NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
NATURE OF BUSINESS
Business
Intellicheck,
Inc. (the “Company” or “Intellicheck”) is a trusted industry leader in SaaS technology solutions that
provide real-time identification authentication and age verification. The Company strives to make it possible for its customers
to enhance safety, security and awareness, increase revenues, improve customer service, and increase operational efficiencies.
The Company’s identity authentication solutions address challenges that include retail fraud prevention, law enforcement
unknown contact identification, and mobile and handheld access control and security for the government, military and commercial
markets. Intellicheck’s products include the Retail ID™ product suite, cutting-edge technology solutions that provides
online, mobile and point of sale of transaction, new account and account takeover fraud protection in the retail industry; Age
ID
®
, a suite of point of sale, iOS and Android smartphone or tablet-based solutions for preventing sale of age-restricted
products to minors attempting to use fake ID’s; Law ID
®
, a smartphone-based solution used by law enforcement
officers to identify and mitigate threats based on real-time authentication of scanned identifications on a smartphone or tablet
and with immediate access to critical information on Nlets, the premiere International Justice and Public Safety Network.; and
Defense ID
®
, a mobile and fixed infrastructure solution for threat identification, identity authentication and
access control to military bases and other government facilities.
Intellicheck
continues to develop and release innovative products based upon its rich patent portfolio consisting of twenty issued patents
and six pending.
Liquidity
For
the six months ended June 30, 2018, the Company incurred a net loss of $2,168,332 and used cash in operations of $2,127,444. As
of June 30, 2018, the Company had cash of $6,462,631, working capital of $5,865,800 and an accumulated deficit of $112,591,157.
Based on the Company’s business plan and cash resources, Intellicheck expects its existing and future resources and revenues
generated from operations and current level of expenses from operations to satisfy its working capital requirements for at least
the next 12 months.
However,
if performance expectations fall short or expenses exceed expectations, the Company may need to secure additional financing or
reduce expenses to continue operations. Failure to do so would have a material adverse impact on its consolidated financial condition.
There can be no assurance that any contemplated additional financing will be available on terms acceptable, if at all. If required,
the Company believes it would be able to reduce expenses to a sufficient level to continue as a going concern.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Intellicheck and its wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”)
and Positive Access Corporation (“Positive Access”). All intercompany balances and transactions have been eliminated
upon consolidation.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03
of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting
principles in the United States of America for complete financial statements. In the opinion of management, the unaudited interim
financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s consolidated
financial position at June 30, 2018 and the consolidated results of operations for the three and six months ended June 30, 2018
and 2017 and the consolidated stockholders’ equity and cash flows for the six months ended June 30, 2018. All such adjustments
are of a normal and recurring nature. Interim consolidated financial statements are prepared on a basis consistent with the Company’s
annual consolidated financial statements. Results of operations for the six month period ended June 30, 2018, are not necessarily
indicative of the operating results that may be expected for the year ending December 31, 2018.
The
consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements at that
date but does not include all of the information and notes required by accounting principles generally accepted in the United
States of America for complete financial statements.
References
in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued
by the Financial Accounting Standards Board (“FASB”).
For
further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2017.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09
, “Revenue from Contracts with Customers
” (“ASU 2014-09” or “ASC 606”),
which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United
States of America (“GAAP”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services
are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those
goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and
estimates may be required within the revenue recognition process than were required under previous GAAP. In addition, this guidance
requires new or expanded disclosures related to the judgments made by companies when following this framework and additional quantitative
disclosures regarding contract balances and remaining performance obligations.
On
January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for reporting periods beginning
after January 1, 2018 are presented under ASC 606, while the comparative information will not be restated and will continue to
be reported under the accounting standards in effect for those periods. See the section “Revenue Recognition and Deferred
Revenue” for a detailed disclosure later in this footnote titled Significant Accounting Policies in these consolidated financial
statements.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
(“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based payment award must be accounted
for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being
accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award
if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately
before and after the change. On January 1, 2018, the Company adopted ASU 2017-09 prospectively to awards after this adoption date
and did not have a material effect on its consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 removes the requirement to perform a hypothetical purchase price
allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2019, and early adoption is permitted. The Company is in the
process of evaluating the impact of this standard on its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
, which requires that lease arrangements longer than 12 months’
result in an entity recognizing an asset and liability. The pronouncement is effective for periods beginning after December 15,
2018 with early adoption permitted. The Company is currently evaluating the impact this guidance but is not expected to have a
material impact on its consolidated financial statements.
