NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies
|
Organization:
Clancy Systems International, Inc.
(the "Company") was organized in Colorado on June 28, 1984. The Company is in the business of developing and marketing
parking ticket writing systems, internet payment remittance systems, and internet industry guides. The Company's revenues are derived
primarily from cities, universities and car rental companies throughout the United States and Canada. The Company manufactures
some of its equipment for field operations, including printers, chargers, mobile device keypads and other items used in its applications.
Use of estimates:
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Accounts receivable:
The allowance for doubtful accounts at
September 30, 2016 and 2017 was $13,300. The Company evaluates trade receivables that are past due to determine the appropriate
allowance for doubtful accounts. The receivables are charged off in the period which they are deemed uncollectible. The Company
contracts primarily with government agencies and takes into account budget year issues in evaluating its past due receivables.
Recoveries of trade receivables previously charged off are recorded when received.
Accounts receivable over 90 days old amounted
to $741,112 and $471,629 at September 30, 2016 and 2017, respectively.
Inventories:
Inventories are carried at the lower of
cost (first-in, first-out) or market. Inventory costs include materials, labor and manufacturing overhead. Inventories consist
primarily of computer and printer parts and supplies and are subject to technical obsolescence.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
Computer software:
Costs incurred to establish the technological
feasibility of computer software are classified as research and development costs, which are charged to expense as incurred. Software
development costs incurred subsequent to establishment of technological feasibility are capitalized and subsequently amortized
based on the lesser of the straight line method over the remaining estimated economic life of the product (generally five years)
or the estimate of current and future revenues for the related software product. Amortization expense for the years ended September
30, 2016 and 2017 amounted to $75,708 and $98,987 respectively, and is included in cost of services. The cost of direct labor is
periodically capitalized as computer software costs.
Property and equipment:
Property and equipment are stated at cost.
Depreciation is provided by the Company on the straight line method over the assets' estimated useful lives as follows:
Building and building improvements
|
10 to 30 years
|
Office furniture and equipment
|
5 years
|
Equipment under service contracts
|
3 to 5 years
|
Vehicles
|
3 to 5 years
|
Property and equipment consists partly
of computers and printers which are subject to technical obsolescence. Depreciation expense for the years ended September 30, 2016
and 2017 amounted to $37,480 and $22,608, respectively.
Sales and retirements of depreciable property
are recorded by removing the related cost and accumulated depreciation from the accounts. Gains and losses on sales and retirements
of property are reflected in results of operations.
Revenue recognition:
Revenue derived from professional service
contracts on equipment and support services is included in income as earned over the contract term; related costs consist mainly
of depreciation, supplies and sales commissions. The Company defers revenue for equipment and services under service contracts
that are billed to customers on a quarterly, semi-annual, annual or other basis. Revenue from the issuance of parking tickets is
recognized on a cash basis when received. Revenue derived from professional service contracts on parking meter and lots fees collections
is recognized on a cash basis when received. Related costs consist mainly of municipalities' fees, depreciation and lot rents.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
The Company recognizes revenue in accordance
with the Securities and Exchange Commission Staff Accounting Bulletin 104 ("SAB 104"). SAB 104 provides the conditions
for realization of revenue areas as follows: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the seller's price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured.
In addition, in accordance with FASB ASC
605-45, revenue is presented gross, determined on a contract by contract basis, where the Company acts as principal, takes title
to the products sold, has the risks and rewards of ownership, such as the risk of loss for collection, delivery or product returns.
Revenue is presented net of direct costs, determined on contract by contract basis, where the Company primarily acts as agent by
providing services for a commission or fee.
Before the Company recognizes revenue,
a contract is entered into with the client (which details the fees to be charged), all software and equipment per the contract
is delivered, and as most of the Company's clients are municipalities or universities, collectability is reasonably assured.
