NOTE C – REVENUE RECOGNITION

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. The new standard introduces a five-step process to be followed in determining the amount and timing of revenue recognition. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with customers, and establishes disclosure requirements which are more extensive than those required under prior U.S. GAAP. Generally, we recognize revenue under Topic 606 for each of our performance obligations either over time (generally, the transfer of a service) or at a point in time (generally, the transfer of a good) as follows:

VasoTechnology

Recurring managed network and voice services provided by NetWolves are recognized as provided on a monthly basis (“over time”). Non-recurring charges related to the provision of such services are recognized in the period provided (“point in time”). In the IT VAR business, software system installations are recognized upon verification of installation and expiration of an acceptance period (“point in time”). Monthly post-implementation customer support provided under such installations as well as software solutions offered under a monthly Software as a Service (“SaaS”) fee basis are recognized monthly over the contract term (“over time”).

VasoHealthcare

Commission revenue is recognized when the underlying equipment has been delivered by GEHC and accepted at the customer site in accordance with the terms of the specific sales agreement (“point in time”).

VasoMedical

In the United States, we recognized revenue from the sale of our medical equipment in the period in which we deliver the product to the customer (“point in time”). Revenue from the sale of our medical equipment to international markets is recognized upon shipment of the product to a common carrier, as are supplies, accessories and spare parts delivered in both domestic and international markets (“point in time”). The Company also recognizes revenue from the maintenance of EECP^® systems either on a time and material as-billed basis (“point in time”) or through the sale of a service contract, where revenue is recognized ratably over the contract term (“over time”).

Impact of Adoption

Effective January 1, 2018, the Company adopted the requirements of Topic 606 using the modified retrospective method, which provided that the cumulative effect from prior periods upon applying the new guidance was recognized in our consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings, and that prior periods are not retrospectively adjusted. A summary and discussion of such cumulative effect adjustment and the impact on current period financial statements of adopting Topic 606 is as follows:

	(in thousands)
	Three months ended March 31, 2018 (unaudited)
	prior U.S. GAAP			Topic 606 impact			as reported
STATEMENT OF OPERATIONS
Revenues
Professional sales services	$	5,155		$	56		$	5,211
Total revenues		17,481			56			17,537

Gross Profit		9,565			56			9,621

Operating expenses
Selling, general and administrative		11,604			(56	)		11,548
Operating loss	$	(2,226	)	$	112		$	(2,114	)

ASSETS
Accounts and other receivables, net	$	8,696		$	432		$	9,128
Deferred commission expense	$	3,548		$	1		$	3,549
Other assets, net	$	2,704		$	194		$	2,898


LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred revenue - current portion	$	15,273		$	334		$	15,607
Deferred revenue - long term	$	5,646		$	42		$	5,688
Accumulated deficit	$	(54,511	)	$	252		$	(54,259	)

Disaggregation of Revenue

The following tables present revenues disaggregated by our business operations and timing of revenue recognition:

	(in thousands)
	Three Months Ended March 31, 2018 (unaudited)								Three Months Ended March 31, 2017 (unaudited)
	IT segment		Professional sales services segment		Equipment segment		Total		IT segment		Professional sales services segment		Equipment segment		Total
Network services	$	10,211					$	10,211	$	9,594					$	9,594
Software sales and support		1,202						1,202		206						206
Commissions				5,211				5,211				5,871				5,871
Medical equipment sales						631		631						423		423
Medical equipment service						282		282						280		280
	$	11,413	$	5,211	$	913	$	17,537	$	9,800	$	5,871	$	703	$	16,374

	Three Months Ended March 31, 2018 (unaudited)								Three Months Ended March 31, 2017 (unaudited)
	IT segment		Professional sales services segment		Equipment segment		Total		IT segment		Professional sales services segment		Equipment segment		Total
Revenue recognized over time	$	10,090	$	-	$	173	$	10,263	$	9,170	$	-	$	189	$	9,359
Revenue recognized at a point in time		1,323		5,211		740		7,274		630		5,871		514		7,015
	$	11,413	$	5,211	$	913	$	17,537	$	9,800	$	5,871	$	703	$	16,374

Transaction Price Allocated to Remaining Performance Obligations

As of March 31, 2018, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $87.1 million, of which we expect to recognize revenue as follows:

	(in thousands)
	Fiscal years of revenue recognition
	remainder of 2018		2019		2020		Thereafter
Unfulfilled performance obligations	$	41,782	$	29,120	$	11,113	$	7,431

Contract Liabilities

Contract liabilities arise in our IT VAR, VasoHealthcare, and VasoMedical businesses. In our IT VAR business, payment arrangements with clients typically include an initial payment due upon contract signing and milestone-based payments based upon product delivery and go-live, as well as post go-live monthly payments for subscription and support fees. Customer payments received, or receivables recorded, in advance of go-live and customer acceptance, where applicable, are deferred as contract liabilities. Such amounts aggregated approximately $105,000 and $371,000 at March 31, 2018 and December 31, 2017, respectively, and are included in accrued expenses and other liabilities in our condensed consolidated balance sheets.

