Accounting Policies

6 Months Ended

Jun. 30, 2014

Accounting Policies:

Stockholders' Equity Note, Redeemable Preferred Stock, Issue, Policy

. STOCKHOLDERS’EQUITY

Convertible Redeemable Preferred Stock

Series A

On September 24, 2008 the Company issued 826,000 shares of Series-A Convertible Preferred Stock (“Series A Preferred Stock”) to its Chief Executive Officer at a price of $3.63 per share for a total of $3,000,000.  Dividends accrue daily on the Series A Preferred at a rate of 10% and are payable only when, and if declared by the Company’s Board of Directors, quarterly in arrears. The Company paid $150,000 in preferred stock dividends for the six months ended June 30, 2014 and 2013.

The Series A Preferred Stock may be converted into common stock at the rate of one share of common for each share of Series A Preferred Stock.   Since September 2010, the Company has had certain rights to cause conversion of all of the shares of Series A Preferred Stock outstanding.  Since September 2012, the Company may redeem, subject to board approval, all of the shares of Series A Preferred Stock then outstanding at a price equal to the greater of (i) 130% of the purchase price plus all accrued and unpaid dividends and (ii) the fair market value of such number of shares of common stock which the holder of the Series A Preferred Stock would be entitled to receive had the redeemed Series A Preferred Stock been converted immediately prior to the redemption.

The Company reports the Series A Preferred Stock on the Company’s consolidated balance sheet within stockholders’ equity.

Series B

On June 20, 2014, as part of a plan to regain compliance with The Nasdaq Capital Market’s  (“ Nasdaq ”) continued listing requirements that a listed company have not less than $2.5 million in shareholders’ equity, the Company  issued 797,000 of Series-B Convertible Preferred Stock (“Series B Preferred Stock)  to  its Chief Executive Officer at a price of $2.51 per share in exchange for the cancellation of  $2,000,000 of outstanding principal owed to its Chief Executive Officer under a certain Revolving Promissory Note dated March 26, 2014.  The audit committee of the board of directors of the Company negotiated and unanimously approved the transaction.

The per share price was determined as the greater of (i) the average closing bid price of a share of the Company’s common stock reported by Nasdaq for the 30 trading days ending two trading days prior to the date of the Series B Preferred Stock agreement and (ii) 10% above the closing bid price of the Company’s common stock on the date of the Series B Preferred Stock agreement.  Accordingly, the per share price was set at $2.51 (“Purchase Price”), corresponding to 10% above the closing bid price on June 20, 2014.  Pursuant to the terms of the Series B Preferred Stock agreement, the Company also granted its Chief Executive Officer certain registration rights in the event the Company elects to file a registration statement with the Securities and Exchange Commission relating to an offering of its equity securities under the Securities Act of 1933, as amended.

The Series B Preferred Stock may be converted into shares of common stock on a one-to-one ratio, subject to customary anti-dilution provisions.  The Series B Preferred Stock will pay a quarterly dividend, which will accrue at an annual rate of 7%, subject to certain rate adjustments as provided for under the agreement, until June 20, 2016 and at an annual rate of 10% thereafter.  The Company’s Chief Executive Officer may convert up to 50% of the Series B shares into shares of common stock at any time until June 20, 2015, and thereafter may convert 100% of his shares of the Series B Preferred Stock into shares of common stock.  Following June 20, 2016, each and every then outstanding share of Series B Preferred Stock is subject to mandatory and automatic conversion into shares of common stock if the closing price of the common stock as reported by the principal exchange or quotation system on which such Common Stock is traded or reported exceeds 300% of the then current conversion price for 30 consecutive trading days.  The Company may redeem up to 50% of the shares of the outstanding Series B Preferred Stock at any time on or prior to December 17, 2014 at a price equal to 110% of the Purchase Price, plus an amount equal to any unpaid and accrued dividends. At any time after December 17, 2014 and prior to June 20, 2015, the Company may redeem up to 50% of the shares of the outstanding Series B Preferred Stock minus the number of shares redeemed in any First Partial Redemption, at a price equal to 130% of the Purchase Price, plus an amount equal to any unpaid and accrued dividends.  Additionally, after June 20, 2015, the Company may redeem all of the outstanding shares of the Series B Preferred Stock issued at a price per share equal to 300% of the purchase price.  The Series B Preferred Stock ranks senior to the Common Stock and on parity with the Company’s Series A Convertible Preferred Stock.

The Company reports the Series B Preferred Stock on the Company’s consolidated balance sheet within stockholders’ equity at the amount of net proceeds received less an imputed dividend cost. The imputed dividend cost of $110,000 was the result of the preferred stock having a dividend rate during the first two years after its issuance (7%) that is lower than the rate that becomes fixed (10%) after the initial two year period. The imputed dividend cost of $110,000 will be

amortized over the first two years from the date of issuance and is based upon the present value of the dividend discount using a 10% yield.

