The accompanying notes are an integral part
of these unaudited financial statements.
The accompanying notes are an integral part
of these unaudited financial statements.
The accompanying notes are an integral part
of these unaudited financial statements.
Notes to the Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
VerifyMe, Inc. (“VerifyMe,”
or the “Company,” “we,” “us,” or “our”) was incorporated in the State of Nevada
on November 10, 1999. The Company is based in Rochester, New York and its common stock, par value $0.001 per share, and warrants
are traded on The Nasdaq Capital Market (“Nasdaq”) under the trading symbols “VRME” and “VRMEW,”
respectively.
The Company is
a technology solutions provider specializing in brand protection functions such as counterfeit prevention, authentication, serialization,
track and trace features for labels, packaging and products. The Company began to commercialize its covert luminescent pigment,
RainbowSecure®, in 2018 and also developed the patented VeriPAS™ software system in 2018, which covertly and overtly
serializes products to track a product’s “life cycle” for brand owners. We believe VeriPAS™ is the only
invisible covert serialization and authentication solution deployed through variable digital printing on HP Indigo (a division
of HP Inc.) printing systems with a smartphone tracking and authentication system. VeriPAS™ is capable of fluorescing, decoding,
and verifying invisible RainbowSecure® codes in the field – designed to allow investigators to quickly and efficiently
authenticate product throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased
over the internet for inspection and investigative actions. This technology is coupled with a secure cloud-based track and trace
software engine which allows brands and investigators to see where products originate and where they are deployed with geo location
mapping and intelligent programable alerts. Brand owners access the VeriPAS™ software over the internet. Brand owners can
then set rules of engagement, establish marketing programs for customer engagement and control, and monitor and protect their products
“life cycle.” The Company has not yet derived any revenue from the VeriPAS™ software system and has derived limited
revenue from the sale of our RainbowSecure® technology.
The Company’s activities are subject to significant risks
and uncertainties, including the need to secure additional funding for working capital and to further develop the Company’s
intellectual property.
Reverse Stock Split
On June 17, 2020, the Company filed a Certificate
of Amendment to the Company’s Amended and Restated Articles of Incorporation, as amended, with the Nevada Secretary of State
to effect a 50-to-1 reverse stock split of the Company’s issued and outstanding common stock and treasury stock, effective
on June 18, 2020 (the “Reverse Stock Split”). The Reverse Stock Split does not affect the total number of shares of
common stock that the Company is authorized to issue. The accompanying financial statements
and notes to the financial statements give retroactive effect to the Reverse Stock Split for all periods presented, unless otherwise
specified.
Basis of Presentation
The accompanying unaudited interim
financial statements (the “Interim Statements”) have been prepared pursuant to the rules and regulations for reporting
on Form 10-Q. Accordingly, certain information and disclosures required by U.S. generally accepted accounting principles (“GAAP”)
for complete financial statements are not included herein. The Interim Statements should be read in conjunction with the financial
statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31,
2019 as filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2020. The accompanying Interim
Statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The interim results for the three and six months ended June 30, 2020 are
not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.
Revenue Recognition
The Company accounts for revenues according
to Accounting Standards Codification (“ASC”) Topic 606, “Revenue
from Contracts with Customers” which established principles for reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.
The Company applies the following five
steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its
agreements:
|
·
|
identify the contract with a customer;
|
|
·
|
identify the performance obligations in the contract;
|
|
·
|
determine the transaction price;
|
|
·
|
allocate the transaction price to performance obligations in the contract; and
|
|
·
|
recognize revenue as the performance obligations are satisfied.
|
During the three and six months ended June 30, 2020, the Company’s
revenues were primarily generated from printing labels with the Company’s technology.
Sequencing
As of September 19, 2019, the Company adopted
a sequencing policy whereby all equity-linked instruments issued prior to the closing of the $600,000 secured convertible debentures
on September 19, 2019 may be classified as equity and all future equity-linked instruments may be classified as a derivative liability
with the exception of instruments related to stock-based compensation issued to employees or directors. As of March 6, 2020
the Company redeemed the secured convertible debentures issued as of September 19, 2019 and as a result abandoned the sequencing
policy previously adopted, so that all equity-linked instruments going forward may be classified as equity.
