NOTES TO CONDENSED FINANCIAL STATEMENTS
|
1.
|
Nature
of Business and Summary of Significant Accounting Policies –
|
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 September 30, 2018 and the statements of
operations for the three and nine months ended September 30, 2018 and 2017, and the statements of cash flows for the nine months
ending September 30, 2018 and 2017 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, 2017.
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 uses 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, 2017. Significant changes to the Company’s accounting policies as a result
of adopting Accounting Standards Codification (ASC) 606 are discussed below.
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 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. 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 stand-alone
selling 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 September 30, 2018 and 2017,
respectively:
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|
Three Months Ended September 30,
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|
|
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2018
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|
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2017
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|
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2018
|
|
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2017
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|
|
|
|
|
|
|
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(percent of revenues)
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System sales
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$
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1,578,226
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|
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$
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1,260,372
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|
|
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67.7
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%
|
|
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67.7
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%
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Maintenance fees
|
|
|
684,738
|
|
|
|
559,624
|
|
|
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29.4
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%
|
|
|
30.0
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%
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Service and other sales
|
|
|
66,717
|
|
|
|
42,688
|
|
|
|
2.9
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%
|
|
|
2.3
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%
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Total revenues
|
|
$
|
2,329,681
|
|
|
$
|
1,862,684
|
|
|
|
100.0
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%
|
|
|
100.0
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%
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The
following table summarizes disaggregated revenues by major product line for the nine months ended September 30, 2018 and 2017,
respectively:
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Nine months ended September 30,
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|
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2018
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|
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2017
|
|
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2018
|
|
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2017
|
|
|
|
|
|
|
|
|
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(percent of revenues)
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System sales
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|
$
|
4,318,205
|
|
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$
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3,329,144
|
|
|
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67.3
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%
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|
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64.7
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%
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Maintenance fees
|
|
|
1,938,446
|
|
|
|
1,655,607
|
|
|
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30.2
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%
|
|
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32.2
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%
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Service and other sales
|
|
|
157,433
|
|
|
|
162,352
|
|
|
|
2.5
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%
|
|
|
3.1
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%
|
Total revenues
|
|
$
|
6,414,084
|
|
|
$
|
5,147,103
|
|
|
|
100.0
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%
|
|
|
100.0
|
%
|
See
Major Customers for disaggregated revenue information about primary geographical markets.
Significant
Judgments
Our
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 was recorded. 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 used 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 other long-term assets on the balance sheet, and are $599,538 and $967,092 as
of September 30, 2018 and December 31, 2017, 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 that any write-off not allowed for will not have a material impact on the Company’s financial position.
Major
Customers
For
the nine month period ended September 30, 2018, three customers comprised approximately 47% of revenue compared to two customers
who accounted for approximately 17% for the nine months ending September 30, 2017. At September 30, 2018, the same three customers
comprised approximately 47% of accounts receivable compared to two customers accounting for approximately 19% at September 30,
2017. The following table summarizes major customer’s information for the nine months ended September 30, 2018 and 2017:
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For the Nine Months ended September 30
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|
|
|
2018
|
|
|
2017
|
|
|
|
% Revenues
|
|
|
% AR
|
|
|
% Revenues
|
|
|
% AR
|
|
Major
|
|
|
47.4
|
%
|
|
|
46.9
|
%
|
|
|
16.8
|
%
|
|
|
19.2
|
%
|
All Others
|
|
|
52.6
|
%
|
|
|
53.1
|
%
|
|
|
83.2
|
%
|
|
|
80.8
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
For
the nine month periods ending September 30, 2018 and 2017, sales to customers in the United States represent 91.2% and 92.7% of
total revenues, respectively.
The
following table summarizes the major customer information for the three months ended September 30, 2018 and the two major customer’s
information for the three months ending September 30, 2017:
For the Three Months Ended September 30
|
|
|
2018
|
|
|
2017
|
|
|
|
% Revenues
|
|
|
% Revenues
|
|
Major
|
|
|
54.2
|
%
|
|
|
42.6
|
%
|
All Others
|
|
|
45.8
|
%
|
|
|
57.4
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
For
the three month periods ending September 30, 2018 and 2017, sales to customers in the United States represent 95.6% and 93.2%
of total revenues, respectively.
A
major customer is defined any customer that represents at least 10% of revenue or outstanding account receivable for a given 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 September 30, 2018 was $503,034, which included work-in-process of $50,824. The inventory value was
$466,207 as of December 31, 2017, which included work-in-process of $0. The Company had no obsolescence reserve at September 30,
2018 or December 31, 2017. At September 30, 2018 the Company recorded a prepayment for inventory yet to be received of approximately
$318,570 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 $28,827 and $4,452
for the three months ended September 30, 2018 and 2017, and $85,411 and $36,157 for the nine months ended September 30, 2018 and
2017, 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 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.
