NOTES TO CONDENSED FINANCIAL STATEMENTS
1.
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Nature of Business and Summary of Significant Accounting Policies –
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Basis of Presentation
The accompanying unaudited condensed financial statements of
Table Trac, Inc. (the “Company,” or “Table Trac”) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
The balance sheet as of March 31, 2019 and the statements of operations, cash flows and stockholders’ equity for the three
months ended March 31, 2019 and 2018 are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Certain
information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying
financial statements should be read in conjunction with the financial statements and notes included in the Table Trac Annual Report
on Form 10-K for the year ended December 31, 2018.
Nature of Business
Table Trac was formed under the laws of the State of Nevada
in June 1995. The Company has offices in Minnetonka, Minnesota and Oklahoma City, Oklahoma. The Company has developed and sells
an information and management system that automates and monitors various aspects of the operations of casinos.
Table Trac provides system sales and technical support to casinos.
System sales include installation, custom casino system configuration, and training. In addition, license and technical support
are provided under separate license and service contracts.
Use of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. The Company’s use of estimates and assumptions include: for revenue recognition, determining the nature and timing
of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations,
variable consideration, and other obligations, realizability of accounts receivable, the valuation of deferred tax assets and
liabilities, deferred revenue and costs, and the valuation of inventory. Actual results could differ from those estimates.
The
Company’s significant accounting policies are described in Note 1 of the financial statement included in its Annual Report
on Form 10-K for the year ended December 31, 2018.
Revenue
The Company derives revenues from the sales of systems, licenses
and maintenance fees, and services, and rental agreements.
System Sales
Revenue is recognized upon transfer of control of promised products
or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.
We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct
and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected, when applicable from customers,
which are subsequently remitted to governmental authorities.
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is a unit of account
in ASC 606. A majority of the Company’s systems sales have multiple performance obligations including an obligation to deliver
a casino management system and another to provide maintenance services. For system sales with multiple performance obligations,
the Company allocates revenue to each performance obligation based on its SSP. The Company generally determines the SSP based
on the price charged to customers. The Company does offer its customers contracts with extended payment terms representing a significant
financing component. The Company must evaluate if any extended payment terms in the contract is an indicator of the transaction
price not being probable. The Company only includes the amount for which it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty is resolved. The Company occasionally enters into a
contract that includes multiple sites; management has determined that each site installation is a separate performance obligation.
In these instances the Company recognizes revenue upon completion of each performance obligation. In addition, the Company has
a contract with a reseller who purchases and resells the Company’s products; monthly the reseller notifies the Company of
their successful installations. The Company submits an invoice to the reseller for these installations. Provided all other revenue
recognition steps have been satisfied, the Company recognizes the revenue if payment of a significant portion of the contract
consideration is due within 12 months of the delivery of the product. System contracts that do not meet this criteria are
deferred and recognized when the uncertainty is resolved, which is consistent with when contractual payments become due. The Company
also analyzes its standard business practice of using long-term contracts and the history of collecting on extended payment term
contracts which include a financing component which is usually a market interest rate. The associated interest income is reflected
accordingly on the statement of operations without making concessions for determining if revenue should be recognized.
Maintenance revenue
Maintenance revenue is recognized ratably over the contract
period. The stand-alone selling price for maintenance is based upon the renewal rate for contracted services.
Service revenue
Service
revenue is recognized after the services are performed and collection of the resulting receivable is reasonably assured. The SSP
price for service revenue is established based upon actual selling prices for the services or prior similar arrangements.
Rental revenue
The Company may offer customers a rental contract. Revenues
are billed monthly on a per-game per-day basis. There is an option to purchase the system after the rental contract expires
at a pre-determined residual value.