Convertible Debt
The Company recognizes the advantageous
value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert debt into common
stock at a price per share that is less than the trading price to the public on the date of the debt. The beneficial value is calculated
as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial
conversion feature of the debt, and is recorded as a discount to the related debt and an addition to additional paid in capital.
The discount is amortized over the remaining outstanding period of related debt using the interest method.
Basic and Diluted Net Income per Share of Common Stock
The Company follows Financial Accounting
Standards Board (“FASB”) ASC 260, “Earnings Per Share,” when reporting earnings per share resulting in
the presentation of basic and diluted earnings per share. Because the Company reported a net loss for each of the periods
presented, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts
reported for basic and diluted loss per share were the same.
For
each of the three and six months ended June 30, 2020 and 2019, there were shares potentially issuable, that could dilute basic
earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion
would have been anti-dilutive to the Company’s losses during the years presented. For the three and six months ended
June 30, 2020, there were approximately 4,369,000 anti-dilutive shares consisting of 446,000 shares issuable upon exercise
of options, 3,779,000 shares issuable upon exercise of warrants, and 144,000 shares issuable upon conversion of preferred stock.
For the three and six months ended June 30, 2019, there were approximately 978,000 anti-dilutive shares consisting of 392,000
shares issuable upon exercise of options, 441,000 shares issuable upon exercise of warrants and 144,000 shares issuable upon conversion
of preferred stock.
Liquidity
On August 27, 2014, FASB issued Accounting Standards Update
(“ASU”) 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern
(“ASU 2014-05”), which requires management to assess a company’s ability to continue as a going concern within
one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.
The accompanying financial statements and notes have been prepared
assuming the Company will continue as a going concern. During the year ended December 31, 2019 the Company suffered from recurring
losses from operations and negative cash flows from operations, resulting in a need for, among other things, capital resources.
As of December 31, 2019, the Company had cash of $252,766 and disclosed that its ability to continue as a going concern was predicated
on the Company’s ability to raise capital and to sustain adequate working capital to finance its operations. During the first
half of 2020, the Company participated in an underwritten public offering and raised approximately $10.0 million in gross proceeds,
and $9,023,046 in net proceeds after deducting discounts and commissions and other offering expenses. The Company met and exceeded
those predications thus mitigating any substantial doubt about the Company’s ability to continue as a going concern as defined
by ASU 2014-05 and its ability to satisfy the estimated liquidity needs for the twelve months from the issuance of the financial
statements.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, the Company
adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees
under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments
to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not
have a material impact on the Company’s financial statements.
Effective January 1, 2019, the Company
adopted ASU No. 2016-02 – “Leases (Topic 842)” and the series of related Accounting Standards Updates that followed
(collectively referred to as “Topic 842”) using the modified retrospective approach. The adoption of Topic 842 did
not have a material impact on the Company’s financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT
Equipment for Lease
During the six
months ended June 30, 2020 and 2019, the Company capitalized $73,563 (including a $51,494 deposit made in fiscal 2019) and $0,
respectively, in connection with the certification and production of the VerifyMe Beeper and the VeriPAS™ Smartphone Authenticator
technology. The Company depreciates equipment for lease over its useful life of five years. Depreciation
expense for equipment for lease was $11,435 and $22,870 for the three and six months ended June 30, 2020, respectively, and $0
for each of the three and six months ended June 30, 2019, and is included in general and administrative expense in the accompanying
Statements of Operations.
