Quarterly report pursuant to Section 13 or 15(d)

SIGNIFICANT ACCOUNTING POLICIES UPDATE

v3.10.0.1
SIGNIFICANT ACCOUNTING POLICIES UPDATE
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
SIGNIFICANT ACCOUNTING POLICIES UPDATE
SIGNIFICANT ACCOUNTING POLICIES UPDATE
The Company’s significant accounting policies are detailed in “Note 2:  Significant Accounting Policies” of its Form 10-K for the year ended December 31, 2017.  Significant changes to the Company’s accounting policies as a result of changes in functional currency, the impact of changes to tax legislation, and adopting Accounting Standards Codification (“ASC”) 606 are discussed below:
Functional Currency:
The United States dollar (“U.S. dollar”) is the currency of the primary economic environment in which the Company’s U.S. subsidiaries operate and the Company has adopted and is using the U.S. dollar as its functional currency. Transactions and balances originally denominated in U.S. dollars are presented at the original amounts. Accordingly, monetary accounts maintained in currencies other than dollars are re-measured into dollars, with resulting gains and losses reflected in the consolidated statements of operations and comprehensive income as financial income or expenses, as appropriate.
In the first quarter of 2018, the Company concluded that the functional currency for its Israeli subsidiary, Epsilor-EFL, changed from the New Israeli Shekel to the U.S. dollar. The primary reason for the change in functional currencies is due to a change in Epsilor-EFL operations whereby the majority of its contracts and material costs are anticipated to be sourced in U.S. dollars. The Company believes that the change in functional currency for this business was necessary as it reflects the primary economic environment in which Epsilor-EFL now operates.
The change in functional currency for Epsilor-EFL is accounted for prospectively from January 1, 2018, and prior year financial statements have not been restated for the change in functional currency. The financial statements of Epsilor-EFL are now reported in U.S. dollars. All balance sheet accounts were translated using the exchange rates in effect at the time of the change in functional currency.  The statements of comprehensive income and cash flows are also reported in U.S. dollars.
Income Taxes:
The U.S. Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act makes broad complex changes to the U.S. tax code including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creating new taxes on certain foreign sourced earnings and additional limitations on the deductibility of interest.
The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) in December, 2017, to provide guidance on accounting for the effects of the Tax Act.  SAB 118 provides for a measurement period of up to one year from the Tax Act enactment date for companies to complete their assessment of and accounting for those effects of the Tax Act.  Under SAB 118, a company must first reflect the income tax effects of the Tax Act for which the accounting is complete in the period of the date of enactment. To the extent the accounting for other income tax effects is incomplete, but a reasonable estimate can be determined, companies must record a provisional estimate to be included in their financial statements.  For any income tax effect for which a reasonable estimate cannot be determined, an entity must continue to apply ASC 740 based on the provisions of the tax laws in effect immediately prior to the Tax Act being enacted until such time as a reasonable estimate can be determined.  The Company requires additional time to complete its analysis of the impacts of the Tax Act and therefore its accounting for the Tax Act is provisional but is a reasonable estimate based on available information.  The Company will complete its analysis and finalize its accounting for this provisional estimate during the one year measurement period as prescribed by SAB 118.
Revenue recognition:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, ASC 606. The new revenue recognition standard relates to revenue from contracts with customers, which, along with amendments issued in 2016 and 2015, supersedes nearly all current U.S. GAAP guidance on this topic and eliminates industry-specific guidance.
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers, which the Company adopted on January 1, 2018, using the modified retrospective method.  The Company evaluated the distinct performance obligations and the pattern of revenue recognition of its significant contracts upon adoption of the standard.  Consequently, after its review of contracts in each revenue stream, the Company concluded that the impact of adopting the standard did not have an impact to its consolidated balance sheets, statements of operations, changes in stockholders’ equity, or cash flows.
During 2018 and 2017, the Company recognized revenues from (i) the sale and customization of interactive training systems (Training and Simulation Division); (ii) maintenance services in connection with such systems (Training and Simulation Division); (iii) the sale of batteries, chargers and adapters, and custom power solutions (Power Systems Division); and (iv) the sale of lifejacket lights (Power Systems Division).
The Company determines its revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations within the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations within the contract
Recognition of revenue when, or as the performance obligation has been satisfied
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In assessing the recognition of revenue, the Company evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. The majority of the Company’s contracts with customers are accounted for as one performance obligation, as the majority of tasks and services is part of a single project or capability. As these contracts are typically a customized customer-specific solution, the Company uses the expected cost plus margin approach to estimate the standalone selling price of each performance obligation.  For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.
The Company also offers maintenance and support agreements (“warranties”) for many of its products.  The specific terms and conditions of those warranties vary depending upon the product sold and country in which the product was sold.  The warranty revenue is recognized on a straight-line basis over the term of the maintenance and support services.   The standalone selling price is determined based on the price charged when sold separately or upon renewal.
The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 92% and 93% of its revenue for the nine-month periods ended September 30, 2018 and 2017, respectively. Substantially all of the Company’s revenue in the Training and Simulation Division and the U.S. Power Systems Division is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, and overhead.
On September 30, 2018, the Company had $70.7 million of expected future revenue relating to performance obligations currently in progress, which it also refers to as total backlog. The Company expects to recognize approximately 29% percent of its backlog as revenue in 2018, and the remaining 71% percent by the end of 2019 and thereafter.
Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events that can exceed a year. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
As a significant change in one or more of these estimates could affect the profitability of its contracts, the Company reviews and updates its contract-related estimates quarterly. The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified.
The aggregate impact of adjustments in contract estimates to net income (loss) is presented below:
 
