2. Revenue Recognition

On January 1, 2017, we adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net reduction to opening equity of $404,000 as of January 1, 2017 due to the cumulative impact of adopting Topic 606. The impact to revenues for the three months ended March 31, 2017 was an increase of $2.8 million as a result of adopting Topic 606.

The adoption of Topic 606 did not have a significant impact on our third-party software or professional engineering services revenue; however, it did have a significant impact on our proprietary DataV software products. We executed our first two DataV contracts in the fourth quarter of 2016. Our current DataV contracts include customization, software license and support and maintenance performance obligations. Under the accounting standards in effect in the prior period, revenues from our DataV software contracts were recognized under a zero profit model whereby revenue was recognized up to the amount of costs incurred. The profit margin was deferred and recognized ratably over the service and maintenance period after delivery and acceptance of the software product. Under Topic 606, revenue is recognized on our DataV contracts when the customization services essential to provide the derived benefit of the software to the customer are completed and control of the product is transferred to the customer as evidenced by customer acceptance. During the three month period ended March 31, 2017, we received customer acceptance on a DataV software license, resulting in the recognition of $2.8 million in revenue for the software license and customization services.

Changes in accounting policies as a result of adopting Topic 606 and nature of goods

The following is a description of principal activities from which we generate revenue. Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers.

Third-Party Software:

We sell third-party software licenses based upon a customer purchase order, shipping a certificate of authenticity (“COA”) to satisfy this single performance obligation. These shipments are also subject to limited return rights; historically, returns have averaged less than one-quarter of one percent. In accordance with Topic 606, we will continue to recognize revenue from third-party products at the time of shipment when the customer accepts control of the COA.

Proprietary Software:

We sell our proprietary software products to customers under a contract or by purchase order. Our DataV software contracts generally include professional services, a perpetual or term license and support and maintenance. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. Contracts that include software customization may result in the combination of the customization services with the software license as one distinct performance obligation. The transaction price is generally in the form of a fixed fee at contract inception. Certain DataV contracts also include variable consideration in the form of royalties earned when customers meet contractual volume thresholds. We allocate the transaction price to each distinct performance obligation based on the estimated standalone selling price for each performance obligation. We then look to how control transfers to the customer in order to determine the timing of revenue recognition. In contracts that include customer acceptance, we recognize revenue when we have delivered the software and received customer acceptance. We recognize revenues from support and maintenance performance obligations over the service delivery period. We recognize revenues from royalties in the period of usage.

Our non-DataV software products generally do not include customization or modification services and are sold in the form of term licenses. These software licenses represent one performance obligation. Revenue is recognized when the software is delivered to the customer.

There are two items involving revenue recognition on DataV software contracts that require us to make more difficult and subjective judgments: the determination of which performance obligations are distinct within the context of the overall contract and the estimated standalone selling price of each performance obligation. In instances where our DataV contracts include significant customization or modification services, the customization and modification services are generally combined with the software license and recorded as one distinct performance obligation. We estimate the standalone selling price of each performance obligation based on either a cost plus margin approach or an adjusted market assessment approach. In instances where we have observable selling prices for professional services and support and maintenance, we may apply the residual approach to estimate the standalone selling price of software licenses.

Professional Engineering Services

We enter into contracts for professional engineering services that include software development and customization. We identify each performance obligation in our professional engineering services contracts at contract inception. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable. The contract pricing is either at stated billing rates per service hour and material costs or at a fixed amount. Services provided under professional engineering agreements generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. We recognize revenue on service contracts based on time and materials as we have the right to invoice. We recognize revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation. Certain professional engineering contracts include substantive customer acceptance provisions. In contracts that include substantive customer acceptance provisions, we recognize revenue upon customer acceptance.

The determination of the total labor hours expected to complete the performance obligations involves significant judgment. In certain situations, when it is impractical for us to reasonably measure the outcome of a performance obligation, and where we anticipate that we will not incur a loss, an adjusted cost based input method is used for revenue recognition. Equal amounts of revenue and cost are recognized during the contract period, and profit is recognized when the project is completed and accepted.