Use
of Estimates
The
preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the
Company’s consolidated financial statements and accompanying notes. Significant estimates and assumptions that affect amounts
reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred
tax valuation allowances, and the fair value of stock options granted under the Company’s stock-based compensation plans.
Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from
those estimates.
Allowance
for Doubtful Accounts
The
Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical
experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions
and other factors that may affect customers’ ability to pay.
Inventory
Inventory
is stated at the lower of cost or market and cost is determined using the first-in, first-out method. Inventory is primarily comprised
of finished goods. As of June 30, 2018 and December 31, 2017, the majority of inventory is related to Government and Commercial
Identity products for intended near-term sales.
Goodwill
Goodwill
represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. Pursuant to ASC
Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain
circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary
to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting
unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less
than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions,
industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease
in share price. There were no impairment charges recognized during the six months ended June 30, 2018 and 2017.
Intangible
Assets
Intangible
assets include trade names, patents and non-contractual customer relationships. The Company uses the straight line method to amortize
these assets over their estimated useful lives. The Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC Topic 360.
To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of the assets. There were no impairment charges recognized
during the six months ended June 30, 2018 and 2017.
Income
Taxes
The
Company accounts for income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards.
Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as
of June 30, 2018 and December 31, 2017, due to the uncertainty of the realizability of those assets.
Fair
Value of Financial Instruments
The
Company adheres to the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This pronouncement
requires that the Company calculate the fair value of financial instruments and include this additional information in the notes
to financial statements when the fair value is different than the book value of those financial instruments. The Company’s
financial instruments include cash, accounts receivable, note receivable, accounts payable and accrued expenses. As of June 30,
2018 and December 31, 2017, the carrying value of the Company’s financial instruments approximated fair value, due to their
short-term nature.
Revenue
Recognition and Deferred Revenue
General
Effective
January 1, 2018, the Company adopted ASC 606. In accordance with ASC 606, the Company’s analysis indicated that there was
no change to how the Company records revenue and that the standard only impacted enhanced disclosure regarding revenue recognition,
including disclosures of revenue streams, performance obligations and the related judgments and estimates necessary to apply the
new standard.
ASC
606 was applied using the modified retrospective method. There was no cumulative effect of the initial application to be recognized
as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative periods have not been adjusted and
continue to be reported under FASB ASC Topic 605,
Revenue Recognition
.
The
majority of license fees and services revenue are generated from fixed-price contracts, which provide for licenses to software
products and services to customize such software to meet the customers’ use. In certain instances, customization services
are determined to be essential to the functionality of the delivered software. Under ASC 606, revenue is recognized when a customer
obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange
for those goods or services. The Company measures revenue based on the consideration specified in a customer arrangement, and
revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise
in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct
performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation.
Customers typically receive the benefit of the Company’s services as they are performed. Substantially all customer contracts
provide that the Company is compensated for services performed to date.
Invoicing
is based on schedules established in customer contracts. Payment terms are generally established at 30 days from the invoice date.
Product returns are recorded as a reduction to revenue.
Revenue
is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected
on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer,
in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Furthermore,
the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to
a customer.
Nature
of goods and services
The
following is a description of the products and services from which the Company generates revenue, as well as the nature, timing
of satisfaction of performance obligations, and significant payment terms for each:
Hosted
Subscription Services Revenue
Subscription
services allows customers to access a set of data for a predetermined period of time. As the customer obtains access at a point
in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously
receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, subscription
revenue should be recognized over time based on the usage of the hosted subscription services, which can vary from month to month.
The revenue is typically based on a formula such as number of stores using the service in a given month multiplied by a fee per
store.
License
Revenue
The
Company also recognizes revenues from licensing of its software to customers. The license allows customers to access a set of
data for a predetermined period of time. The licensed software requires continuing service or post contractual customer support
and performance. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription
period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance
as the entity performs. Accordingly, the revenue should be recognized over time based on usage, which can vary from month to month.
The revenue is typically based on a formula such as number of stores in a given month multiplied by a fee per store. Royalties
from the licensing of the Company’s technology are recognized as revenues in the period they are earned.
