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Significant Accounting Policies
 12 Months Ended
Dec. 31, 2011
Accounting Policies [Abstract]  
Significant Accounting Policies [Text Block]
2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the financial statement rules and regulations of the Securities and Exchange Commission.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company amounts have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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. The more significant areas requiring use of estimates and judgment relate to revenue recognition, accounts receivable valuation reserves, realizability of intangible assets, realizability of deferred income tax assets and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

 

Significant Customers and Concentration of Credit Risk

 

Customers representing ten percent or more of annual consolidated revenues are set forth in the table below for the years ended December 31:

 

    2011     2010  
    As a % of     As a % of  
Customer Name   Revenues     Revenues  
             
Transportation Security Administration (“TSA”)     23 %     21 %
Department of Homeland Security (“DHS”)     27 %     19 %
Washington Headquarters Services (“WHS”)     3 %     11 %

 

Customers representing ten percent or more of consolidated trade accounts receivable and unbilled receivables are set forth in the table below as of December 31:

 

    2011     2010  
    As a % of     As a % of  
Customer Name   Receivables     Receivables  
             
Transportation Security Administration (“TSA”)     9 %     30 %
Department of Homeland Security (“DHS”)     34 %     24 %

 

Due to the nature of the Company’s business and the relative size of certain contracts, which are entered into in the ordinary course of business, the loss of any single significant customer could have a material adverse effect on its results of operations.

  

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable.

 

Fair Value of Financial Instruments

 

The consolidated financial statements include financial instruments for which the fair market value may differ from amounts reflected on a historical basis. The Company’s financial instruments include cash equivalents, accounts receivable, short and long-term debt and other financial instruments associated with the issuance of the common stock. The carrying values of cash equivalents and accounts receivable approximate their fair value because of the short maturity of these instruments and past evidence indicates that these instruments settle for their carrying value. The carrying amounts of the Company’s bank borrowings under its credit facility approximate fair value because the interest rates reflect current market rates.

 

Cash and Cash Equivalents

 

The Company maintains interest-bearing cash deposits and short-term overnight investments with a large financial institution. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents for purposes of these consolidated financial statements. Interest-bearing cash deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of $250,000. At December 31, 2011 and 2010, the Company had interest-bearing deposits with a large financial institution in excess of FDIC limits of approximately $1,239,000 and $4,192,000, respectively.

 

Accounts Receivable

 

The majority of the Company's accounts receivable is due from the federal government and established private sector commercial companies.

 

Government – The Company enters into standard master contract vehicles or an individual purchase requisition with federal and state governments and their agencies. Federal contracts are bid and awarded on a cost plus fixed fee or fixed award fee, firm fixed price or time and material basis. Federal and state government customer orders are covered by a contract vehicle or master services agreement and specific goods and services are generally submitted through task orders or purchase requisitions under a master contract or under an individual purchase requisition. Tangible goods and services provided under these contracts are generally not interdependent and billable upon delivery of goods or services. On occasion, federal or state government customers may prepay for goods or services in advance.

  

Commercial – The Company enters into standard contractual arrangements with corporations using a master service agreement and customized statement of work which outlines the product or services purchased and optional products and services and standard pricing based on volume. Consulting services are charged based upon standard professional rates based on level of expertise. Also, the Company enters into fee arrangements for which the fees earned are based on a percentage of savings or other measure as determined in the contract.

 

Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are usually due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary. Customer account balances outstanding longer than the contractual payment terms are reviewed for collectability and after 90 days are considered past due unless arrangements were made at the time of the transaction that specified different payment terms.

 

The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

 

The Company has not historically maintained a bad debt reserve for its federal government or commercial customers as it has not experienced any material or recurring bad debt charges and the nature and size of the contracts has not necessitated the Company’s establishment of such a bad debt reserve. Upon specific review and its determination that a bad debt reserve may be required, the Company will reserve such amount if it views the account as potentially uncollectable.

 

Unbilled Accounts Receivable

 

Unbilled accounts receivable on time-and-materials contracts represent costs incurred and gross profit recognized near the period-end but not billed until the following period due to contractual terms or due to timing differences. Unbilled accounts receivable on fixed-price contracts predominantly consist of third party value added resale (VAR) of hardware and software products delivered but not invoiced at the end of the reporting period. Unbilled accounts receivable also consists of monthly managed services performed but not yet invoiced at the end of the reporting period. At December 31, 2011 and 2010, unbilled accounts receivable totaled approximately $2,715,000 and $3,060,000, respectively.

 

Advance Billings and Customer Payments

 

Deferred revenue also arises from advanced customer billings as permitted under contractual arrangements or from advance payments from customers for monthly communications management services. Certain federal and state governments and their agencies may pay for services and/or devices in advance. These advance payments are recorded as deferred revenue and recognized as services are performed and/or devices delivered. Amounts recorded as deferred revenue are released the monthly services are complete at the end of the month. Our revenue recognition policy is below under the caption “revenue recognition”.