Contracts for the Company's ticket writing
system are entered into under one of four different pricing options. The Company (1) sells the equipment and ticket stock and licenses
the software separately, (2) charges a monthly fee for the use of the equipment and software, (3) charges a fee per ticket at the
time the ticket stock is provided to the client, or (4) provides a full privatization program. In a sale transaction, revenue is
recognized on the sale of the equipment, license and ticket stock (less an amount for customer support). When the Company charges
a monthly fee, that fee is recognized in income in the period the services are provided. When the Company charges a fee per ticket,
the Company recognizes revenue for the portion considered a sale of the ticket stock on delivery of the tickets to the client and
the remainder is recognized as revenue over the period of estimated usage of the tickets based on past history with the client.
In a privatization program, client revenue
guarantees may be entered into for a period of time, generally one year at a time. A ratable portion of the client revenue guarantee
is recognized each month as an expense. In revenue split arrangements, the portion of the cash collected and owed each month is
recognized as a liability and an expense.
The Company does not offer a right of return
on sales of equipment or ticket stock. Equipment sold, other than the Company's proprietary products, is covered under the manufacturer's
warranty.
Warranty expense for the Company's products
has been immaterial in the past. Revenue recognition commences after the equipment has been delivered and the software has been
installed and is operational.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
Shipping and handling costs:
The Company pays all shipping costs for
its contract services. Customers are provided prepaid shipping labels for returning equipment to the Company for repair and shipping
repaired equipment back to the client is paid for by the Company.
Advertising costs:
The Company expenses the costs of advertising
as incurred. Advertising expense was $55 and $72 for the years ended September 30, 2016 and 2017, respectively.
Deferred Income taxes:
The Company accounts for deferred income
taxes under FASB ASC 740-10. Under ASC 740-10, deferred income taxes are accounted for under an asset and liability approach that
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of transactions based on temporary
differences. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in future years. The Company's temporary differences
consist primarily of tax operating loss carry forwards, depreciation differences and capitalized section 263A costs.
Cash equivalents:
For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Marketable securities:
The Company accounts for marketable securities
in accordance with ASC 320-10. In accordance with ASC 320-10, the investment in securities has been classified as available-for-sale
because the securities are being held for an indefinite period of time. Under the available-for-sale classification, the securities
are recorded as an asset at current market value on the balance sheet with an amount representing unrealized gains and losses recorded
as comprehensive income. The current market value is derived from published market quotations. At the time of sale, a gain or loss
is recognized in the statement of operations using the cost basis of securities sold as determined by specific identification.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
Investments in marketable securities at
September 30, 2016 and 2017 consist of Colorado local government and municipal bonds that are triple A rated and insured that are
subject to market risk related to changes in interest rates and are available for sale. At September 30, 2016, the securities had
a cost basis of $1,103,623 and a fair market value of $1,154,624. At September 30, 2017, the securities had a cost basis of $1,105,194
and fair market value of $1,127,197.
The adjustment to unrealized holding losses
(gains) on available-for-sale securities included in accumulated other comprehensive income (loss) as a component of stockholders'
equity increased by $27,104 for the year ended September 30, 2016 and decreased by $28,998 for the year ended September 30, 2017,
and totaled $22,003 at September 30, 2017.
Fair value of financial instruments:
All financial instruments are held for
purposes other than trading. The following methods and assumptions were used to estimate the fair value of each financial instrument
for which it is practicable to estimate that value.
For cash and cash equivalents, accounts
receivable, accounts payable and current portions of long-term debt and obligations under capital leases, the carrying amount is
assumed to approximate fair value due to the short-term maturities of these instruments. For long-term debt obligations under capital
leases, the carrying value approximates fair value due to the interest rates approximating prevailing market rates.
Marketable securities — the carrying
amounts approximate the fair value because the securities are valued at prices based on published market quotations.
Concentrations of credit risk:
Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash, trade receivables and marketable securities.
The Company places its cash with high quality financial institutions. At September 30, 2016 and 2017 and at various times during
the years ended September 30, 2016 and 2017, the balance at one of the financial institutions exceeded FDIC insurance limits on
interest bearing accounts.
The Company provides credit,
in the normal course of business, to customers throughout the United States. All transactions are denominated in U.S. Dollars.
The Company performs ongoing credit evaluations of its customers. Credit terms are typically 30 days from billing date.