Nine months ended September 30,
 
2018
 
2017
 
Training and Simulation Division
 
Power Systems Division
 
Training and Simulation Division
 
Power Systems Division
Net income (loss)
$
449,580

 
$
77,403

 
$
858,769

 
$
92,050

 
Three months ended September 30,
 
2018
 
2017
 
Training and Simulation Division
 
Power Systems Division
 
Training and Simulation Division
 
Power Systems Division
Net income (loss)
$
(139,016
)
 
$
320,269

 
$
402,581

 
$
(208,861
)

Revenue by Category. As of September 30, 2018 and 2017 the Company’s portfolio of products and services consisted of 525 and 500 active contracts, respectively.
Revenue by major product line was as follows:
 
Nine months ended September 30,
 
Three months ended September 30,
 
2018
 
2017
 
2018
 
2017
Product Revenue
 
 
 
 
 
 
 
Air Warfare Simulation
$
13,324,429

 
$
14,476,934

 
$
3,667,058

 
$
5,075,082

Vehicle Simulation
17,040,554

 
8,694,974

 
6,040,922

 
4,351,624

Use-of-Force
10,677,612

 
9,636,388

 
4,132,059

 
4,489,977

Service Revenue
 
 
 
 
 
 
 
Warranty
2,533,558

 
2,331,673

 
825,863

 
680,284

Total Training and Simulation Division
$
43,576,153

 
$
35,139,969

 
$
14,665,902

 
$
14,596,967

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract Manufacturing
$
10,130,597

 
$
9,565,368

 
$
3,100,586

 
$
3,114,482

Power Distribution and Generation
5,695,039

 
3,810,061

 
1,413,117

 
1,479,509

Batteries
9,767,890

 
16,134,215

 
3,118,375

 
4,944,867

Engineering Services and Other
3,797,917

 
5,076,966

 
1,546,497

 
1,794,616

Total Power Division
$
29,391,443

 
$
34,586,610

 
$
9,178,575

 
$
11,333,474


The table below details the percentage of total recognized revenue by type of arrangement for the nine and three months ended September 30, 2018 and 2017:
 
Nine months ended September 30,
 
Three months ended September 30,
Type of Revenue
2018
 
2017
 
2018
 
2017
Sale of products
95.0
%
 
96.7
%
 
94.5
%
 
97.2
%
Maintenance and support agreements
3.5
%
 
3.3
%
 
3.5
%
 
2.6
%
Long term research and development contracts
1.5
%
 
%
 
2.0
%
 
0.2
%
Total
100
%
 
100
%
 
100
%
 
100
%

Revenue by contract type was as follows:
 
Training and
Simulation
Division
 
Power Systems
Division
Nine months ended September 30, 2018
 
 
 
Fixed Price
$
35,975,495

 
$
26,807,005

Cost Reimbursement (Cost Plus)
4,120,987

 
1,822,659

Time and Materials
3,479,671

 
761,779

Total
$
43,576,153

 
$
29,391,443

Nine months ended September 30, 2017
 
 
 
Fixed Price
$
28,849,966

 
$
28,830,143

Cost Reimbursement (Cost Plus)
4,610,512

 
4,203,220

Time and Materials
1,679,491

 
1,553,247

Total
$
35,139,969

 
$
34,586,610

Three months ended September 30, 2018
 
 
 
Fixed Price
$
11,948,500

 
$
8,372,521

Cost Reimbursement (Cost Plus)
1,511,711

 
567,767

Time and Materials
1,205,691

 
238,287

Total
$
14,665,902

 
$
9,178,575

Three months ended September 30, 2017
 
 
 
Fixed Price
$
12,657,859

 
$
9,250,841

Cost Reimbursement (Cost Plus)
1,524,987

 
1,714,584

Time and Materials
414,121

 
368,049

Total
$
14,596,967

 
$
11,333,474


Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with fixed-price contracts. However, these types of contracts offer additional profits when the Company completes the work for less than originally estimated. Cost-reimbursement contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time and materials contracts, the Company’s profit may fluctuate if actual labor-hour costs vary significantly from the negotiated rates.
Revenue by customer was as follows:
 
Training and
Simulation
Division
 
Power Systems
Division
Nine months ended September 30, 2018
 
 
 
U.S. Government
 
 
 
Department of Defense (DoD)
$
12,399,861

 
$
2,115,108

Non-DoD
7,655,130

 

Foreign Military Sales (FMS)
2,055,333

 

Total U.S. Government
$
22,110,324

 
$
2,115,108

 
 
