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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Inventory Valuation

For annual periods, the Company values inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods. As such, substantially all of the inventory value at March 31, 2020 and 2019 has been estimated using a gross profit percentage based on historical gross profit percentages of previous periods as applied to the net sales of the current period, as management believes that the gross profit percentage on these items are materially consistent from period to period. The remainder of the inventory value at March 31, 2020 and 2019 is estimated based on the Company's standard cost perpetual inventory system, as management believes the perpetual system computed value for these items provides a better estimate of value for that inventory. Adjustments to reconcile the annual physical inventory to the Company's books are treated as changes in accounting estimates and are recorded in the fourth quarter.

Credit and Concentration Risks

Net Sales and Accounts Receivable

There were three customers that represented 79.9% and 73.8% of total net sales for the three months ended March 31, 2020 and 2019, respectively. This is set forth in the table below.

Customer	Percentage of Sales
	March 31, 2020		March 31, 2019
	(Unaudited)		(Unaudited)
1		36.20		28.80
2		31.50		31.40
3		12.20		*
4		*		13.60

* Customer was less than 10% of total net sales for the three months ended March 31, 2020 and 2019, respectively.

There were two customers that represented 60.0% of gross accounts receivable at March 31, 2020 and three customers that represented 67.8% of gross accounts receivable at December 31, 2019, respectively. This is set forth in the table below.

Customer	Percentage of Receivables
	March 31, 2020		December 31, 2019
	(Unaudited)
1		43.60		32.70
2		16.40		25.10
3		*		10.00

* Customer was less than 10% of Gross Accounts Receivable at March 31, 2020.

Cash and Cash Equivalents

During the year, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts.

Major Suppliers

The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed.

Leases

The Company accounts for leases under ASC 842, "Leases". All leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

Earnings (Loss) per share

Basic earnings (loss) per share ("EPS") is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

For purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method.

The following is the calculation of net income (loss) applicable to common stockholders utilized to calculate EPS:

	Three Months Ended
	March 31, 2020		March 31, 2019
	(Unaudited)		(Unaudited)
Net Income (loss) per statement of operations	$	1,058,000	$	(923,000	)
Add: Convertible Note Interest for Potential Note Conversion		170,000		-

Net income (loss) used to calculate earnings per share	$	1,228,000	$	(923,000	)

The following is a reconciliation of the denominators of basic and diluted earnings per share computations:

	Three Months Ended
	March 31, 2020		March 31, 2019
	(Unaudited)		(Unaudited)
Weighted average shares outstanding used to compute basic earnings per share		30,380,234		28,601,390
Effect of dilutive stock options and warrants		1,137,769		-
Effect of dilutive convertible notes payable		5,003,451		-
Weighted average shares outstanding and dilutive securities
used to compute dilutive earnings per share		36,521,454		28,601,390

The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares:

	Three Months Ended
	March 31, 2020		March 31, 2019
	(Unaudited)		(Unaudited)
Stock Options		234,000		861,000
Warrants		1,423,000		2,240,000
		1,657,000		3,101,000

The following securities have been excluded from the calculation even though the exercise price was less than the average market price of the common shares because the effect of including these potential shares was anti-dilutive due to the net loss incurred during that period:

	Three Months Ended
	March 31, 2020		March 31, 2019
	(Unaudited)		(Unaudited)

Stock Options		-		500,000
Warrants		-		-
		-		500,000

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC 718, "Compensation – Stock Compensation." Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation expense for employees amounted to $140,000 and $233,000 for the three months ended March 31, 2020 and 2019, respectively. Stock compensation expense for directors amounted to $55,000 and $131,000 for the three months ended March 31, 2020 and 2019, respectively. Stock compensation expenses for employees and directors were included in operating expenses on the accompanying Condensed Consolidated Statements of Income.

Goodwill

Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at both March 31, 2020 and December 31, 2019 relates to the acquisition of NTW.

Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.

The COVID-19 pandemic was a triggering event for testing whether goodwill has been impaired. The goodwill amounted to $163,000 at March 31, 2020. The Company performed a qualitative assessment and determined it is not more likely than not that the fair value was less than their carrying values as of March 31, 2020. We will continue to monitor the impacts of the COVID-19 pandemic in future quarters. Changes in our forecasts or further decreases in the value of our common stock could cause book values to exceed fair values which may result in goodwill impairment charges in future periods.

The Company has determined that there has been no impairment of goodwill at March 31, 2020 and 2019.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.