The following table summarizes disaggregated revenues by major
product line for the three months ended March 31, 2019 and 2018, respectively:
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Three
Months Ended March 31,
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|
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2019
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|
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2018
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|
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2019
|
|
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2018
|
|
|
|
|
|
|
|
|
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(percent of revenues)
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System sales
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$
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658,595
|
|
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$
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380,867
|
|
|
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48.1
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%
|
|
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35.2
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%
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Maintenance fees
|
|
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672,569
|
|
|
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627,018
|
|
|
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49.1
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%
|
|
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58.0
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%
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Service and other sales
|
|
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37,466
|
|
|
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73,383
|
|
|
|
2.8
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%
|
|
|
6.8
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%
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Total revenues
|
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$
|
1,368,630
|
|
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$
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1,081,268
|
|
|
|
100.0
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%
|
|
|
100.0
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%
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See Major Customers for disaggregated revenue information
about primary geographical markets.
Significant Judgments
Contracts
with customers often include promises to transfer multiple products and services to a customer. Determining whether products and
services are considered distinct performance obligations that should be accounted for separately versus together may require significant
judgment.
Judgment is required to determine the SSP
for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately. We use
a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there
is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly
observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include
market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to
the stratification of those products and services by customers and circumstances. In these instances, we may use information such
as the size of the customer and geographic region in determining the SSP.
We
evaluated the contractual payment terms of all system sales generated during the year to determine the proper recognition or deferral
of revenue. We believe the 12 month subsequent collection threshold of 67% or greater is the most appropriate for the Company
to constrain revenue.
We
evaluate the interest rates in customer contracts with extended payment terms, representing a significant financing component.
These rates range from approximately 1% to 6% and we believe those to be appropriate market interest rates for the financing component.
Deferred System Sales Costs
Incremental
cost to obtain and fulfil a contract are deferred and amortized over the related system contract term. These costs are recognized
on a straight-line basis over the term of the contract which is generally 18-48 months beginning when revenues are generated.
These costs are the most significant component of contract and other long-term assets on the balance sheet, and are $507,695 and
$528,401 as of March 31, 2019 and December 31, 2018, respectively.
Accounts Receivable / Allowance for Doubtful Accounts
Accounts
receivable are initially recorded at the invoiced amount and carried on the balance sheet at net realizable value, which includes
foreign currency translation as of each balance sheet date. Accounts receivable include unsecured regular customer receivables
and unsecured amounts from financed contracts coming due within 12 months. Amounts from financed contracts due beyond 12 months
are recorded as “Long-term accounts receivable – financed contracts.” Interest is recorded upon receipt
to other income on the statements of operations. An allowance for doubtful accounts is recorded when the Company believes the
amounts may not be collected. Management believes that receivables, net of the allowance for doubtful accounts, are fully collectible.
Accounts receivable are written off when management determines collection is no longer likely. While the ultimate result may differ,
management believes future write-offs not included in the allowance will not have a material impact on the Company’s financial
position.
Major Customers
For the three month period ended March 31, 2019, two customers
comprised approximately 28% of revenue compared to one customer who accounted for approximately 15% for the three months ending
March 31, 2018. At March 31, 2019, three different customers comprised approximately 41% of accounts receivable compared to two
customers accounting for approximately 25% at March 31, 2018. The following table summarizes major customer’s information
for the three months ended March 31, 2019 and 2018:
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For the Three Months ended March
31,
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2019
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2018
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|
|
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% Revenues
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% AR
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% Revenues
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% AR
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Major
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27.6
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%
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40.9
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%
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|
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15.0
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%
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|
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25.2
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%
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All Others
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|
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72.4
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%
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59.1
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%
|
|
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85.0
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%
|
|
|
74.8
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%
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Total
|
|
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100.0
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%
|
|
|
100.0
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%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
For the three month periods ending March 31, 2019 and 2018,
sales to customers in the United States represent 79.1% and 94.0% of total revenues, respectively. For the three month periods
ending March 31, 2019 and 2018, sales to a customer in Australia represent 12.3% and 0% of total revenues, respectively.
A
major customer is defined as any customer that represents at least 10% of revenue for a given period or outstanding account receivable
at the endo of a period.
Inventory
Inventory, consisting of finished goods, is stated at the lower
of cost or net realizable value. The average cost method, which approximates the first in, first out method, is used to value inventory.
