Certain of the matters discussed in this report, including, without limitation, matters discussed under this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act) and are subject to the occurrence of certain risks, uncertainties and contingencies which may not occur in the time frames anticipated or otherwise, and, as a result, could cause actual results to differ materially from such statements. In addition to other factors and matters discussed elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the
Securities and Exchange Commission("SEC") over the last 12 months, including our Annual Report on Form 10-K filed with the SECon March 28, 2014, these risks, uncertainties and contingencies include, but are not limited to, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control. Overview We are a supplier of software products for the property and casualty insurance industry, supplying a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies. We also offer on-going support services including incorporating recent insurance rate and rule changes in our solutions. These support services also include analyzing the changes, developments, quality assurance, documentation and distribution of insurance rate and rule changes. We earn revenue from software contract licenses, fees for servicing the product, which we call support services, and professional services. Total revenue for the three months ended June 30, 2014increased to approximately $5,001,000from approximately $4,004,000for the three months ended June 30, 2013, mainly due to an increase in support and professional services revenues for the three months ended June 30, 2014. Total revenue for the six months ended June 30, 2014decreased to approximately $10,209,000from approximately $10,889,000for the six months ended June 30, 2013, mainly due to a decrease in license revenue.
The following is an overview of the key components of our revenue and other important financial data for the three and six months ended
Software Licenses. Our license revenue in the three and six months ended
June 30, 2014of approximately $227,000and $1,034,000, respectively, was from new and existing customers who chose to renew, add onto or extend their use of our software. For the three and six months ended June 30, 2013, we generated approximately $697,000and $4,320,000, respectively, in license revenue. Our new software license revenue is affected by the strength of general economic and business conditions and the competitive position of our software products. New software license sales are characterized by long sales cycles and intense competition. Timing of new software license sales can substantially affect our quarterly results. Support Services. Support services revenue was approximately $2,121,000and $4,251,000, respectively, in the three and six months ended June 30, 2014compared to approximately $1,981,000and $4,004,000, respectively, in the same periods in 2013. Support services revenue is influenced primarily by the following factors: the renewal rate from our existing customer base; the amount of new maintenance associated with new license sales; and annual price increases. Professional Services. Professional services revenue was approximately $2,653,000and $4,924,000, respectively, in the three and six months ended June 30, 2014compared to approximately $1,326,000and $2,565,000, respectively, in the same periods of 2013, due to an increase in demand for customizations and implementations of Cover-All Policy in the three and six months ended June
30, 2014. 14
Income (Loss) before Income Taxes. Income (loss) before income taxes was approximately
$332,000and $769,000, respectively, in the three and six months ended June 30, 2014compared to approximately $(1,145,000)and $(436,000), respectively, in the same periods of 2013, primarily due to an increase in support and professional services revenue and our continuing and ongoing effort to maintain our expenses in line with our revenues for the six months ended June 30, 2014. Net Income (Loss). Net income (loss) for the three and six months ended June 30, 2014was approximately $328,000and $762,000, respectively, compared to approximately $(1,149,000)and $(444,000), respectively, in the same periods of 2013. This was mainly a result of an increasein support and professional services revenue in the three months ended June 30, 2014.
EBITDA. Earnings before interest, taxes, depreciation and amortization ("EBITDA"), a non-GAAP metric, was approximately
We continue to face competition for growth in 2014 mainly in the marketing and selling of our products and services to new customers, caused by a number of factors, including long sales cycles and general economic and business conditions. In addition, there are risks related to customers' acceptance and implementation delays, which could affect the timing and amount of license revenue we are able to recognize. However, given the positive response to our new software from existing customers and the introduction of additional software capabilities, we are expanding our sales and marketing efforts to both new and existing customers. Consequently, we are incurring additional sales and marketing expense in advance of generating the corresponding revenue. As we shift over time from software development to deployment, from a financial perspective, the non-cash charges for amortization of developed software will increasingly impact our bottom line. Therefore, in order to provide more visibility to investors, we have decided to also report EBITDA to show what we believe is the Company's earnings power without the impact of, among other items, amortization. In the first six months of 2014, the non-cash charge for amortization of capitalized software decreased to
$745,000from $2,273,000in the same period in 2013, and we expect this amount to be approximately $1,500,000, or $0.06per share, in 2014, depending on our sales success. Therefore, we believe that EBITDA will be a useful measure of the true earnings power of the Company while we complete the development and deployment cycle. As such, we expect to increasingly focus on EBITDA to evaluate our progress.