Significant portions of the Company's revenues
are derived from contracts with universities, car rental companies and municipalities.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
Earnings per share:
The Company follows ASC 260-10 in presenting
earnings per share which establishes the methodology of calculating basic earnings per share and diluted earnings per share. The
calculations differ by adding any instruments convertible to common stock (such as stock options, warrants, and convertible preferred
stock) to weighted average shares outstanding when computing diluted earnings per share. At September 30, 2016 and 2017, the Company
had no potentially dilutive securities.
Impairment of long-lived assets:
The Company evaluates the carrying value
of assets, other than investments in marketable securities, for potential impairment on an ongoing basis. In accordance with ASC
360-10, the Company periodically evaluates the carrying value of long-lived assets and long-lived assets to be disposed of and
certain identifiable intangibles related to those assets for potential impairment. The Company considers projected future operating
results, cash flows, trends and other circumstances in making such estimates and evaluations and, if necessary, reduces the carrying
value of impaired assets to fair value.
Segment Information:
The Company follows ASC 280-10 for segment
reporting. Certain information is disclosed, based on the way management organizes financial information for making operating decisions
and assessing performance. The Company currently operates in a single segment and will evaluate additional segment disclosure requirements
as it expands its operations.
Comprehensive income (loss):
The Company reports comprehensive income
(loss) in accordance with ASC 220-10, which requires the reporting of all changes in equity during a period, except those resulting
from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. This
encompasses unrealized gains and losses from available-for-sale securities held.
Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance with ASU 2015-04, ASU2016-08,
ASU 2016-12, and ASU 2016-20. The new guidance will replace all current U.S GAAP guidance about revenue recognition, including
industry specific guidance. The core principal of this new guidance is that revenue is recognized when promised goods or services
are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange
for those goods or services. The new guidance will also change our companies accounting for certain incremental
costs to obtain a customer contract, such as sales commissions by requiring that such costs be capitalized and charged to expense
over the period of expected benefit. This guidance is effective for the Company's annual September 30, 2018 financial statements.
The Company is currently evaluating the impact this new guidance may have on the financial statements and related disclosures.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory, as part of its simplification initiative. The previous guidance required an entity
to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable
value less a normal profit margin. Under the new guidance, inventory is measured at the lower of cost and net realizable value,
which would eliminate the other two options. The amendment is effective for financial statements issued for fiscal years beginning
after December 15, 2016. The Company does not expect the new guidance to have a material effect on its financial statements and
related disclosures.
In November 2015, the FASB issued ASU No.
2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes. This guidance is designed to reduce complexity
in financial reporting without sacrificing the quality of information provided to users. Under current GAAP, an entity is required
to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial
position. The new standard will require deferred tax assets and liabilities to be classified as noncurrent in a classified statement
of financial position. The standard is effective for financial statements issued for annual periods beginning after December 15,
2016. The Company does not believe this new guidance will have a material impact on its financial statements.
Inventories consist of the following at September 30:
|
|
2016
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Finished goods
|
|
$
|
19,738
|
|
|
$
|
19,738
|
|
Work in process
|
|
|
4,854
|
|
|
|
4,854
|
|
Purchased parts and supplies
|
|
|
5,825
|
|
|
|
5,825
|
|
|
|
$
|
30,417
|
|
|
$
|
30,417
|
|
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
3.
|
Fair value measurements
|
Financial Accounting Standards Board ASC
820, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under ASC 820 are described below:
|
Level 1:
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the
Company has the ability to access.
|
|
Level 2:
|
Inputs to the valuation methodology include:
|
|
·
|
Quoted prices for similar assets or liabilities in active markets;
|
|
·
|
Quoted prices for identical or similar assets or liabilities in inactive
markets;
|
|
·
|
Inputs other than quoted prices that are observable for the asset
or liability;
|
|
·
|
Inputs that are derived principally from or corroborated by observable
market data by correlation or other means.
|
If the asset or liability has a specified (contractual) term,
the level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3:
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement
|
The asset's or liability's fair value measurement
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
3.
|
Fair value measurements (continued)
|
Following is a description of the valuation methodologies used
for assets measured at fair value.