NOTE 3 – INTANGIBLE ASSETS
Patents and Trademarks
The
current patent and trademark portfolios consist of ten granted U.S. patents and one granted European patent validated in four countries,
five pending U.S. and foreign patent applications, six registered U.S. trademarks, four registered foreign registrations, including
one each in Colombia, Europe, Japan, and Mexico, and four pending U.S. and foreign trademark applications. In January 2020, the
Company received a Notice of Allowance for the U.S. Patent Application for the dual code authentication process relating to the
Company’s invisible QR code and smartphone reading system “Device and Method for Authentication.” The Company’s
registered patents expire between the years 2021 and 2037. Costs associated with the registration and legal defense of the patents
have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined
to be 17 to 19 years. During the six months ended June 30, 2020 and 2019, the Company capitalized $28,763 and $28,574, respectively,
of patent and trademarks costs. Amortization expense for patents and trademarks was $7,003 and $5,928 for the three months ended
June 30, 2020 and 2019, respectively, and $13,635 and $11,635 for the six months ended June 30, 2020 and 2019, respectively.
Capitalized Software
Costs incurred in connection with the development
of software related to our proprietary digital products are accounted for in accordance with FASB ASC 985 “Costs of
Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged
to research and development expense. Software development costs are capitalized after a product is determined to be technologically
feasible and is in the process of being developed for market. Amortization of capitalized software costs begins once the product
is available to the market. Capitalized software costs are amortized over the estimated life of the related product, generally
five years, using the straight-line method. The Company will evaluate its software assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be recoverable. During
the six months ended June 30, 2020 and 2019, the Company capitalized $0 and $46,196, respectively, related to software costs. Amortization
expense for capitalized software was $5,012 and $0 for the three months ended June 30, 2020 and 2019, respectively, and $10,023
and $0 for the six months ended June 30, 2020 and 2019, respectively, included in general and administrative expense in
the accompanying Statements of Operations.
NOTE 4 – CONVERTIBLE PREFERRED
STOCK
The Company is authorized to issue Series
A Convertible Preferred Stock, par value of $0.001 per share (the “Series A”) and Series B Convertible Preferred Stock,
par value of $0.001 per share (the “Series B”). As of June 30, 2020, there were no shares of Series A outstanding and
0.85 of a share of Series B outstanding convertible into 144,444 shares of common stock. During the six months ended June 30, 2020
and June 30, 2019, 0 and 304,778 shares of Series A, respectively, were converted into 0 and 121,911 shares of the Company’s
common stock, respectively. Each share of Series A and Series B has limited voting rights, is entitled to participate with the
common stock on liquidation and holders of Series A and Series B are subject to beneficial ownership limitations.
NOTE 5 – CONVERTIBLE DEBT
On September 19, 2019, the Company
completed the closing of $600,000 of secured convertible debentures (the “2019 Debentures”) for gross proceeds of $540,000
after original issue discounts. As of September 18, 2019 (the “Effective Date”), the Company entered into two substantially
identical securities purchase agreements (the “Securities Purchase Agreements”) with two purchasers (the “Purchasers”),
which provided for the issuance of up to an aggregate of $1.2 million in principal amount of the 2019 Debentures (the “Bridge
Financing”) of which the first tranche of $600,000 was issued. The Securities Purchase Agreements provided for the issuance
of the 2019 Debentures due one year from the dates of issuance in two $600,000 tranches: the first tranche as described above,
and the second tranche, at the discretion of the Purchasers and us, to occur any time after November 17, 2019. If, at any time
after November 17, 2019, the Purchasers elected not to consummate the closing of the second tranche, then the Company was entitled
to raise up to $600,000 from additional investors (including the Company’s affiliates) who would have a security interest
on a pari passu basis with the Purchasers in the first tranche, so long as such investors agreed not to convert the securities
received until the Purchasers in the first tranche had completely converted the 2019 Debentures or been fully repaid.
In connection with the 2019 Debentures,
each of the Purchasers received commitment fees of $5,000 and 500,000 restricted shares (the “Commitment Shares”) of
our common stock. The placement agent for the 2019 Debentures received a cash fee of 8% of the gross proceeds received at the closing
and was entitled to receive warrants convertible into shares of common stock until May 2020 when the placement agent waived its
right to receive the warrants.