 
 
U.S. Commercial
$
16,546,210

 
$
16,159,067

Non-U.S. Government
1,786,538

 
2,003,417

Non-U.S. Commercial
3,133,081

 
9,113,851

Total Revenue
$
43,576,153

 
$
29,391,443

Nine months ended September 30, 2017
 
 
 
U.S. Government
 
 
 
Department of Defense (DoD)
$
7,698,425

 
$
7,166,810

Non-DoD
8,604,167

 

Foreign Military Sales (FMS)
1,128,897

 

Total U.S. Government
17,431,489

 
7,166,810

 
 
 
 
U.S. Commercial
$
13,697,477

 
$
10,603,502

Non-U.S. Government
2,815,271

 
9,014,963

Non-U.S. Commercial
1,195,732

 
7,801,335

Total Revenue
$
35,139,969

 
$
34,586,610

Three months ended September 30, 2018
 
 
 
U.S. Government
 
 
 
Department of Defense (DoD)
$
4,753,006

 
$
772,751

Non-DoD
3,272,251

 

Foreign Military Sales (FMS)
341,933

 

Total U.S. Government
8,367,190

 
772,751

 
 
 
 
U.S. Commercial
$
4,744,148

 
$
4,669,493

Non-U.S. Government
394,091

 
180,253

Non-U.S. Commercial
1,160,473

 
3,556,078

Total Revenue
$
14,665,902

 
$
9,178,575

Three months ended September 30, 2017
 
 
 
U.S. Government
 
 
 
Department of Defense (DoD)
$
3,226,920

 
$
2,715,675

Non-DoD
3,162,425

 

Foreign Military Sales (FMS)
721,353

 

Total U.S. Government
7,110,698

 
2,715,675

 
 
 
 
U.S. Commercial
$
5,765,592

 
$
3,204,902

Non-U.S. Government
1,496,856

 
3,392,865

Non-U.S. Commercial
223,821

 
2,020,032

Total Revenue
$
14,596,967

 
$
11,333,474


Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. The majority of the Company’s contract amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers, particularly on its international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
 
September 30, 2018
 
December 31, 2017
 
Training and Simulation Division
 
Power Systems
Division
 
Training and Simulation Division
 
Power Systems
Division
Unbilled Receivables – Current
$
9,681,738

 
$
9,867,754

 
$
7,263,461

 
$
8,831,055

Deferred Revenues – Current
(6,061,829
)
 
(452,272
)
 
(5,860,345
)
 
(917,968
)
Net Contract Assets and Liabilities:
$
3,619,909

 
$
9,415,482

 
$
1,403,116

 
$
7,913,087


The $3.7 million increase in the Company’s net contract assets (liabilities) from December 31, 2017 to September 30, 2018 was due to the timing of milestone payments on certain US Government and commercial contracts.
During the nine months ended September 30, 2018 and 2017, the Company recognized $5.2 million and $4.8 million in revenue related to the Company’s contract liabilities at December 31, 2017 and 2016, respectively.
The Company did not record any provisions for impairment of its unbilled receivables during the nine months ended September 30, 2018 or 2017, respectively.
Trade Receivables
Trade receivables include amounts billed and currently due from customers. The amounts are recorded at net estimated realizable value.  The value of the Company’s trade receivables when appropriate includes an allowance for estimated uncollectible amounts.  The Company calculates an allowance based on its history of write-offs, the assessment of customer creditworthiness, and the age of the outstanding receivables.
As of September 30, 2018 and December 31, 2017, the Company’s trade receivables recorded in the consolidated balance sheets were $14.2 million and $19.3 million, respectively.  The Company has not recorded any provisions for doubtful accounts and no reserves have been established at September 30, 2018 or December 31, 2017, respectively.  The Company believes its exposure to concentrations of credit risk is limited due to the nature of its operations, where a significant number of its contracts are typically a customized customer specific solution.
Contract Costs
Certain eligible costs, typically incurred during the initial phases of the Company’s service contracts, are capitalized when the costs related directly to the contract, are expected to be recovered, and generate or enhance resources to be used in satisfying the performance obligation.  These costs primarily consist of production design.  If the carrying amount is not recoverable, an impairment loss is recognized.
Practical Expedients and Exemptions
The Company has elected the following practical expedients and exemptions as allowed under the new revenue guidance:
Sales Commissions
The Company has elected to expense its sales commissions when incurred because the amortization period is less than one year. These costs are recorded within selling and marketing expenses.
Financing
The Company has elected to not adjust the consideration for the effects of a significant financing component as the term of the majority of contracts is twelve months or less.
Sales Tax
The Company acts as an agent in the collection and remittance of sales taxes.  Historically, the Company has excluded these amounts from the calculation of revenue.  These taxes will continue to be excluded from the transaction price.
Shipping and Handling Costs
The Company has elected to account for shipping and handling activities that are incurred after the customer obtained control of the product as fulfillment costs rather than a separate service provided to the customer for which consideration would need to be allocated.
The Company will continue to account for shipping and handling as fulfillment costs when these costs are incurred prior to the customer obtaining control.