Accounting Policies

9 Months Ended

Sep. 30, 2016

Accounting Policies:

Basis of Presentation and Significant Accounting Policies

BASIS OF PRESENTATION

The consolidated financial statements at September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015 of Astea International Inc. and subsidiaries (“Astea” or the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods.  The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the SEC for quarterly reports on Form 10-Q.  It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto, included in the Company’s latest annual report (Form 10-K) and our Form 10-Q’s for the quarters ended March 31, 2015, June 30, 2015, September 30, 2015, March 31, 2016 and June 30, 2016. The interim financial information presented is not necessarily indicative of results expected for the entire year ending December 31, 2016.

Concentration Risk, Credit Risk, Policy

1.       CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to credit risk, consist of cash equivalents and accounts receivable.  The Company’s policy is to limit the amount of credit exposure to any one financial institution.  The Company places investments with financial institutions evaluated as being creditworthy, or investing in short-term money market funds which are exposed to minimal interest rate and credit risk.  Cash balances are maintained with several banks.  Certain operating accounts may exceed insured limits.

The Company sells its products to customers involved in a variety of industries including information technology, medical devices and diagnostic systems, industrial controls and instrumentation and retail systems.  While the Company does not require collateral from its customers, it does perform continuing credit evaluations of its customers’ financial condition.

Share-based Compensation, Option and Incentive Plans Policy

Share-Based Awards

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton (“Black-Scholes”) option-pricing formula and amortizes the estimated option value using an accelerated amortization method where each option grant is split into tranches based on vesting periods.  The Company’s expected term represents the period that the Company’s share-based awards are expected to be outstanding and was determined based on historical experience regarding similar awards, giving consideration to the contractual terms of the share-based awards and employee termination data.  Executive level employees who hold a majority of options outstanding, and non-executive level employees each have similar historical option exercise and termination behavior and thus were grouped for valuation purposes.  The Company’s expected volatility is based on the historical volatility of its traded common stock and places exclusive reliance on historical volatilities to estimate stock volatility over the expected term of its awards.  The Company has historically not paid dividends to common stockholders and has no foreseeable plans to issue dividends.  The risk-free interest rate is based on the yield from the U.S. Treasury zero-coupon bonds with an equivalent term. 

As of September 30, 2016, the total unrecognized compensation cost related to non-vested options amounted to $175,000, which is expected to be recognized over the options’ average remaining vesting period of 2.5 years. 

Under the Company’s stock option plans, option awards generally vest over a four year period of continuous service and have a 10 year contractual term.  The fair value of each option is amortized on a straight-line basis over the option’s vesting period.  The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model.

There were 115,000 and 136,000 options granted during the nine months ended September 30, 2016 and 2015, respectively.  Activity under the Company’s stock option plans for the nine months ended September 30, 2016 is as follows:

	OPTIONS OUTSTANDING
		Shares		Weighted Average Exercise Price Per Share
Balance, December 31, 2015		738,000		$	3.06
Granted		115,000			1.91
Forfeited		(65,000	)		2.11
Expired		(12,000	)		7.48
Balance, September 30, 2016		776,000		$	2.90

The following table summarizes outstanding options under the Company’s stock option plans as of September 30, 2016:

	Number of Shares	Weighted Average Exercise Price Per Share	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding Options	776,000	$2.90	5.27	$53,000
Ending Vested and Exercisable	548,000	$3.31	3.89	$16,000
Options Vested and Expected to Vest	714,000	$2.99	4.96	$43,000

Convertible Preferred Stock

Income Tax, Policy

NCOME TAX

The Company has identified its federal tax return and its state returns in Pennsylvania and California as “major” tax jurisdictions.  Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.  The Company’s evaluation was performed for tax years ended 2012 through 2015, the only periods subject to examination. The Company believes that its income tax positions and deductions will be sustained on a tax authority audit and does not anticipate any adjustments that will result in a material change to its financial position, results of operations or cash flows.

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income before income taxes.  Penalties are recorded in general and administrative expenses and interest accrued or receivable is recorded in interest expense or interest income, respectively, in the statement of operations.  For the first nine months of 2016 and 2015, there were no interest or penalties related to uncertain tax positions.

