REVENUES

Revenue recognition:

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 90% and 94% of its revenue for the three-month period ended March 31, 2019 and 2018, 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 March 31, 2019, the Company had $70.5 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 68.1% its backlog as revenue in 2019, and the remaining 31.9% 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:



	Three months ended March 31,
	2019					2018
	Training and Simulation Division		Power Systems Division			Training and Simulation Division		Power Systems Division
Net income (loss)	$	146,278	$	(30,419	)	$	71,440	$	(119,778	)

Revenue by Category. As of March 31, 2019 and 2018 the Company’s portfolio of products and services consisted of 476 and 500 active contracts, respectively.

Revenue by major product line was as follows:



	Three months ended March 31,
	2019		2018
Product Revenue
Air Warfare Simulation	$	3,499,202	$	5,032,659
Vehicle Simulation	7,080,941		5,463,998
Use-of-Force	2,457,177		3,260,049
Service Revenue
Warranty	952,295		801,158
Total Training and Simulation Division	$	13,989,615	$	14,557,864


Contract Manufacturing	$	3,217,992	$	4,164,324
Power Distribution and Generation	250,700		3,275,380
Batteries	2,382,475		4,146,112
Engineering Services and Other	937,857		1,104,829
Total Power Division	$	6,789,024	$	12,690,645

The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
Type of Revenue	2019		2018
Sale of products	92.1	%	96.4	%
Maintenance and support agreements	4.6	%	2.9	%
Long term research and development contracts	3.3	%	0.7	%
Total	100	%	100	%

Revenue by contract type was as follows:



	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
Fixed Price	$	10,971,102	$	6,169,657
Cost Reimbursement (Cost Plus)	1,349,345		431,050
Time and Materials	1,669,168		188,317
Total	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
Fixed Price	$	12,209,969	$	12,072,168
Cost Reimbursement (Cost Plus)	1,338,951		388,749
Time and Materials	1,008,944		229,728
Total	$	14,557,864	$	12,690,645

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
Three months ended March 31, 2019
U.S. Government
Department of Defense (DoD)	$	4,893,803	$	441,033
Non-DoD	2,604,486		—
Foreign Military Sales (FMS)	642,269		—
Total U.S. Government	$	8,140,559	$	441,033

U.S. Commercial	$	4,771,042	$	3,167,221
Non-U.S. Government	241,553		291,965
Non-U.S. Commercial	836,462		2,888,805
Total Revenue	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
U.S. Government
Department of Defense (DoD)	$	3,432,193	$	512,212
Non-DoD	2,738,807		—
Foreign Military Sales (FMS)	584,781		—
Total U.S. Government	$	6,755,781	$	512,212

U.S. Commercial	$	6,028,998	$	7,717,964
Non-U.S. Government	926,164		1,517,816
Non-U.S. Commercial	846,921		2,942,653
Total Revenue	$	14,557,864	$	12,690,645

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.



	March 31, 2019									December 31, 2018
	Training and Simulation Division			Power Systems Division			Total			Training and Simulation Division			Power Systems Division			Total
Contract Assets - Current	$	14,251,984		$	8,067,984		$	22,319,968		$	10,358,679		$	7,509,217		$	17,867,896
Contract Liabilities - Current	(6,076,744		)	(674,041		)	(6,750,785		)	(6,697,522		)	(357,257		)	(7,054,779		)
Net Contract Assets and Liabilities:	$	8,175,240		$	7,393,943		$	15,569,183		$	3,661,157		$	7,151,960		$	10,813,117

The $4.8 million increase in the Company’s net contract assets (liabilities) from December 31, 2018 to March 31, 2019 was due to the timing of milestone payments on certain U.S. Government and commercial contracts.

During the three months ended March 31, 2019 and 2018, the Company recognized $2.8 million and $3.0 million, respectively, in revenue related to the Company’s contract liabilities.

The Company did not record any provisions for impairment of its contract assets during the three months ended March 31, 2019 and 2018.

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 March 31, 2019 and December 31, 2018, the Company’s trade receivables recorded in the consolidated balance sheets were $11.8 million and $16.3 million, respectively. The Company had an immaterial provision for doubtful accounts at March 31, 2019 and December 31, 2018. 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.