Earnings Per Share, Policy

 LOSS PER SHARE

Loss per share is computed on the basis of the weighted average number of shares and common stock equivalents outstanding during the period.  In the calculation of diluted loss per share, shares outstanding are adjusted to assume conversion of the Company’s non-interest bearing convertible stock and exercise of options as if they were dilutive.  In the calculation of basic loss per share, weighted average numbers of shares outstanding are used as the denominator.

The Company had net loss allocable to common stockholders for the three and six months ended June 30, 2014 and 2013.  Loss per share is computed as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator:
Net loss available to common shareholders-basic
and diluted	$	(827,000	)	$	(1,029,000	)	$	(2,162,000	)	$	(2,123,000	)
Denominator:
Weighted average shares used to compute net loss available to common shareholders per common share-basic and diluted		3,587,000			3,591,000			3,587,000			3,591,000
Basic and diluted net loss per share to common shareholder	$	(0.23	)	$	(0.29	)	$	(0.60	)	$	(0.59	)

All options outstanding to purchase shares of common stock and shares of common stock issued on the assumed conversion of the eligible preferred stock were excluded from the diluted loss per common share calculation for the three and six months ended June 30, 2014 and 2013, as the inclusion of these options would have been antidilutive.

Segment Reporting, Policy

GEOGRAPHIC SEGMENT DATA

The Company and its subsidiaries are engaged in the design, development, marketing and support of its service management software solutions.  Substantially all revenues result from the license of the Company’s software products and related professional services and customer support services.  The Company’s chief executive officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance.  Accordingly, the Company considers itself to have three reporting segments as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues
Software license fees
United States	$	847,000		$	383,000		$	867,000		$	746,000
Total United States
software license fees		847,000			383,000			867,000			746,000
Europe		35,000			136,000			478,000			237,000
Asia Pacific		305,000			379,000			305,000			389,000
Total foreign software
license fees		340,000			515,000			783,000			626,000
Total software license fees		1,187,000			898,000			1,650,000			1,372,000
Services and maintenance
United States		2,580,000			3,032,000			5,350,000			5,825,000
Total United States
services and maintenance revenue		2,580,000			3,032,000			5,350,000			5,825,000
Europe		788,000			676,000			1,714,000			1,197,000
Asia Pacific		742,000			689,000			1,422,000			1,564,000
Total foreign services and
maintenance revenue		1,530,000			1,365,000			3,136,000			2,761,000
Total services and maintenance
revenue		4,110,000			4,397,000			8,486,000			8,586,000
Total revenue	$	5,297,000		$	5,295,000		$	10,136,000		$	9,958,000
Net  loss
United States	$	(183,000	)	$	(582,000	)	$	(1,201,000	)	$	(879,000	)
Europe		(212,000	)		(272,000	)		(73,000	)		(650,000	)
Asia Pacific		(357,000	)		(100,000	)		(738,000	)		(444,000	)
Net loss	$	(752,000	)	$	(954,000	)	$	(2,012,000	)	$	(1,973,000	)

Subsequent Events, Policy

.           SUBSEQUENT EVENTS

Failure to Satisfy a Continued NASDAQ Listing Rule or Standard

On April 7, 2014 the Company received a notification letter from the NASDAQ Stock Market advising the Company of its failure to comply with the required minimum of $2,500,000 in stockholders’ equity for continued listing on the NASDAQ Capital Market, pursuant to NASDAQ listing rule 5550(b)(1).  The Company fell below the minimum requirement with reported stockholders’ equity of $1,829,000 in its Form 10-K for the year ended December 31, 2013.  The Company’s loss in the first three months of 2014 further reduced the reported stockholders’ equity to $516,000.

The Company presented its plan to NASDAQ on May 22, 2014, which included the conversion of outstanding debt into equity, and improved operating results. On May 29, 2014 NASDAQ granted the Company an extension of time in which to regain compliance.  The extension was based upon both the completion of the debt to equity conversion by June 30, 2014 (which was accomplished on June 20, 2014 by converting $2,000,000 of borrowings by its Chief Executive Officer to 797,000 shares of Series B Preferred Stock), and the filing of results by August 14, 2014 that would evidence compliance with the minimum equity standard.  As reported on the balance sheet of this Form 10-Q, stockholders’ equity at June 30, 2014 is $1,651,000.  Since the Company is not in compliance with the minimum equity requirement, it has proactively engaged in a discussion with NASDAQ requesting an extension of time to evidence compliance.  If this proposal is not accepted by NASDAQ, then NASDAQ will provide written notification of its intent to delist the Company’s’ securities, and the Company will have the opportunity to appeal that decision to a Hearings Panel.

The prior NASDAQ compliance issue regarding lacking the required third independent director was remedied on July 28, 2014 by the appointment of a new independent director to the Board of Directors of the Company and Audit Committee.

Line of Credit from Director/ Officer- Related Party Transaction

On August 12, 2014, the Board of Directors approved a reduction in the Line of Credit from Mr. Bergreen from $3,000,000 to $1,000,000.  As stated previously, in June 2014, $2,000,000 which had been outstanding under the line of credit was canceled in exchange for 797,000 shares of Series B convertible preferred stock.