USE OF NON-GAAP FINANCIAL MEASURES
In evaluating our business, we consider and use EBITDA as a supplemental measure of our operating performance. The Company defines EBITDA as earnings before interest, taxes, depreciation and amortization. The Company presents EBITDA because it believes it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. The term EBITDA is not defined under U.S. generally accepted accounting principles, or U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. EBITDA has limitations as an analytical tool, and when assessing the Company's operating performance, investors should not consider EBITDA in isolation, or as a substitute for net income (loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Among other things, EBITDA does not reflect the Company's actual cash expenditures. Other companies may calculate similar measures differently than we do, limiting their usefulness as comparative tools. We compensate for these limitations by relying on our U.S. GAAP results and using EBITDA only supplementally. 15
The following is an unaudited reconciliation of U.S. GAAP net income to EBITDA for the three and six months ended
Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Net Income (Loss)
$ 327,789 $ (1,148,999 ) $ 761,638 $ (443,673 )Interest Income (Expense), Net 95,270 90,912
188,942 183,423 Income Tax Expense 3,920 3,505 7,608 8,171 Depreciation 49,429 66,398 131,258 128,236 Amortization: Amortization of Capitalized Software 372,638 1,181,017 745,276 2,273,124 Amortization of Customer Lists/Relationships 15,167 17,408 30,334 50,908 Amortization of Deferred Financing Costs 7,810 6,947 15,395 13,693 Total Amortization 395,615 1,205,372 791,005 2,337,725 EBITDA
$ 872,023 $ 217,188 $ 1,880,451 $ 2,213,882EBITDA per Common Share: Basic $ 0.03 $ 0.01 $ 0.07 $ 0.09Diluted $ 0.03 $ 0.01 $ 0.07 $ 0.0916
Results of Operations
The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues: Three Months Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Revenues: License 4.5 % 17.4 % 10.1 % 39.7 % Support Services 42.4 49.5 41.6 36.8 Professional Services 53.1 33.1 48.3 23.5 Total Revenues 100.0 100.0 100.0 100.0 Cost of Revenues: License -- (7.7 ) -- 0.4 Support Services 29.3 40.9 30.9 39.6 Professional Services 24.2 19.1 22.7 13.3 Total Cost of Revenues 53.5 52.3 53.6 53.3 Direct Margin 46.5 47.7 46.4 46.7 Operating Expenses: Sales and Marketing 10.9 13.1 10.0 10.8 General and Administrative 15.1 12.2 14.6 9.8
20.9 Research and Development 4.5 19.4 5.1 7.6 Total Operating Expenses 38.0 74.1 37.0 49.1 Operating (Loss) Income 8.5 (26.4 ) 9.4 (2.4 ) Other Expense (Income): Interest Expense (Income) 1.9 2.3 1.9 1.7 Other Income -- (0.1 ) -- (0.1 ) Total Other Expense (Income) 1.9 2.2 1.9 1.6
Income (Loss) Before Income Taxes 6.6 (28.6 ) 7.5
(4.0 ) Income Taxes -- 0.1 -- 0.1 Net Income (Loss) 6.6 % (28.7 )% 7.5 % (4.1 )%
Three and Six Months Ended
Total revenues for the three months ended
June 30, 2014were approximately $5,001,000compared to approximately $4,004,000for the same period in 2013. License fees were approximately $227,000for the three months ended June 30, 2014compared to approximately $697,000in the same period in 2013 as a result of fewer sales to new and existing customers in 2014. For the three months ended June 30, 2014, support services revenues were approximately $2,121,000compared to approximately $1,981,000in the same period of the prior year primarily due to the annual renewals from existing customers and new customer contracts signed in 2013. Professional services revenue contributed approximately $2,653,000in the three months ended June 30, 2014compared to approximately $1,326,000in the second quarter of 2013, as a result of an increase in demand for new software capabilities and customizations from our current customer base and implementation of Cover-All Policy for our new customers. 17
For the six months ended
Cost of sales was approximately
