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Recently Adopted Accounting Pronouncements

9 Months Ended

Sep. 30, 2018

Accounting Changes and Error Corrections [Abstract]

Recently Adopted Accounting Pronouncements

H)	*Recently Adopted Accounting Pronouncements.*

FASB ASU No. 2014-09. In May 2014, the FASB issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that would: remove inconsistencies and weaknesses, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, jurisdictions, industries, and capital markets, improve disclosure requirements and resulting financial statements, and simplify the presentation of financial statements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the standard on January 1, 2018 utilizing the full retrospective method.

We implemented new internal controls for the implementation and modified and augmented our existing internal controls to enable the preparation of financial information on adoption. The most significant impacts of adopting the new standard related to the following:

2015 imaging software license contract. We consummated a $4.625 million license contract in October 2015 that included a $4.5 million license fee plus a $125,000 software maintenance fee. We delivered the licensed software and the customer paid us in the fourth quarter of 2015. Under legacy GAAP, we were unable to establish vendor specific objective evidence (“VSOE”) for the maintenance element and, as a result we recognized the total fee ratably over the twelve-month period that ran from October 2015 to October 2016. Under the new standard, license revenue of $4.5 million from that contract is recognized in 2015 when control over the software was transferred to the customer and software maintenance revenue of $125,000 is recognized ratably over the twelve-month period that ran from October 2015 to October 2016. This change resulted in a decrease in revenue of $3.6 million for fiscal year 2016. This change had no impact to our reported results for the three and nine months ended September 30, 2017.

ii)

DSL royalty contracts. Under our legacy revenue recognition policy, we recognized DSL royalty revenue in the period in which we received royalty reports, which was typically in the quarter immediately following the quarter in which sales of royalty-bearing products occurred. Under the new standard, we recognize DSL royalty revenue in the quarter in which sales of royalty-bearing products occur. Therefore, we make estimates of royalties earned in the current period and record royalty revenue based on those estimates. This change resulted in a decrease in revenue of $17,000 and $39,000 for fiscal years 2017 and 2016, respectively. This change resulted in a increase in revenue of $2,000 for the three months ended September 30, 2017, and an increase in revenue of $9,000 for the nine months ended September 30, 2017.

iii)

Minimum license/royalty payment contract. One of our revenue contracts required the customer to make a fixed payment for professional services as well as minimum license/royalty payments for software to be distributed to end-users. Under legacy GAAP, we recognized the professional services fee over the period that the services were performed and revenue for the minimum license/royalty payments when those minimum payments became due. Under the new standard we recognized the estimated amount of total consideration, including the professional services fee and our estimate of variable consideration related to the minimum license/royalty payments, in the contract that we expect to be entitled to and recognized revenue in the period(s) that the related licenses and services were transferred to the customer. This change resulted in a decrease in revenue of $800,000 for fiscal year 2017, $200,000 of which related to the three months ended September 30, 2017 and $600,000 of which related to the nine months ended September 30, 2017, an increase in revenue of $860,000 for fiscal year 2016, an increase in unbilled receivables of $1.4 million in fiscal year 2017, an increase in unbilled receivables of $2.2 million in fiscal year 2016 and an increase in stockholders’ equity of $2.2 million in fiscal year 2016.

iv)

Sales commissions and other third-party acquisition costs. Under legacy GAAP, sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers were expensed as incurred. ASC 340 requires these costs to be recognized as an asset when incurred and expensed over a period consistent with the period of transfer to the customer of goods or services to which the asset relates. We adopted the practical expedient that if the amortization period of the asset that we otherwise would have recognized is one year or less, we expense the sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers when incurred. The adoption of the new standard resulted in a decrease in expense of approximately $114,000 for fiscal year 2017, $26,000 of which related to the three months ended September 30, 2017 and $81,000 of which related to the nine months ended September 20, 2017, and $294,000 for fiscal year 2016 and a decrease in stockholders’ equity of $0.3 million in fiscal year 2016. For fiscal year 2017, the decrease in expense primarily relates to lower sales commissions due to lower revenue on our minimum license/royalty payment contract as noted above. For fiscal year 2016, the decrease primarily relates to lower sales commissions due to lower revenue from our 2015 imaging software license contract and lower revenue on our minimum license/royalty payment contract as noted above.