Inventory is reviewed annually for the lower of cost or net realizable value and obsolescence. Any material cost found to be above
net realizable value or considered obsolete is written down accordingly. The inventory value as of March 31, 2019 was $1,040,059,
which included work-in-process of $305,990. The inventory value was $762,165 as of December 31, 2018, which included work-in-process
of $50,824. The Company had no obsolescence reserve at March 31, 2019 or December 31, 2018. At March 31, 2019 the Company recorded
a prepayment for inventory yet to be received of approximately $302,783 as a component of prepaid expenses and other current assets.
Research and Development
The Company expenses all costs related to research and development
as incurred. Research and development expense was $1,760 and $40,965 for the three months ended March 31, 2019 and 2018, respectively.
Research and development expenses are included in selling, general and administrative expenses on the statements of operations.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (‘FASB’)
issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control
of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those
goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and
cash flows arising from contracts with customers.
We adopted the standard effective January 1, 2018, using
the modified retrospective method, which did not require us to restate each prior reporting period presented. We elected the available
practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information
on adoption.
Effective
January 1, 2019, we adopted the FASB Accounting Standards Update (‘ASU’) 2016-02,
Leases
, which requires the recognition
of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The
original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the
FASB issued ASU 2018-11,
Targeted Improvements to ASC 842
, which included an option to not restate comparative periods
in transition and elect to use the effective date of ASC 842,
Leases
, as the date of initial application of transition,
which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded both operating lease right-of-use (‘ROU’)
assets and lease liabilities of approximately $136,000. The adoption of ASC 842 had an immaterial impact on our Condensed
Statement of Earnings and Condensed Statement of Cash Flows for the three-month period ended March 31, 2019. In addition, we elected
the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry
forward the historical lease classification.
Additional information and disclosures required by this new
standard are contained in Note 3,
‘Operating Leases’
.
Accounts receivable consisted of the following at:
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March 31, 2019
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December 31, 2018
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Accounts receivable under normal 30 day terms
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$
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2,254,114
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|
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$
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2,165,820
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Financed contracts:
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|
|
|
|
|
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Current portion of long-term
|
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767,623
|
|
|
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866,494
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Long-term, net of current portion
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1,020,398
|
|
|
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1,030,354
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Total accounts receivable
|
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4,042,135
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|
|
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4,062,668
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Less allowance for doubtful accounts
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(165,840
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)
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(165,840
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)
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Accounts receivable, net
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$
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3,876,295
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|
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$
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3,896,828
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Presented on the balance sheet as:
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|
|
|
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Accounts receivable, net
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$
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2,855,897
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$
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2,866,474
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Long-term accounts receivable - financed contracts
|
|
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1,020,398
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|
|
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1,030,354
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The
allowance for financed and trade receivable represents management’s estimate of probable losses in our trade and financed
receivables as of the date of the financial statements. The allowance provides for probable losses that have been identified with
specific customer relationships and for probable losses believed to be inherent in the trade and financed receivables, but that
have not been specifically identified.
Accounts
receivable includes financed contracts at March 31, 2019 and December 31, 2018 which were $1,788,021 and $1,896,848, respectively,
offset by contract liabilities on the balance sheets of $1,707,650 and $1,690,660, respectively.
A
roll-forward of the Company’s allowance for doubtful accounts for the periods presented is as follows:
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March
31, 2019
|
|
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December
31, 2018
|
|
Accounts receivable allowance,
beginning of year
|
|
$
|
165,840
|
|
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$
|
181,473
|
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Provision adjustment
|
|
|
0
|
|
|
|
125,405
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|
Write-off
|
|
|
0
|
|
|
|
(141,038
|
)
|
Accounts receivable
allowance, end of period
|
|
$
|
165,840
|
|
|
$
|
165,840
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|
The
allowance for doubtful accounts as of March 31, 2019 and December 31, 2018 is $104,040 for the trade receivables and $61,800 for
financed contracts.
We
lease space under non-cancelable operating leases for our two office locations. These leases do not have significant rent escalation
holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent
rent provisions.
Our
leases include one or more options to renew. The exercise of lease renewal options included in our ROU assets and lease liabilities
if they are reasonably certain of exercise.