Equipment
Revenue
Revenue
from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer
has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has
been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the
equipment is received.
Non-Recurring
Services Revenue
The
non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes
revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as
it is provided and the Company’s performance obligation has been satisfied.
Extended
Warranty
Extended
warranty revenues is generated when a warranty is provided to the customer separately of other performance obligations when the
equipment is sold. As the customer obtains access at a point in time and continues to have access for the remainder of the warranty
term, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance
as the Company performs. The related revenue is recognized ratably over the specified term of the warranty period. The extended
warranty is separate to the Company’s standard warranty of usually one year that it receives from its vendor.
Disaggregation
of revenue
In
the following tables, revenue is disaggregated by product and service and the timing of revenue recognition. The table also includes
a reconciliation of the disaggregated revenue.
|
|
For
the Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Products
and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
subscription services
|
|
$
|
221,096
|
|
|
$
|
203,040
|
|
Licensing
|
|
|
679,863
|
|
|
|
392,139
|
|
Equipment
|
|
|
60,544
|
|
|
|
236,335
|
|
Non-recurring
Services
|
|
|
27,288
|
|
|
|
109,598
|
|
Extended
warranties on equipment
|
|
|
3,607
|
|
|
|
4,048
|
|
Other
|
|
|
9,020
|
|
|
|
6,174
|
|
|
|
$
|
1,001,418
|
|
|
$
|
951,334
|
|
|
|
|
|
|
|
|
|
|
Timing
of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
transferred at a point in time
|
|
$
|
69,564
|
|
|
$
|
242,509
|
|
Services
transferred over time
|
|
|
931,854
|
|
|
|
708,825
|
|
|
|
$
|
1,001,418
|
|
|
$
|
951,334
|
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Products
and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
subscription services
|
|
$
|
414,078
|
|
|
$
|
414,752
|
|
Licensing
|
|
|
1,370,178
|
|
|
|
776,930
|
|
Equipment
|
|
|
182,457
|
|
|
|
304,845
|
|
Non-recurring
Services
|
|
|
71,937
|
|
|
|
148,689
|
|
Extended
warranties on equipment
|
|
|
7,107
|
|
|
|
8,354
|
|
Other
|
|
|
17,723
|
|
|
|
10,424
|
|
|
|
$
|
2,063,480
|
|
|
$
|
1,663,994
|
|
|
|
|
|
|
|
|
|
|
Timing
of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
transferred at a point in time
|
|
$
|
200,180
|
|
|
$
|
315,269
|
|
Services
transferred over time
|
|
|
1,863,300
|
|
|
|
1,348,725
|
|
|
|
$
|
2,063,480
|
|
|
$
|
1,663,994
|
|
Contract
balances
The
current portion of deferred revenue at June 30, 2018 and December 31, 2017 was $624,064 and $739,980, respectively, and primarily
consists of revenue that is recognized over time for one-year software license contracts and hosted subscription services. The
changes in these balances are related to the satisfaction or partial satisfaction of these contracts. Of this balance at December
31, 2017, $227,490 and $536,873 was recognized as revenue for the three and six months ended June 30, 2018, respectively. The
long-term portion of deferred revenue is $48,751 and $87,736 as of June 30, 2018 and December 31, 2017, respectively.
The
Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied
in previous periods.
Transaction
price allocated to the remaining performance obligations
The
following table includes estimated revenue expected to be recognized in the future related to performance obligations that are
unsatisfied (or partially unsatisfied) at the end of the reporting period:
|
|
2018
|
|
|
2019
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
subscription services
|
|
$
|
189,223
|
|
|
$
|
83,432
|
|
|
$
|
12,379
|
|
|
$
|
285,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
$
|
285,822
|
|
|
$
|
74,533
|
|
|
$
|
2,381
|
|
|
$
|
362,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring
services
|
|
$
|
391
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
warranties on equipment
|
|
$
|
6,252
|
|
|
$
|
9,896
|
|
|
$
|
8,506
|
|
|
$
|
24,654
|
|
All
consideration from contracts with customers is included in the amounts presented above.
Business
Concentrations and Credit Risk
During
the three and six month periods ended June 30, 2018, the Company made sales to two customers that accounted for approximately
34% and 33% of total revenues, respectively. The revenue was associated with commercial identity sales customers. These customers
represented 36% of total accounts receivable at June 30, 2018. During the three and six month periods ended June 30, 2017, the
Company made sales to two customers that accounted for approximately 28% and 24% of total revenues, respectively. The revenue
was associated with two commercial identity customers.