 

Deferred Implementation Revenues and Costs

 

Certain customer contracts may include an additional implementation charge to cover the cost of programming and technician labor costs required to set up first-time communication expense management portals and custom customer reports. These costs are deferred and amortized over the estimated customer life. There were no material deferred implementation costs incurred during fiscal 2011.

 

Property and Equipment

 

Property and equipment (including assets acquired under capital lease arrangements) are stated at historical cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method over the estimated useful lives based upon the classification of the property and/or equipment or lease period for assets acquired under capital lease arrangements. The estimated useful lives of the assets are as follows:

 

Land and building   20 years
Computer hardware and software   3 years
Furniture and fixtures   5 years
Mobile equipment   3 years

 

 

The Company assesses the recoverability of property and equipment by determining whether the depreciation of property and equipment over its remaining life can be recovered through projected undiscounted future cash flows. The amount of property and equipment impairment if any, is measured based on fair value and is charged to operations in the period in which property and equipment impairment is determined by management. As of December 31, 2011, the Company’s management has not identified any material impairment of its property and equipment.

  

Software Development Costs

 

The Company capitalizes costs related to software and implementation in connection with its internal use software systems including its Public Key Infrastructure (PKI) certificate issuance database and application, Intelligent Telecommunications Management System (ITMS) and Clarity Communications Management databases and applications and its Foresight ordering and helpdesk database and application. For software development costs (or “internally developed intangible assets”) related to software products for sale, lease or otherwise marketed, significant development costs are capitalized from the point of demonstrated technological feasibility until the point in time that the product is available for general release to customers. Once the product is available for general release, capitalized costs are amortized based on units sold, or on a straight-line basis generally over a six-year period or such other such shorter period as may be required.

 

Goodwill and Other Intangible Assets

 

The Company accounts for goodwill and other indefinite-lived intangible assets in accordance with ASC Topic 350 “Intangibles”. Under ASC Topic 350, goodwill and certain indefinite-lived intangible assets are not amortized but are subject to an annual impairment test during the fourth quarter of each year, and between annual tests if indicators of potential impairment exist. The Company has elected to perform this review annually on December 31st of each calendar year. See Note 6 to the consolidated financial statements for additional discussion about annual impairment testing.

 

Revenue Recognition Principles

 

The Company has a standard internal process that is used to determine whether all required criteria for revenue recognition have been met. Revenue is generally recognized when persuasive evidence of an arrangement exists, products and/or services have been delivered, the contract price is fixed or determinable and collectability is reasonably assured. For the sale of non-software products and services that are not interdependent, the earnings process is generally complete upon delivery of the product or service. For the sale of software, which is not part of an integrated solution, the earnings process is general complete upon issuance or delivery. For other software, which is part of an integrated solution, the earnings process is measured using percentage of completion as the individual component parts have no value until the solution has been delivered. A summary of the Company’s revenue streams and specific revenue recognition policies are as follows:

 

Communications Management

 

§ Managed Services: Telecommunications expense management and device management services are delivered on a monthly basis based on a standard fixed pricing scale per user or device or other service utilization metric. Managed services are not interdependent and there are no undelivered elements in these arrangements. Revenue is recognized upon the completion of the delivery of monthly managed services. The Company also offers invoice management and payment services, which may subject the Company to credit risk it is are responsible for the payment of multiple billable arrangements by and between its customer and various carriers. The Company recognizes revenues and related costs on a gross basis for these arrangements as it has discretion in choosing providers, rate plans, and devices in providing the services to its customers. For arrangements in which the Company does not have such credit risk, it recognizes revenues and related costs on a net basis.

 

§ Value Added Reseller Services: The Company procures and resells telecommunication services and devices to the customer and recognizes revenue upon receipt of inventory and bills the customer at cost plus applicable contractual fees earned.

 

§ Compliance Services: The Company provides a variety of telecommunication management consulting services and charges a fee for time and materials incurred or a contingent-fee based on expected savings or other metric determined. Services performed include permission based audits, accounts payable audits, and compliance reviews. Revenue on time and material arrangements is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred to deliver consulting services. Revenue on contingent-fee arrangements are recognized upon customer acceptance of proposed billing.

 

Cybersecurity Solutions

 

§ Managed Credentialing Services: The Company provides through its proprietary PKI identity credentialing software certificates and identity credentialing software certificate consoles and other software. PKI credentialing provided as a managed service involves the sales of an individual software certificate which is issued by the Company. Pricing for certificates issued by the Company are based on third party evidence of value.  Certificates issued have a fixed life and cannot be modified or reissued. There is no obligation to provide post contract services in relation to certificates issued and consoles delivered.  Revenue is recognized from the sales of credentials upon issuance.