Revenue recognition related to our other arrangements for software licenses, software maintenance, services, and hardware remained substantially unchanged.

As a practical expedient, for contracts that were modified before the earliest reporting period of application of the standard, we have not retrospectively restated the contracts for those contract modifications. Instead we have reflected the aggregate effect of all modifications that occurred before the earliest reporting period of application when (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.

We have not restated contracts that began and were completed within the same annual reporting period. For completed contracts that have variable consideration, we have used the transaction price at the date the contract was completed rather than estimating variable consideration amounts in comparative reporting periods.

For fiscal years 2017 and 2016, adoption of the standard resulted in an aggregate decrease in revenue of $0.8 million and $2.8 million, respectively, a decrease in costs and expenses of $0.1 million and $0.3 million, respectively, a decrease in the provision for income taxes of $0.4 million and $1.0 million, respectively, and an increase in stockholders’ equity of $0.9 million and $1.2 million respectively, primarily due to the changes noted above. In addition, adoption of the standard resulted in an increase in accounts receivable of $1.4 million and $2.2 million as of December 31, 2017 and 2016, respectively, driven by unbilled receivables from recognition of revenue from the estimate of variable consideration related to the minimum license/royalty payments in one of our contracts; a decrease in deferred tax assets of $0.3 million and $0.8 million as of December 31, 2017 and 2016, respectively, driven primarily by a difference in timing of revenue recognition and expenses for book and tax purposes; and an increase in accrued expenses of $0.2 million and $0.3 million as of December 31, 2017 and 2016, respectively, driven by sales commissions related to recognition of revenue from the estimate of variable consideration related to the minimum license/royalty payments in one of our contracts.

For the three and nine months ended September 30, 2017, adoption of the standard resulted in an aggregate decrease in revenue of $198,000 and $592,000, respectively, a decrease in costs and expenses of $25,000 and $82,000, respectively, and a decrease in the provision for income taxes of $89,000 and $207,000, respectively, primarily due to the same reasons noted above.

See Impacts of Topic 606 Adoption to Reported Results below for the impact of the adoption of the new standard on our consolidated financial statements.

Impacts of Topic 606 Adoption to Reported Results

Adoption of the new revenue standard impacted our reported results as follows:

						Three Months Ended
(In thousands, except per share data)						September 30, 2017
			New Revenue
			Standard
	As Reported		Adjustment			As Adjusted
Consolidated Statements of Income:
Revenue	$	5,905	$	(198	)	$	5,707
Costs and expenses		4,259		(25	)		4,234
Provision for income taxes		545		(89	)		456
Net income		1,229		(84	)		1,145
Net income per share - basic and diluted		0.06		(0.01	)		0.05

						Nine Months Ended
(In thousands, except per share data)						September 30, 2017
			New Revenue
			Standard
	As Reported		Adjustment			As Adjusted
Consolidated Statements of Income:
Revenue	$	12,997	$	(592	)	$	12,405
Costs and expenses		12,131		(82	)		12,049
Provision for income taxes		742		(207	)		535
Net income		1,863		(303	)		1,560
Net income per share - basic		0.09		(0.02	)		0.07
Net income per share - diluted		0.08		(0.01	)		0.07

(In thousands)						September 30, 2017
			New Revenue
			Standard
	As Reported		Adjustment			As Adjusted
Consolidated Balance Sheets:
Accounts receivable, net	$	5,616	$	1,643		$	7,259
Prepaid expenses and other current assets		315		14			329
Deferred tax assets		5,648		(545	)		5,103
Accrued expenses		1,272		251			1,523
Stockholders' equity		60,589		861			61,450

Adoption of the new revenue standard had no impact on total cash provided from or used in operating, financing, or investing in our consolidated statements of cash flows.