At September 30, 2016, the Company maintained a 100% valuation allowance for its remaining deferred tax assets, based on the uncertainty of the realization of the deferred tax assets due to the uncertainty of future taxable income.

Earnings Per Share, Policy

 INCOME (LOSS) PER SHARE

Income (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 income (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 income (loss) per share, weighted average numbers of shares outstanding are used as the denominator.

The Company had net income allocable to the common stockholders for the three months ended September 30, 2016 and a net loss allocable to stockholders of the nine months ended September 30, 2016 and the three and nine months ended September 30, 2015. In the three months ended September 30, 2016 there were 28,000 net additional dilutive stock options assumed to be converted into common stock shares and in the nine months ended September 30, 2016 and the three and nine months ended September 30, 2015, the outstanding stock options would have been antidilutive due to the net loss incurred during those periods.  In addition, 100% of the outstanding convertible preferred stock, 1,623,000 shares, were eligible to be converted into common stock. For purpose of this calculation, if converted, it was assumed that upon conversion, the related dividends were not paid. However, as of the three and ninth months ended September 30, 2016 and 2015 shares of common stock issued on the assumed conversion of the eligible preferred stock were excluded from the diluted income (loss) per common shares calculation as the inclusion of these shares would have been antidilutive.

	Three Months Ended September 30,					Nine Months Ended September 30,
		2016		2015			2016			2015
Numerator:
Net income (loss)	$	148,000	$	(1,315,000	)	$	(1,598,000	)	$	(2,381,000	)
Preferred dividend		125,000		125,000			375,000			375,000
Net income (loss) available to common        shareholders	$	23,000	$	(1,440,000	)	$	(1,973,000	)	$	(2,756,000	)
Denominator:
Basic weighted average number of       common shares outstanding		3,587,000		3,587,000			3,587,000			3,587,000
Effect of dilutive stock options		28,000		-			-			-
Diluted weighted average number of     common shares outstanding		3,615,000		3,587,000			3,587,000			3,587,000
Basic income (loss) per common share	$	0.01	$	(0.40	)	$	(0.55	)	$	(0.77	)
Diluted income (loss) per    common share	$	0.01	$	(0.40	)	$	(0.55	)	$	(0.77	)

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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues
Software license fees
United States	$	212,000		$	322,000		$	793,000		$	2,659,000
Total United States software license fees		212,000			322,000			793,000			2,659,000
Europe		81,000			241,000			581,000			1,043,000
Asia Pacific		355,000			26,000			366,000			206,000
Total foreign software license fees revenue		436,000			267,000			947,000			1,249,000
Total software license fees		648,000			589,000			1,740,000			3,908,000
Subscriptions
United States		332,000			188,000			1,187,000			551,000
Total United States subscriptions		332,000			188,000			1,187,000			551,000
Europe		276,000			6,000			859,000			15,000
Asia Pacific		55,000			105,000			185,000			223,000
Total foreign subscriptions		331,000			111,000			1,044,000			238,000
Total subscription revenue		663,000			299,000			2,231,000			789,000
Services and maintenance
United States		2,477,000			2,908,000			7,668,000			8,451,000
Total United States services and
maintenance revenue		2,477,000			2,908,000			7,668,000			8,451,000
Europe		1,029,000			740,000			2,620,000			2,179,000
Asia Pacific		871,000			692,000			2,463,000			2,300,000
Total foreign services and
maintenance revenue		1,900,000			1,432,000			5,083,000			4,479,000
Total services and maintenance revenue		4,377,000			4,340,000			12,751,000			12,930,000
Total revenue	$	5,688,000		$	5,228,000		$	16,722,000		$	17,627,000
Net income (loss)
United States	$	(166,000	)	$	(982,000	)	$	(1,534,000	)	$	(911,000	)
Europe		235,000			(325,000	)		(21,000	)		(1,230,000	)
Asia Pacific		79,000			(8,000	)		(43,000	)		(240,000	)
Net income (loss)	$	148,000		$	(1,315,000	)	$	(1,598,000	)	$	(2,381,000	)