  

§ PKI Credentialing Consoles: PKI credentialing provided as a customer driven solution involves the bulk sale of a fixed number of individual software certificates which are delivered to the customer and issued by the customer. Pricing for certificates issued by the Company are based on third party evidence of value.  Certificates issued have a fixed life and cannot be modified or reissued. There is no obligation to provide post contract services in relation to certificates issued and consoles delivered.  Revenue is recognized upon delivery of the credentials and/or consoles when there are no other additional deliverables. There is no obligation to provide post contract services in relation to certificates issued and consoles delivered.  Cost of Revenues includes general infrastructure support costs to maintain the continued issuance of credentials. For other software, which is part of an integrated solution, revenue is recognized using percentage of completion as the individual component parts have no value until the solution has been delivered.

 

Consulting Services and Products

 

§ Value Added Reseller Services: The Company procures and resells third party hardware/software products and maintenance services under cost-reimbursable contracts. The Company contracts separately with third party vendors who deal in such products and services to procure products and services for its customers. The Company’s pricing is based on Third Party Evidence of Value (“TPE”) with either handling charges or additional fees included in General Services Administration (‘GSA”) schedule which is similar to those offered by other hardware vendors for similar products and/or services as well as charges for handling and additional fees. The Company bears significant risk as it exercises significant discretion in establishing technical requirements and choosing equipment and as such recognizes revenues and related costs on a gross basis. Hardware elements are separately procured and priced through third party vendors who deal in such equipment. Revenue is recognized upon delivery of the product or service when it is not part of an integrated solution or as a percentage of completion if it is part of an integrated solution.

 

§ Information Technology Consulting: The Company offers traditional information technology and network consulting and security assurance services under a time and materials or on a fixed fee basis. The Company also offers to its telecommunications customers telecommunications network assessments, contract negotiations, information security consulting services, and infrastructure consulting services. Revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred to provide services. Revenue is recognized on certain contingency-based consulting arrangements to the extent expected savings are realized and the customer signs-off on our value billing.

  

Income Taxes

 

The Company accounts for income taxes in accordance with authoritative guidance which requires that deferred tax assets and liabilities be computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The guidance requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. The Company recognizes the impact of an uncertain tax position taken or expected to be taken on an income tax return in the financial statements at the amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained upon audit by the relevant taxing authority.

 

Basic and Diluted Earnings Per Share (EPS)

 

Basic EPS includes no dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common and restricted stock were exercised or converted into common and restricted stock. The number of incremental shares from assumed conversions of stock options, stock warrants and unvested restricted stock awards included in the calculation of diluted EPS was calculated using the treasury stock method. See Note 10 to the consolidated financial statements for computation of EPS.

 

Stock-Based Compensation

 

The Company previously adopted the provisions of ASC 718-10, “Stock Compensation” (formerly known as SFAS No. 123R), using the modified prospective application transition method. Under this method, compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date is recognized over the remaining service period. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under ASC 718-10, as originally issued. All new awards that are modified, repurchased, or cancelled after the adoption date are accounted for under provisions of ASC 718-10. The Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period. In addition, pursuant to ASC 718-10, the Company is required to estimate the amount of expected forfeitures when calculating share-based compensation, instead of accounting for forfeitures as they occur, which was the Company’s practice prior to the adoption of ASC 718-10. See Note 11 to the consolidated financial statements.

  

Non-Employee Stock-Based Compensation:

 

The Company accounts for stock-based non-employee compensation arrangements using the fair value recognition provisions of ASC 505-50, “Equity-Based Payments to Non-Employees” (formerly known as FASB Statement 123, Accounting for Stock-Based Compensation and “Emerging Issues Task Force” EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services).

 

Accounting Standards Updates

 

Revenue Recognition

 

In October 2009 the FASB issued Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging Issues Task Force.” This update provides amendments to the criteria in ASC Topic 605, “Revenue Recognition,” for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on vendor-specific objective evidence (VSOE) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. ASU 2009-13 also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and became effective for our 2011 fiscal year beginning January 1, 2011. This update did not have a material impact on our financial statements.

 

Supplementary Pro Forma Information for Business Combinations

 

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The update requires that the pro forma information for business combinations to be presented as if the business combination occurred at the beginning of the prior annual reporting period when calculating both the current reporting period and the prior reporting period pro forma financial information. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this update in the fourth quarter of 2011 in connection with a business combination.

  

Goodwill Impairment Testing

 

In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”).  ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted this standard on January 1, 2011 and it did not have a material impact on its financial statements as none of its operating segments have zero or negative carrying amounts.