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded
the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an
analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate
statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which
a statement of operations is required to be filed. The Company anticipates its first presentation of changes in stockholders’
equity will be included in its Form 10-Q for the quarter ended March 31, 2019.
Accounts
receivable consisted of the following at:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable under normal 30 day terms
|
|
$
|
2,748,781
|
|
|
$
|
1,493,084
|
|
Financed contracts:
|
|
|
|
|
|
|
|
|
Current portion of long-term
|
|
|
894,819
|
|
|
|
1,741,669
|
|
Long-term, net of current portion
|
|
|
1,163,823
|
|
|
|
1,515,120
|
|
Total accounts receivable
|
|
|
4,807,423
|
|
|
|
4,749,873
|
|
Less allowance for doubtful accounts
|
|
|
(125,027
|
)
|
|
|
(181,473
|
)
|
Accounts receivable, net
|
|
$
|
4,682,396
|
|
|
$
|
4,568,400
|
|
Presented on the balance sheet as:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
3,518,573
|
|
|
$
|
3,053,280
|
|
Long-term accounts receivable - financed contracts
|
|
|
1,163,823
|
|
|
|
1,515,120
|
|
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 of the trade and financed receivables, but that
have not been specifically identified.
Accounts
receivable includes financed contracts at September 30, 2018 and December 31, 2017 which are $2,058,642 and $3,256,789, respectively,
offset by contract liabilities on the balance sheets of $1,903,639 and $3,313,772, respectively.
A
roll-forward of the Company’s allowance for doubtful accounts for the periods presented is as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable allowance, beginning of year
|
|
$
|
181,473
|
|
|
$
|
200,266
|
|
Provision adjustment
|
|
|
84,592
|
|
|
|
(18,793
|
)
|
Write-off
|
|
|
(141,038
|
)
|
|
|
0
|
|
Accounts receivable allowance, end of period
|
|
$
|
125,027
|
|
|
$
|
181,473
|
|
The
allowance for doubtful accounts is $125,027 and $181,473 for the trade receivables at September 30, 2018 and December 31, 2017,
respectively, and $0 for the financed contracts at both September 30, 2018 and December 31, 2017.
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3.
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Stockholders’
Equity –
|
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 September 30, 2018, the Company did not repurchase any shares for its treasury. For the nine month
period ending September 30, 2018, the Company repurchased 48,500 shares totaling approximately $112,000 at an average price of
$2.31 per share for its treasury.
Stock
Compensation
In
January, the Company awarded 50,000 shares at a price of $2.35 per share from its treasury to its new CFO. These shares are subject
to a four year vesting schedule as follows: 20,000 shares at the end of year one; 10,000 shares in each subsequent year. No shares
vested during the nine month period ended September 30, 2018. 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. The unvested stock
compensation is expected to be recognized over a weighted average period of approximately two years. As of September 30, 2018,
the remaining unrecognized stock compensation expense approximated $95,500. As of September 30, 2018, the Company holds 138,132
common shares in treasury for future employee issuances for potential bonuses. Such common shares in treasury include shares repurchased
pursuant to the stock repurchase program.
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, 2014 through 2017, which are the tax years that remain subject to examination by major tax jurisdictions
as of September 30, 2018. 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 nine months ended September 30, 2018 and 2017:
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Basic and diluted earnings per share calculation:
|
|
|
|
|
|
|
|
|
Net income to common stockholders
|
|
$
|
695,109
|
|
|
$
|
312,666
|
|
Weighted average number of common shares outstanding - basic
|
|
|
4,474,531
|
|
|
|
4,511,965
|
|
Basic net income per share
|
|
$
|
0.16
|
|
|
$
|
0.07
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
4,482,148
|
|
|
|
4,511,965
|
|
Diluted net income per share
|
|
$
|
0.16
|
|
|
$
|
0.07
|
|
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 September 30, 2018 and 2017:
|
|
For the Three Months Ended
September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Basic and diluted earnings per share calculation:
|
|
|
|
|
|
|
|
|
Net income to common stockholders
|
|
$
|
464,408
|
|
|
$
|
272,049
|
|
Weighted average number of common shares outstanding - basic
|
|
|
4,468,602
|
|
|
|
4,511,965
|
|
Basic net income per share
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
4,475,982
|
|
|
|
4,511,965
|
|
Diluted net income per share
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
6.
|
Foreign
Currency Exchange Rate Risk -
|
The
Company is exposed to foreign currency risks that arise from some of its foreign customers in Colombia, transacted in Colombia
pesos. In addition, exchange rate fluctuations may cause our international results to fluctuate when translated into U.S. dollars.
These risks may change over time as business practices evolve and could have an impact on the Company’s financial results
in the future due to the long term nature of the Company’s accounts receivable in Colombia, which totaled approximately
$74,000 and $314,000 at September 30, 2018 and December 31, 2017, respectively. The Company monitors its risk associated with
the volatility of certain foreign currencies against the U.S. dollar.