In our VasoHealthcare business, we bill amounts for certain milestones in advance of customer acceptance of the equipment. Such amounts aggregated approximately $20,338,000 and $22,126,000 at March 31, 2018 and December 31, 2017, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue. In addition, we record a contract liability for amounts expected to be repaid to GEHC due to customer order reductions. Such amounts aggregated approximately $2,310,000 and $1,143,000 at March 31, 2018 and December 31, 2017, respectively, and are included in accrued expenses and other liabilities in our condensed consolidated balance sheets.

In our VasoMedical business, we bill amounts for post-delivery services and varying duration service contracts in advance of performance. Such amounts aggregated approximately $957,000 and $941,000 at March 31, 2018 and December 31, 2017, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue.

During the three months ended March 31, 2018, we recognized approximately $2.6 million of revenues that were included in our contract liability balance at the beginning of such period.

Costs to Obtain or Fulfill a Contract

Topic 606 requires that incremental costs of obtaining a contract are recognized as an asset and amortized to expense in a pattern that matches the timing of the revenue recognition of the related contract. We have determined the only significant incremental costs incurred to obtain contracts with customers within the scope of Topic 606 are certain sales commissions paid to associates. In addition, the Company elected the practical expedient to recognize the incremental costs of obtaining a contract when incurred for contracts where the amortization period for the asset the Company would otherwise have recognized is one year or less.

Under prior U.S. GAAP, we recognized sales commissions in our equipment segment as incurred. Under Topic 606, sales commissions applicable to service contracts exceeding one year have been capitalized and amortized ratably over the term of the contract. In our IT VAR business, all commissions paid in advance of go-live were, under prior U.S. GAAP, capitalized as deferred commission expense and charged to expense at go-live or customer acceptance, as applicable. Under Topic 606, IT VAR commissions allocable to multi-year subscription contracts or multi-year post-contract support performance obligations are amortized to expense ratably over the terms of the multi-year periods. IT VAR commissions allocable to other elements continue to be charged to expense at go-live or customer acceptance, as was previously done. At the date of adoption of Topic 606, we recorded an asset, and related adjustment to retained earnings, of approximately $139,000 in our condensed consolidated balance sheets for the amount of unamortized sales commissions for prior periods, as calculated under the new guidance. The impact to our financial statements of adopting Topic 606, as it relates to costs to obtain contracts, was a reduction in commission expense of approximately $56,000, a reduction to deferred commission expense of approximately $1,000, and an increase in long term deferred commission expense (recorded in other assets) of approximately $194,000 (inclusive of the beginning balance adjustment of $139,000).

In our professional sales services segment, under both prior U.S. GAAP and Topic 606, commissions paid to our sales force are deferred until the underlying equipment is accepted by the customer.

At March 31, 2018, our condensed consolidated balance sheet includes approximately $5,290,000 in capitalized sales commissions to be expensed in future periods, of which $3,549,000 is recorded in deferred commission expense and $1,741,000, representing the long term portion, is included in other assets.

Significant Judgments when Applying Topic 606

Contract transaction price is allocated to performance obligations using estimated stand-alone selling price. Judgment is required in estimating stand-alone selling price for each distinct performance obligation. We determine stand-alone selling price maximizing observable inputs such as stand-alone sales when they exist or substantive renewal price charged to clients. In instances where stand-alone selling price is not observable, we utilize an estimate of stand-alone selling price based on historical pricing and industry practices.

Certain revenue we record in our professional sales service segment contains an estimate for variable consideration. Due to the tiered structure of our commission rate, which increases as annual targets are achieved, under Topic 606 we record revenue and deferred revenue at the rate we expect to be achieved by year end. Under prior U.S. GAAP, we recognized revenue at the rate achieved at the applicable reporting date. We base our estimate of variable consideration on historical results of previous years’ achievement under the GEHC agreement. Such estimate will be reviewed each quarter and adjusted as applicable. For the three months ended March 31, 2018, the Company recorded approximately $432,000 in accounts and other receivables, net; $376,000 in combined short term and long term deferred revenue; and $56,000 in commission revenue resulting from our estimate of variable consideration.