for cash. We cannot assure you that, if needed, financing can be obtained or, if obtained, that it will be on reasonable terms. As such, our principal accountants have expressed doubt about our ability to continue as a going concern because our revenues do not cover our cash expenditures.
This report discusses our financial statements, which have been prepared in accordance with GAAP. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, recoverability of intangible assets, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not clear from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not clear from other sources, primarily the valuation of intangible assets. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.
Critical Accounting Policies
Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Please see Note 2 to our financial statements for a more complete description of our significant accounting policies.
Intangible assets and software development costs
Management regularly reviews property, equipment, intangibles and other long-lived assets for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Management believes that the accounting estimate related to impairment of the Companys property and equipment, is a critical accounting estimate because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Managements assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so.
The Company reviews the carrying value of intangible assets for impairment whenever events and circumstances indicate that the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the fair value. The factors considered by management in performing this assessment include current operating results, trends and prospects, the way the property is used, and the effects of obsolescence, demand, competition and other economic factors.
24
Revenue recognition
We recognize revenue when all the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the dollar amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
Sales related to long-term contracts for services (such as engineering, product development and testing) extending over several years are accounted for under the percentage-of-completion method of accounting. Sales under these contracts are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method utilizing budgeted milestones or tasks as designated per each contract. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.
For all other sales of products or services the Company recognizes revenues based on the terms of the customer agreement. The customer agreement takes the form of either a contract or a customer purchase order and each provides information with respect to the product or service being sold and the sales price. If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized at the time of shipment of the product to the customer.
Stock-Based Compensation
We record stock based compensation in accordance with the guidance in ASC Topic 718 which requires us to recognize expense related to the fair value of our employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. We recognize the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
We records stock-based compensation issued to external entities for goods and services at either the fair market value of the shares issued or the value of the services received, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC 505-50-30.
Off-Balance Sheet Arrangements
As of June 30, 2017, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.