Annual report pursuant to Section 13 and 15(d)

Note 2 - Revenue from Contracts with Customers

v3.21.1
Note 2 - Revenue from Contracts with Customers
 12 Months Ended
Dec. 31, 2020
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]
2.
           
Revenue from Contracts with Customers
 
Revenue is recognized when all of the following steps have been taken and criteria met for each contract:
 
 
•
Identification of the contract, or contracts, with a customer
 -
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party's rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform and, (iii) it determines that collection of substantially all consideration to which the Company will be entitled in exchange for goods or services that will be transferred is probable based on the customer's intent and ability to pay the promised consideration.
 
 
•
Identification of the performance obligations in the contract
 -
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from
third
parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are
not
met, the promised goods or services are accounted for as a combined performance obligation.
 
 
•
Determination of the transaction price
-
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. The Company typically estimates the transaction price impact of discounts offered to the customers for early payments on receivables or rebates based on sales target achievements. Constraints are applied when estimating variable considerations based on historical experience where applicable.
 
 
•
Allocation of the transaction price to the performance obligations in the contract
-
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price by taking into account available information such as historical selling prices of the performance obligation, geographic location, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations.
 
 
•
Recognition of revenue when, or as, the Company satisfies performance obligations
-
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
 
Nature of Products and Services
 
The Company generates revenue from the sales of information technology professional services, sales of
third
-party software licenses and implementation and training services, sales of
third
-party support and maintenance contracts based on those software products, and incentive payments received from
third
-party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. The Company sells through its direct relationships with end customers and under subcontractor arrangements.
 
Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units have occurred and units are accepted by the customer or are reasonably expected to be accepted. Generally, revenue under fixed-price arrangements and mixed arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer. For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, with
no
predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time.
 
Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses. The Company's obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer's administrative contact gains training in and beneficial use of the administrative portal. If the transaction prices of the performance obligations related to implementing the government administrator's use of the administrative portal and administrator support for the individual contract are material (rare), these obligations are recognized separately over time, as performed. Revenue for bulk desktop software licenses for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer's administrative contact gains training in and beneficial use of the administrative portal. For desktop software licenses sold on an individual license basis to non-government customers, where the Company has
no
obligation to the customer after the
third
-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs.
 
Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company's reseller agreements for it to be the
first
line of support (direct support) and
second
line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support is
not
estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.
 
Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.
 
Disaggregation of Revenue from Contracts with Customers
 
Contract
  
Year ended 12/31/2020
    
Year ended 12/31/2019
  
Type
  
Amount
    
Percentage
    
Amount
    
Percentage
  
                                 
Services Time & Materials
   $
4,627,252
      
33.3
 %   $
2,446,439
      
24.1
 %
                                 
Services Fixed Price
    
194,505
      
1.4
 %    
434,058
      
4.3
 %
                                 
Services Combination
    
476,629
      
3.4
 %    
231,122
      
2.3
 %
                                 
Services Fixed Price per Unit
    
228,754
      
1.6
 %    
132,171
      
1.3
 %
                                 
Third-Party Software
    
7,697,940
      
55.4
 %    
6,233,703
      
61.3
 %
                                 
Software Support & Maintenance
    
545,991
      
3.9
 %    
660,926
      
6.5
 %
                                 
Incentive Payments
    
132,000
      
1.0
 %    
26,562
      
0.2
 %
                                 
Total Revenue
   $
13,903,071
      
 
     $
10,164,981
      
 
  
 
Contract Balances
 
Accounts Receivable
 
Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company's assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were
no
such allowances recognized at
December 31, 2020,
and
December 31, 2019.
The accounts receivable balance does
not
include the amount invoiced but withheld from payment as a financing component under
one
contract with a customer. The present value of the withheld amount is classified as a contract asset.
 
Contract Assets
 
Contract assets consist of assets resulting when revenue recognized exceeds the amount billed or billable to the customer due to allocation of transaction price, and of amounts withheld from payment of invoices as a financing component of a contract. Changes in contract assets balances in
2020
and
2019
are as follows:.
 
Contract Assets
  
 
 
 
         
Balance at December 31, 2019
   $
-
  
Contract assets added
    
210,688
  
Balance at December 31, 2020
   $
210,688
  
 
There was
no
balance of contract assets at
December 31, 2018.
 
Contract Liabilities
 
Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have
not
been recognized as revenue because the related goods or services have
not
been transferred. Changes in contract liabilities balances in
2020
and
2019
are as follows:
 
Contract Liabilities
  
 
 
 
         
Balance at December 31, 2018
   $
318,552
  
Contract liabilities added
    
861,637
  
Revenue recognized
    
(715,966
 )
Balance at December 31, 2019
   $
464,223
  
Contract liabilities added
    
1,465,299
  
Revenue recognized
    
(982,638
 )
Balance at December 31, 2020
   $
946,884
  
 
Revenue recognized during
2020
from the balance at
December 31, 2019
was
$464,223,
and revenue recognized during
2019
from the balance at
December 31, 2018,
was
$318,552.
 
Costs to Obtain or Fulfill a Contract
 
When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it would
not
have incurred those costs if the contract had
not
been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There were
no
such assets at
December 31, 2020,
and
December 31, 2019.
When incurred, these costs are amortized ratably over the periods of the contracts to which those costs apply.
 
Financing Components
 
In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that
one
of its subcontracts to a prime contractor includes a significant financing component. The subcontract is invoiced on a time and materials basis, under which
90%
of each invoice amount is paid under regular terms, and the
10%
payment balance of each invoice is deferred until the prime contractor meets a specific deliverable under its prime contract, which is expected to occur approximately
June 2022.
The primary purpose of this arrangement is to assist the prime contractor in meeting all of its financial obligations until it can realize the financial benefit of meeting the deliverable. The Company has estimated its interest rate of
4.5%
based on a small premium over the rate of its revolving line of credit as of the measurement date. The financing component cumulative balance is reflected in contract assets above.
 
Deferred Costs of Revenue
 
Deferred costs of revenue consist of the costs of
third
-party support and maintenance contracts for enterprise server-based software, as well direct costs associated with contract deliverables for which control of the work product has
not
passed to the customer and contract revenue has
not
been recognized. These costs are reported under the prepaid expenses and other current assets caption on the Company's balance sheets. The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue. Changes in deferred costs of revenue balances in
2020
and
2019
are as follows:
 
Deferred Costs of Revenue
  
 
 
 
         
Balance at December 31, 2018
   $
294,115
  
         
Deferred costs added - maintenance
    
799,742
  
Deferred costs expensed
    
(640,250
 )
         
Balance at December 31, 2019
   $
453,607
  
         
Deferred costs added - maintenance
    
66,624
  
Deferred costs added - deliverables
    
41,161
  
Deferred costs expensed
    
(472,324
 )
         
Balance at December 31, 2020
   $
89,068