Net
Loss Per Share
Basic
net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number
of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive effect
of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method.
The calculation of diluted net loss per share excludes all anti-dilutive shares.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,100,375
|
)
|
|
$
|
(1,098,553
|
)
|
|
$
|
(2,168,332
|
)
|
|
$
|
(2,035,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares – Basic/Diluted
|
|
|
15,623,351
|
|
|
|
10,769,437
|
|
|
|
15,448,255
|
|
|
|
10,750,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per share – Basic/Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.19
|
)
|
The
following table summarizes the common stock equivalents excluded from loss per diluted share because their effect would be anti-dilutive
due to the net loss:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock
options
|
|
|
1,074,332
|
|
|
|
1,652,920
|
|
|
|
1,074,332
|
|
|
|
1,652,920
|
|
Warrants
|
|
|
471,801
|
|
|
|
472,801
|
|
|
|
471,801
|
|
|
|
472,801
|
|
Restricted
stock
|
|
|
6,957
|
|
|
|
28,025
|
|
|
|
6,957
|
|
|
|
28,025
|
|
|
|
|
1,553,090
|
|
|
|
2,153,746
|
|
|
|
1,553,090
|
|
|
|
2,153,746
|
|
3.
INTANGIBLE ASSETS
The
changes in the carrying amount of intangible assets for the six months ended June 30, 2018 were as follows:
Net
balance at December 31, 2017
|
|
$
|
463,578
|
|
Deduction:
Amortization expense
|
|
|
(78,503
|
)
|
Net
balance at June 30, 2018
|
|
$
|
385,075
|
|
The
following summarizes amortization of intangible assets included in the accompanying consolidated statements of operations:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost
of sales
|
|
$
|
32,374
|
|
|
$
|
59,164
|
|
|
$
|
64,748
|
|
|
$
|
118,326
|
|
General
and administrative
|
|
|
6,878
|
|
|
|
19,728
|
|
|
|
13,755
|
|
|
|
39,456
|
|
|
|
$
|
39,252
|
|
|
$
|
78,892
|
|
|
$
|
78,503
|
|
|
$
|
157,782
|
|
4.
NOTE RECEIVABLE
On
August 31, 2015, the Company sold the wireless enterprise assets to the Jamestown S’Klallam Tribe (the “Buyer”)
for total consideration of $350,000 which consists of an upfront cash payment of $30,000, the issuance of a promissory note totaling
$200,000 and contingent consideration up to a maximum of $120,000 based on future earnings. Under the terms of the promissory
note, monthly payments of $3,683 including principal and interest at 4%, are to be made over a 60-month term expiring in August
2020. At June 30, 2018, the total note receivable is $91,575, of which $41,288 and $50,287 is included in Other Current Assets
and Note Receivable, net of current portion, respectively, on the Consolidated Balance Sheets. At December 31, 2017, the total
note receivable was $111,609, of which $40,471 and $71,138 is included in Other Current Assets and Notes Receivable, net of current
portion, respectively on the Consolidated Balance Sheets.
5.
DEBT
Revolving
Line of Credit
The
Company has a revolving credit facility with Northwest Bank (“Northwest”). This agreement allows for borrowings to
the lesser of (i) $2,000,000 or (ii) 95% of the balance in the Company’s money market account less $250,000. The borrowings
are secured by the Company’s existing deposit and money market accounts with Northwest. The facility bears interest at a
rate consistent with Northwest’s money market account (0.65% at June 30, 2018) plus 3%. Interest is payable monthly and
the principal is due upon maturity on May 22, 2019. As of June 30, 2018, there were no amounts outstanding under this facility
and unused availability under this facility was $2,000,000.
6.
ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Professional
fees
|
|
$
|
151,355
|
|
|
$
|
78,552
|
|
Payroll
and related
|
|
|
401,830
|
|
|
|
365,384
|
|
Severance
payments to former officer
|
|
|
316,812
|
|
|
|
316,812
|
|
Other
|
|
|
58,284
|
|
|
|
54,602
|
|
|
|
$
|
928,281
|
|
|
$
|
815,350
|
|
7.