Disaggregation of revenue:

The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):

	Three Months Ended March 31, 2017
	Third Party Software		Proprietary Software		Total Software		Professional Engineering Services		Total
Primary geographical markets
North America	$	16,296	$	2,645	$	18,941	$	2,829	$	21,770
Europe		424		—		424		398		822
Asia		77		9		86		163		249
Total	$	16,797	$	2,654	$	19,451	$	3,390	$	22,841

Major products/services lines
Third-party software	$	16,797	$	—	$	16,797	$	—	$	16,797
Proprietary software		—		2,654		2,654		—		2,654
Professional engineering services		—		—		—		3,390		3,390
	$	16,797	$	2,654	$	19,451	$	3,390	$	22,841

Timing of revenue recognition
Products transferred at a point in time	$	16,797	$	2,654	$	19,451	$	590	$	20,041
Products and services transferred over time		—		—		—		2,800		2,800
	$	16,797	$	2,654	$	19,451	$	3,390	$	22,841

Contract balances:

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):

	As of March 31, 2017
Receivables	$	15,751
Short-term contract assets		883
Long-term contract assets		31
Short-term contract liabilities (deferred revenue)		1,908
Long-term contract liabilities (deferred revenue)		115

We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to our contractual right to consideration for completed performance objectives not yet invoiced, and also includes deferred contract acquisition costs, which will be amortized along with the associated revenue. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract. We had no asset impairment charges related to contract assets in the period.

Significant changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands):

	Three Months Ended March 31, 2017
	Contract Assets		Contract Liabilities*
Revenue recognized that was included in the contract liability (def. revenue) balance at Jan. 1, 2017	$	—	$	2,627
Increases due to cash received, excluding amounts recognized as revenue during the period		—		929
Transferred to receivables from contract assets recognized at January 1, 2017		752		—
Performance obligations satisfied in previous periods		—		—
* Comprised of Deferred Revenue

Contract acquisition costs:

In connection with the adoption of Topic 606, we are required to capitalize certain contract acquisition costs consisting primarily of commissions paid when contracts are signed. As of January 1, 2017, the date we adopted Topic 606, we capitalized $292,000 in contract acquisition costs related to contracts that were not completed. For contracts that have a duration of less than one year, we follow a Topic 606 practical expedient and expense these costs when incurred; for contracts with life exceeding one year, as is more common with our DataV software bookings, we record these costs in proportion to each completed contract performance obligation. In the three months ended March 31, 2017, the amount of amortization was $141,000 and there was no impairment loss in relation to costs capitalized.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The estimated revenues do not include amounts of variable consideration attributable to royalties or unexercised contract renewals (in thousands):

	Remainder of 2017		2018		2019
Third-party software	$	109	$	110	$	36
Proprietary software		1,794		470		196
Professional engineering services		246		—		—

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been less than one year. We record these costs within selling, general and administrative expenses.

In accordance with Topic 606, the disclosure of the impact of adoption to our condensed consolidated statements of income and balance sheets was as follows:

	Three months ended March 31, 2017
	Impact of changes in accounting policies
(in thousands, except per share amounts)	As Reported			Balances without adoption of Topic 606			Effect of Change Higher/(Lower)

Revenue:
Software	$	19,451		$	17,138		$	2,313
Professional engineering service		3,390			2,944			446
Total revenue		22,841			20,082			2,759
Cost of revenue:
Software		14,114			14,114			—
Professional engineering service		2,474			2,150			324
Total cost of revenue		16,588			16,264			324
Gross profit		6,253			3,818			2,435
Operating expenses:
Selling, general and administrative		4,865			4,724			141
Research and development		1,347			1,347			—
Total operating expenses		6,212			6,071			141
Income from operations		41			(2,253	)		2,294
Net income (loss)	$	202		$	(2,092	)	$	2,294
Basic income(loss) per share	$	0.02		$	(0.17	)	$	0.19
Diluted income (loss) per share	$	0.02		$	(0.17	)	$	0.19

	March 31, 2017
(in thousands)	As Reported			Balances without adoption of Topic 606			Effect of Change Higher/(Lower)
Assets:
Contract Assets	$	883		$	904		$	(21	)
Liabilities:
Deferred revenue - current		1,908			3,047			(1,139	)
Deferred revenue - noncurrent		115			1,332			(1,217	)
Shareholders' Equity:
Accumulated deficit		(96,016	)		(98,352	)		2,336