$2,674,000and $5,471,000, respectively, for the three and six months ended June 30, 2014compared to approximately $2,092,000and $5,807,000, respectively, for the same periods in 2013 due to an increase in personnel-related costs in the six months ended June 30, 2014. In the second quarter of 2013, we reversed the bonus accrual of $310,000we had accrued in the first quarter of 2013. We are expanding our delivery bandwidth while maintaining our costs in line with our revenues through improved productivity and new technology in order to meet our increasing demand. Non-cash capitalized software amortization was approximately $373,000and 745,000, respectively, for the three and six months ended June 30, 2014as compared to approximately $1,181,000and $2,273,000, respectively, for the same periods in 2013. We capitalized approximately $0and $0, respectively, of software development costs in the three and six months ended June 30, 2014as compared to approximately $646,000and $1,430,000, respectively, in the same periods in 2013. The direct margin during the three and six month periods ended June 30, 2014was 46.5% and 46.4%, respectively, compared to 47.7% and 46.7%, respectively, in the same periods in 2013. Support services margin increased in the three and six months ended June 30, 2014compared to the same periods in 2013 primarily due to several cost saving initiatives. Professional services direct margin increased for the three and six months ended June 30, 2014, compared to the same periods in 2013, primarily due to use of offshore resources to provide customizations to new and existing customers.
We expect our quarterly gross margin to vary in percentage terms in future periods as we experience changes in the mix between higher gross margin license revenues and lower gross margin services revenues.
Amortization of capitalized software was approximately
$373,000and $745,000, respectively, for the three and six months ended June 30, 2014, as compared to approximately $1,181,000and $2,273,000, respectively, in the same periods of 2013. The Company revised the estimated useful life of its capitalized software, effective January 1, 2014, from three years to five years.
Research and development expenses decreased to approximately
Sales and marketing expenses were approximately
General and administrative expenses increased to approximately
$756,000and $1,489,000, respectively, in the three and six months ended June 30, 2014as compared to approximately $489,000and $1,066,000, respectively, in the same periods in 2013. This increase in 2014 was mainly due to reclassing of all facilities costs to general and administrative expenses in 2014.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations primarily from cash flow from operations and from debt facilities. Cash from operations results primarily from net income from the income statement plus non-cash expenses (depreciation and amortization) and is adjusted for changes in working capital from the balance sheet. 18
Our largest source of operating cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related services. Payments from customers for software licenses are generally received at the beginning of the contract term. Payments from customers for support services and ASP services are generally received in advance on a quarterly basis. Payments for professional services are generally received 30 days after the services are performed. On
September 11, 2012, we entered into a $2,250,000credit facility with Imperium Commercial Finance Master Fund, LP, an affiliate of Imperium Partners(the "Loan Agreement"). The $2,250,000credit facility, which will support our product/services expansion and growth initiatives, consists of a $2,000,000three-year term loan, bearing interest at a fixed rate of 8% per annum, and a $250,000revolving credit facility, also bearing interest at a fixed rate of 8% per annum. Imperium also received five-year warrants to purchase 1,400,000 shares of our common stock, with an exercise price of $1.48per share. In connection with the Imperium Loan Agreement financing, we incurred deferred financing costs of $92,283, which will be amortized over the life of the loan (or earlier if the loan becomes due or is repaid before its fixed maturity). At June 30, 2014, we had cash and cash equivalents of approximately $3,489,000compared to cash and cash equivalents of approximately $1,849,000at December 31, 2013. The increase in cash and cash equivalents is primarily attributable to the increase in support and professional services revenue in the six months ended June 30, 2014.
Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain existing customers and generate new license sales and related product support agreements. In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development. Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows. We intend to maintain our expenses in line with existing revenue streams from maintenance support, ASP services and professional services and to invest in our products consistent with our sales efforts. Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. Statement of operations items that should be considered in assessing our liquidity include revenues, cost of revenues (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses. Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities. At
June 30, 2014, we had working capital of approximately $2,040,000compared to working capital of approximately $(19,000)at December 31, 2013. For the six months ended June 30, 2014, net cash provided from operating activities totaled approximately $1,705,000compared to approximately $2,446,000for the six months ended June 30, 2013due to a decrease in license revenue for the six months ended June 30, 2014. In 2014, cash flow from operating activities represented the Company's principal source of cash and results primarily from net income (loss), less non-cash expense and changes in working capital. For the six months ended June 30, 2014, net cash used for investing activities was approximately $8,000compared to approximately $1,449,000for the six months ended June 30, 2013. The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from operations. For the six months ended June 30, 2014, net cash used for financing activities was approximately $57,000compared to approximately $63,000for the six months ended June 30, 2013. The cash used for financing activities in 2014 consisted of the principal payments on our capital lease. 19
Our primary uses of cash are for operating expenses, including personnel-related expenditures, facilities and technology costs, and for interest only payments under our Loan Agreement. We may need additional funding for any large capital expenditures and for continued product development. We lease computer equipment for terms of three years in order to have the latest available technology to serve our customers and develop new products. Interest on the outstanding principal balance under the Imperium Notes accrues at a fixed rate equal to 8% per annum and is payable monthly, in arrears. The outstanding principal and any remaining interest under the Imperium Notes will be immediately due and payable to Imperium on the earlier of (1)
September 10, 2015and (2) the date Imperium's obligation to advance funds under the revolving credit line is terminated following an event of default pursuant to the terms and conditions of the Loan Agreement. Payments and prepayments received by Imperium will be applied against principal and interest as provided for in the Loan Agreement. On December 16, 2011, we announced that our board of directors authorized a share buyback plan of up to 1,000,000 shares of the Company's common stock, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Imperium Loan Agreement prohibits buybacks of our common stock. On December 30, 2011, the Company completed the acquisition of the PipelineClaims assets (excluding working capital) of Ho'ike Services, Inc.dba BlueWave Technology ("BlueWave"), a provider of enterprise claims management software to the property and casualty insurance industry based in Honolulu, Hawaii. The aggregate purchase price for the acquisition, in addition to the assumption by the Company of certain assumed liabilities, consisted of the following: (i) $1,100,000in cash on the closing date, (x) $635,821of which (net of adjustments for certain prepayments to BlueWave and other prorations) was paid in cash to BlueWave, and (y) $400,000of which was deposited into an escrow account to be held and distributed by an escrow agent pursuant to the terms of an escrow agreement to secure possible future indemnification claims and certain other post-closing matters in favor of the Company; and (ii) up to an aggregate of $750,000in an earnout, which earnout will be based upon the performance of the acquired business in the five years following the closing. More particularly, for each of the five years following the closing, BlueWave will be entitled to receive an amount equal to ten percent (10%) of the PipelineClaims Free Cash Flow (as such term is defined in the purchase agreement) but in no event will the Company be required to pay to BlueWave in excess of $750,000in the aggregate for the 5-year period. For each of the first two years following the closing of the BlueWave transaction, BlueWave was not entitled to receive any earnout payment. In December 2012, we received a disbursement from the escrow account of $250,000as a result of a contractual provision entitling us to such amount if PipelineClaims was not licensed by Island Insuranceby December 31, 2012. We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, support services and professional services. We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling twelve-month basis. We believe that our current cash balances and anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months. These projections include anticipated sales of new licenses, the exact timing of which cannot be predicted with absolute certainty and can be influenced by factors outside the Company's control. Our ability to fund our working capital needs and address planned capital expenditures will depend on our ability to generate cash in the future. We anticipate generating future working capital through sales to new customers and continued sales and services to our existing customers. 20
Our future liquidity and capital resource requirements will depend on many factors, including, but not limited to, the following trends and uncertainties we face:
· Our ability to generate cash is subject to general economic, financial,
competitive and other factors beyond our control.
· Our need to invest resources in product development in order to continue to
enhance our current product, develop new products, attract and retain customers
and keep pace with competitive product introductions and technological
· We experience competition in our industry and continuing technological changes.
· Insurance companies typically are slow in making decisions and have numerous
bureaucratic and institutional obstacles, which can make our efforts to attain
new customers difficult.
· We compete with a number of larger companies who have greater resources than
those of ours.
· We compete on the basis of insurance knowledge, products, services, price,
technological advances and system functionality and performance.
· Our operations continue to depend upon the continuing business of our existing
customers and our ability to attract new customers.