INCOME TAXES
As
of December 31, 2017, the Company had net operating loss carryforwards (NOL’s) for federal and New York state income tax
purposes of approximately $11 million. There can be no assurance that the Company will realize any benefit of the NOL’s.
The federal and New York state NOL’s are available to offset future taxable income and expire from 2018 through 2037 if
not utilized. The Company has a full valuation allowance on its deferred tax assets since management continues to believe that
it is more likely than not that these assets will not be realized.
8.
SHARE BASED COMPENSATION
The
Company accounts for the issuance of equity awards to employees in accordance with ASC Topic 718 and 505, which requires that
the cost resulting from all share based payment transactions be recognized in the financial statements. These pronouncements establish
fair value as the measurement objective in accounting for share based payment arrangements and requires all companies to apply
a fair value based measurement method in accounting for all share based payment transactions with employees. All stock-based compensation
is included in operating expenses for the periods as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Compensation
cost recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
$
|
57,719
|
|
|
$
|
88,040
|
|
|
$
|
112,153
|
|
|
$
|
177,158
|
|
Research
& development
|
|
|
6,274
|
|
|
|
6,678
|
|
|
|
12,548
|
|
|
|
14,360
|
|
|
|
$
|
63,993
|
|
|
$
|
94,718
|
|
|
$
|
124,701
|
|
|
$
|
191,518
|
|
Stock
Options
The
Company uses the Black-Scholes option pricing model to value the options. The table below presents the weighted average expected
life of the options in years. The expected life computation is based on the time to option expiration. Volatility is determined
using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the
U.S. Treasury yield curve in effect at the time of grant.
Stock
option activity under the 1998, 1999, 2001, 2003, 2006 and 2015 Stock Option Plans (collectively, the “Plans”) during
the periods indicated below were as follows:
|
|
Number
of Shares Subject to Issuance
|
|
|
Weighted-average
Exercise
Price
|
|
|
Weighted-average
Remaining Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2017
|
|
|
1,631,358
|
|
|
$
|
1.36
|
|
|
|
1.70
years
|
|
|
$
|
2,106,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
102,500
|
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(65,688
|
)
|
|
|
(4.22
|
)
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(593,838
|
)
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2018
|
|
|
1,074,332
|
|
|
$
|
1.44
|
|
|
|
2.42
years
|
|
|
$
|
1,031,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
|
|
811,988
|
|
|
$
|
1.30
|
|
|
|
2.16
years
|
|
|
$
|
862,310
|
|
The
aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s
closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had they all exercised their options on June 30, 2018. This amount changes
based upon the fair market value of the Company’s stock.
Restricted
Stock Units
The
Company issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of
common stock of the Company. During the six months ended June 30, 2018, the Company issued RSUs to certain directors as compensation.
RSU agreements can vest immediately or with the passage of time. The vesting of all RSUs is contingent on continued board and
employment services.
The
compensation expense incurred by the Company for RSUs is based on the closing market price of the Company’s common stock
on the date of grant and is amortized ratably on a straight-line basis over the requisite service period and charged to general
and administrative expense with a corresponding increase to additional paid-in capital.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2017
|
|
|
5,859
|
|
|
$
|
2.56
|
|
|
$
|
-
|
|
Granted
|
|
|
23,253
|
|
|
|
1.95
|
|
|
|
|
|
Vested
and settled in shares
|
|
|
(22,155
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2018
|
|
|
6,957
|
|
|
$
|
2.30
|
|
|
$
|
-
|
|
As
of June 30, 2018, there was $238,679 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested
stock options and restricted stock units, which is expected to be recognized over a weighted average period of approximately 3.18
years.
The
Company had 752,672 shares available for future grants under the Plans at June 30, 2018.
Warrants
All
previously granted warrants were issued with an exercise price that was equal to or above the fair market value of the Company’s
common stock on the date of grant. As of June 30, 2018, the Company had 471,801 remaining warrants outstanding and exercisable
through 2021. During the six months ended June 30, 2018, there were no warrants exercised.
9.
COMMON STOCK
On
August 4, 2017, the Company completed a public offering of 4,168,750 shares of its common stock, offered to the public at $2.25
per share. Net proceeds to the Company from this offering were approximately $8,670,000 after deducting underwriting discounts
and commissions paid by the Company. Direct offering costs totaling approximately $157,000 were recorded as a reduction to the
net proceeds on the consolidated statement of stockholders’ equity.