NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (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, car rental companies and laundry facilities 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, 2017 and 2018 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.
Inventories:
Inventories are carried at
the lower of cost (first-in, first-out) and net realizable value. Inventory costs include materials, labor and manufacturing overhead.
Inventories consist primarily of computer and printer parts and supplies and are subject to technical obsolescence.
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, 2017 and 2018 amounted to $98,987 and $111,254 respectively, and is included in cost of services.
The cost of direct labor is periodically capitalized as computer software costs.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
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, 2017 and 2018 amounted to $22,608 and $17,232, 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, lots fees and laundry
facility collections are recognized on a cash basis when received. Related costs consist mainly of municipalities' fees, depreciation
and lot rents.
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.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
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. Agent transactions include cash collections of $8,560,052 and $8,613,537,
net of vendor payments in the amount of $7,955,731 and $8,027,604 for the years ended September 30, 2017 and 2018, respectively.
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.
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.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
Advertising costs:
The Company expenses the costs of advertising
as incurred. Advertising expense was $72 and $0 for the years ended September 30, 2017 and 2018, 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.
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 requires deferred tax assets and liabilities to be classified
as noncurrent in a classified statement of financial position. The Company has adjusted the presentation of these financial statements
accordingly. The ASU has been applied retrospectively to all periods presented.
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, 2017 (unaudited) and September
30, 2018 (unaudited)
1.
|
Organization and Summary of Significant Accounting Policies (continued)
|
Investments in marketable
securities at September 30, 2017 and 2018 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, 2017,
the securities had a cost basis of $1,105,194 and a fair market value of $1,127,197. At September 30, 2018, the securities had
a cost basis of $1,093,297 and fair market value of $1,091,416.
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 decreased by $28,998 for the year ended September 30, 2017 and decreased by $23,884 for the year ended
September 30, 2018, and totaled $(1,881) at September 30, 2018.
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 and accounts payable the carrying amount is assumed to approximate fair value due to the short-term maturities
of these instruments.
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, 2017 and 2018 and at various
times during the years ended September 30, 2017 and 2018, 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, municipalities and laundry facilities.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (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,
2017 and 2018, 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.
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (unaudited)
Inventories consist of the following at September
30:
|
|
2017
|
|
|
2018
|
|
|
|
(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
|
|
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, 2017 (unaudited) and September
30, 2018 (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, 2017 and 2018.
Assets at fair
value as of September 30, 2018 (unaudited)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
1,091,416
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,091,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,091,416
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,091,416
|
|
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
|
|
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2017 (unaudited) and September
30, 2018 (unaudited)
The components of the Company's deferred
tax assets, net at September 30 are as follows:
|
|
2017
(unaudited)
|
|
|
2018
(unaudited)
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Section 263A capitalization
|
|
$
|
56,900
|
|
|
$
|
57,100
|
|
Allowance for doubtful accounts
|
|
|
4,300
|
|
|
|
4,300
|
|
Net operating loss carryforward
|
|
|
250,700
|
|
|
|
304,500
|
|
|
|
|
311,900
|
|
|
|
365,900
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(67,700
|
)
|
|
|
(77,400
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
244,200
|
|
|
$
|
288,500
|
|
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 statements of income
|
|
2017
(unaudited)
|
|
|
2018
(unaudited)
|
|
Income tax benefit at the statutory rate
|
|
$
|
(54,028
|
)
|
|
$
|
(35,001
|
)
|
State and local income taxes, net of federal income tax
|
|
|
(5,532
|
)
|
|
|
|
|
Tax exempt income
|
|
|
(13,112
|
)
|
|
|
(12,665
|
)
|
Effect of graduated tax rates
|
|
|
12,425
|
|
|
|
3,244
|
|
Nondeductible expenses
|
|
|
106
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(60,141
|
)
|
|
$
|
(44,300
|
)
|
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, 2017 (unaudited) and September
30, 2018 (unaudited)
4.
|
Income Taxes (continued)
|
Interest and penalties,
if any are recorded as income taxes in the consolidated income statement. The Company is subject to routine audits by taxing jurisdictions;
however, there are currently no audits for any tax periods in progress.
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 332,662,651 and 332,541,922 during the years
ended September 30, 2017 and 2018, respectively.
6.
|
Professional service contracts
|
Clancy provides equipment
and support services under 12 month professional service contracts. At September 30, 2017 and 2018, all of the contracts contained
cancellation provisions requiring notice of 30 days or less.
The Company has evaluated
subsequent events from September 30, 2018 through July 24, 2019, 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.