· A decline in software spending in the insurance industry could result in a
decrease in our revenue.
Material risks to cash flow from operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.
We do not expect for there to be a need for a change in the mix or relative cost of our sources of capital.
The New York State Department of Taxation and Finance(the "Department") conducted an examination of the Company for state sales and use tax for audit periods March 1, 2009through February 28, 2013. In February 2014, the Company received a Statement of Proposed Audit Change from the Department. The Change asserts proposed Sales and Use Tax due in the amount of approximately $191,600together with interest of approximately $46,400. Interest will continue to accrue on the proposed outstanding balances until the date of payment. On March 11, 2014, the Company paid the Department an aggregate of approximately $238,000in satisfaction in full of all amounts owed in connection with such examination.
Net Operating Loss Carryforwards
The deferred tax asset from tax net operating loss carryforwards of approximately
$4,673,000represents approximately $11,800,000of net operating loss carryforwards which are subject to expiration beginning in 2028. During the six months ended June 30, 2014, the deferred tax asset valuation allowance was decreased for the assumed utilization of prior period net operating loss carryforwards utilized to offset taxable income for the current period, subject to federal alternative minimum tax limitations. In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Factors that may affect the Company's ability to achieve sufficient forecasted taxable income in future periods may include, but are not limited to, the following: increased competition, a decline in sales or margins, a loss of market share, and a decrease in demand for professional services. Based upon the levels of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, at June 30, 2014, management believes that it is more likely than not that the Company will realize the benefits, net of the established valuation allowance, of these deferred tax assets in the future. The Tax Reform Act of 1986 enacted a complex set of rules which limits a company's ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result of stock which may be issued by us from time to time, and the conversion of outstanding warrants, or the result of other changes in ownership of our
outstanding stock, the 21
Company may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.
Off-Balance Sheet Transactions
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
SEChas issued cautionary advice to elicit more precise disclosure in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," about accounting policies that management believes are most critical in portraying our financial results and in requiring management's most difficult subjective or complex judgments. The preparation of financial documents in conformity with accounting principles generally accepted in the United States of Americarequires management to make judgments and estimates. On an on-going basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts, a valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets. The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from the amounts estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
· Revenue Recognition
· Valuation of
· Valuation of Allowance for Doubtful Accounts Receivable
· Deferred Income Taxes Revenue Recognition Revenue recognition rules are very complex, and certain judgments affect the application of our revenue policy. The amount and timing of our revenues is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions, royalties and other variable expenses. Our revenues are recognized in accordance with FASB ASC 986-605, "Software Revenue Recognition," as amended. Revenue from the sale of software licenses is predominately related to the sale of standardized software and is recognized when these software modules are delivered and accepted by the customer, the license term has begun, the fee is fixed or determinable, and collectability is probable. Revenue from support services is recognized ratably over the life of the contract. Revenue from professional consulting services is recognized when the service is provided. Amounts invoiced to our customers in excess of recognizable revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period. 22
Our revenues are derived from the licensing of our software products, professional services, and support services. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable, and collection is probable.
License Revenue. We recognize our license revenue upon delivery, provided that collection is determined to be probable and no significant obligations remain.
Services and Support Revenue. Our services and support revenue is composed of professional services (such as consulting services and training) and support services (maintenance, support and ASP services). Our professional services revenue is recognized when the services are performed. Our support services are recognized ratably over the term of the arrangement.
Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established. Once technological feasibility is established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available for general release to customers. Costs associated with product enhancements that extend the original product's life or significantly improve the original product's marketability are also capitalized once technological feasibility for that particular enhancement has been established. Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying of that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.
Valuation of Allowance for Doubtful Accounts Receivable
Management's estimate of the allowance for doubtful accounts is based on historical information, historical loss levels, and an analysis of the collectability of individual accounts. We routinely assess the financial strength of our customers and, based upon factors concerning credit risk, establish an allowance for uncollectible accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.
Deferred Income Taxes
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax planning and strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. We estimate our income tax valuation allowance by assessing which deferred tax assets are more-likely-than-not to be recovered in the future. The valuation allowance is based on our estimates of taxable income in each jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. If it appears that we will not generate such taxable income, we may need to increase the valuation allowance against the related deferred tax asset in a future period. 23