Our
leases do not provide an implicit rate; we use our incremental borrowing rate of 5% which is based on the information available
at the date of adoption in determining the present value of the lease payments.
The
cost components of our operating leases were $15,519 for the period ended March 31, 2019.
Maturities
of our lease liabilities for all operating leases are as follows as of March 31, 2019:
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Leased
Facilities
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2019
|
|
|
$
|
46,181
|
|
2020
|
|
|
|
57,436
|
|
2022
|
|
|
|
28,632
|
|
Total Lease Payments
|
|
|
|
132,249
|
|
Less: Interest
|
|
|
|
(9,982
|
)
|
Present value of lease liabilities
|
|
|
$
|
122,267
|
|
The weighted average remaining lease terms equals 2.13 years
as of March 31, 2019.
4.
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Stockholders’
Equity –
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Stock Repurchase Program
On January 7, 2018, the Company’s Board of Directors approved
the repurchase of its outstanding shares, using management’s discretion, of its common stock from private unsolicited sellers’
in the open market. On May 10, 2018, the Company’s Board of Directors approved the repurchase of its outstanding common shares
in an aggregate amount of up to 200,000 shares not to exceed $600,000, in both private unsolicited and open –market transactions,
until December 31, 2019. Company insiders are prohibited from participating in the stock repurchase program.
During the three month period ended March 31, 2019, the Company
did not repurchase any shares for its treasury.
Stock Compensation
On
January 8, 2018, the Board of Directors of Table Trac Inc. appointed Randy Gilbert as the Company’s Chief Financial Officer
and awarded him 50,000 Restricted Stock shares. These shares are subject to a four year vesting schedule as follows: 20,000 shares
on January 8, 2019 and 10,000 shares in each subsequent year. Grant date fair value of $117,500 will be recognized equally over
the vesting period as stock compensation expense as a component of selling, general and administration expense.
Additionally, on December 12, 2018, the Board of Directors of
Table Trac Inc. approved a resolution which awarded 9,000 Restricted Stock shares to employees and the new Board of Directors.
These shares are subject to a one year vesting period.
The unvested stock compensation expense is expected to be recognized
over a weighted average period of approximately two years. As of March 31, 2019, the remaining unrecognized stock compensation
expense approximated $90,000.
The Company has no stock options outstanding as of March 31,
2019 and 2018.
The
Company has 39,000 shares of restricted stock outstanding as of March 31, 2019 and 59,000 restricted shares outstanding at December
31, 2018.
The Company accounts for income taxes by following the asset
and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences
of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and
liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences and operating loss and
tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The impact of the tax rate changes on deferred tax assets and liabilities is recognized in the
year that the change is enacted. Management believes that any write-off not allowed for will not have a material impact on the
Company’s financial position.
The Company files income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. Based on its evaluation, the Company believes that it has no significant unrecognized tax positions.
The Company’s evaluation was performed for the tax years ended December 31, 2015 through 2018, which are the tax years that
remain subject to examination by major tax jurisdictions as of March 31, 2019. The Company does not believe there will be any material
changes in its unrecognized tax positions over the next 12 months.
The Company may from time to time be assessed interest or penalties
by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results.
In accordance with current guidance, the Company classifies interest and penalties as income tax expense is incurred.
The Company computes earnings per share under two different
methods, basic and diluted, and presents per-share data for all periods in which statements of operations are presented. Basic
earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock
equivalents outstanding.
The following table provides a reconciliation of the numerators
and denominators used in calculating basic and diluted earnings per share for the three months ended March 31, 2019 and 2018:
|
|
For
the Three Months Ended
March 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Basic and diluted earnings
per share calculation:
|
|
|
|
|
|
|
|
|
Net income
(loss) to common stockholders
|
|
$
|
7,955
|
|
|
$
|
(179,836
|
)
|
Weighted average number of common shares outstanding - basic
|
|
|
4,496,494
|
|
|
|
4,486,559
|
|
Basic net income (loss)
per share
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
Weighted average number of common shares outstanding - diluted
|
|
|
4,504,503
|
|
|
|
4,486,559
|
|
Diluted net income
(loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|