Municipal bonds: Valued at the closing
price reported on the active market on which the individual securities are traded.
The methods described above may produce
a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while
the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value
measurement at the reporting date.
The following table set forth by level,
within the fair value hierarchy, the Company's assets at fair value as of September 30, 2016 and 2017.
Assets at fair
value as of September 30, 2017 (unaudited)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
1,127,197
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,127,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,127,197
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,127,197
|
|
Assets at fair value as of September
30, 2016 (unaudited)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
1,154,624
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,154,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,154,624
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,154,624
|
|
The components of the Company's current deferred tax assets
and liabilities at September 30 are as follows:
|
|
2016
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Section 263A capitalization
|
|
$
|
5,100
|
|
|
$
|
3,600
|
|
Allowance for doubtful accounts
|
|
|
4,300
|
|
|
|
4,300
|
|
Net operating loss carryforward
|
|
|
184,800
|
|
|
|
250,700
|
|
Current deferred tax assets
|
|
$
|
194,200
|
|
|
$
|
258,600
|
|
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
4.
|
Income Taxes (continued)
|
The components of the Company's non-current deferred tax assets
and liabilities at September 30 are as follows:
|
|
2016
(unaudited)
|
|
|
2017
(unaudited)
|
|
Non current deferred tax assets:
|
|
|
|
|
|
|
Section 263A capitalization
|
|
$
|
53,300
|
|
|
$
|
53,300
|
|
|
|
|
53,300
|
|
|
|
53,300
|
|
Non current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(66,400
|
)
|
|
|
(67,700
|
)
|
|
|
|
|
|
|
|
|
|
Net non current deferred tax liabilities
|
|
$
|
(13,100
|
)
|
|
$
|
(14,400
|
)
|
The following is a reconciliation of the
statutory federal income tax rate applied to pre-tax accounting net income compared to the income taxes in the consolidated statements
of income:
|
|
2016
(unaudited)
|
|
|
2017
(unaudited)
|
|
Income tax benefit at the statutory rate
|
|
$
|
(25,912
|
)
|
|
$
|
(54,028
|
)
|
State and local income taxes, net of federal income tax
|
|
|
(4,087
|
)
|
|
|
(5,532
|
)
|
Tax exempt income
|
|
|
(12,916
|
)
|
|
|
(13,112
|
)
|
Effect of graduated tax rates
|
|
|
11,750
|
|
|
|
12,425
|
|
Nondeductible expenses
|
|
|
102
|
|
|
|
106
|
|
Other
|
|
|
264
|
|
|
|
|
|
|
|
$
|
(30,799
|
)
|
|
$
|
(60,141
|
)
|
The Company is subject to guidance issued
by the FASB relating to "Accounting for Uncertainty in Income Taxes." The guidance applies to all tax positions accounted
for in the financial statements, including positions taken in a previously filed tax return or expected to be taken in a future
tax return.
The Company has analyzed its filing positions
in Federal and significant state jurisdictions where it is required to file income tax returns. Management believes the Company's
positions and deductions will be sustained on audit
and does not anticipate any adjustments that will result in a material adverse effect on its financial conditions, results of operations
or cash flows.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2016 (unaudited) and September
30, 2017 (unaudited)
4.
|
Income Taxes (continued)
|
Interest and penalties, if any
are recorded as income taxes in the consolidated income statement. The Company is no longer subject to U.S. Federal income tax
examinations for years prior to 2014 and 2013 for state tax examinations.
5.
|
Basic and diluted net income per common share
|
Basic and diluted net income per common
share is based on the weighted average number of shares outstanding of 343,618,011 and 332,662,251 during the years ended September
30, 2016 and 2017, respectively.
6.
|
Professional service contracts
|
Clancy provides equipment and support services
under 12 month professional service contracts. At September 30, 2016 and 2017, all of the contracts contained cancellation provisions
requiring notice of 30 days or less.
The Company has evaluated subsequent events from September 30, 2017 through October 11, 2018, which is
the date the financial statements were issued. Other than disclosed above, there have been no material events noted in this period
which would impact the results reflected in this report, the Company's results going forward or require additional disclosure.