The 2019 Debentures contained
provisions that entitled each Purchaser, at any time, to convert all or any portion of the outstanding principal amount of its
2019 Debenture(s) plus any accrued interest into restricted shares of common stock. If we consummated a public offering within
180 calendar days of the Effective Date, then the conversion price would be the lesser of (a) $7.50 or (b) 70% multiplied of the
price per share of the common stock we issued in the public offering (the “QPI Discounted Price”), subject to further
adjustment as provided in the 2019 Debentures as well as subject in each case to equitable adjustments resulting from any stock
splits, stock dividends, recapitalizations or similar events. Further, if the Company consummated a public offering of common stock
which resulted in us receiving gross proceeds of at least $5 million within 180 calendar days of the Effective Date then we would
have been obligated to repay the outstanding amounts owed under the 2019 Debentures, to the extent they were not converted and
including the applicable redemption premium then in effect, within three days of consummation of such an offering.
If any portion of the 2019 Debentures
was outstanding on the 181st calendar day after the Effective Date, then the conversion price would equal the lesser of (a) $7.50,
(b) the QPI Discounted Price, or (c) 70% of the lowest volume-weighted average price (as reported by Bloomberg LP) of the common
stock on any trading day during the 20 trading days immediately preceding the date of conversion of the 2019 Debentures (provided,
further, that if either we are not DWAC operational at the time of conversion, the common stock is traded on the OTC Pink at the
time of conversion, or the conversion price was less than $0.50 per share, then 70% would automatically adjust to 60%).
The 2019 Debentures were subject
to a “conversion blocker” such that the each of the Purchasers could not convert the 2019 Debentures to the extent
that the conversion would result in the Purchaser and its affiliates holding more than 4.99% of the outstanding common stock (which
the Purchaser could increase to 9.99% upon at least 61 days prior written notice to us).
So long as no event of default
had occurred and was continuing under the 2019 Debentures, the Company could at our option call for redemption all or part of the
2019 Debentures prior to the maturity date, upon not more than two calendar days written notice, for an amount equal to: (i) if
the redemption date was 90 calendar days or less from the date of issuance of the 2019 Debentures, 110% of the sum of the principal
amount; (ii) if the redemption date was greater than or equal to 91 calendar days from the date of issuance of the 2019 Debentures
and less than or equal to 150 calendar days from the date of issuance of the 2019 Debentures, 120% of the sum of the principal
amount; (iii) if the redemption date was greater than or equal to 151 calendar days from the date of issuance of the 2019 Debentures
and less than or equal to 180 calendar days from the date of issuance of the 2019 Debentures, 125% of the sum of the principal
amount; and (iv) if either (1) the 2019 Debentures were in default but the holder consents to the redemption notwithstanding such
default or (2) the redemption date was greater than or equal to 181 calendar days from the date of issuance of the 2019 Debentures,
130% of the sum of the principal amount.
The 2019 Debentures included
an adjustment provision that, subject to certain exceptions, would reduce, at the Purchaser’s option, the conversion price
if we issued common stock or common stock equivalents (including in variable rate transactions) at a price lower than the then-current
conversion price of the 2019 Debentures. Any reverse stock split of our outstanding shares would also have resulted in an adjustment
of the conversion price of the 2019 Debentures.
The conversion option, the QPI put and
the put that were exercisable upon certain financing events are embedded derivatives that are collectively bifurcated at fair value,
with subsequent changes in fair value recognized in the Statement of Operations. The fair value estimate is a Level 3 measurement
as defined by ASC Topic 820, Fair Value Measurements and Disclosures, as it is based on significant inputs not observable in the
market. The Company estimated the fair value of the monthly payment provision using a Monte Carlo Simulation, with 10,000 trials,
with the following key inputs:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Stock price
|
|
-
|
|
|
$3.50 - $5.00
|
|
Terms (years)
|
|
-
|
|
|
0.72 – 1.00
|
|
Volatility
|
|
-
|
|
|
153.9% - 195.7%
|
|
Risk-free rate
|
|
-
|
|
|
1.60% - 1.87%
|
|
Probability of QPI
|
|
-
|
|
|
50%
|
|
As of December 31, 2019, the Company’s warrants issuable
to the Company’s placement agent in relation to the 2019 Debentures were treated as derivative liabilities and changes in
the fair value were recognized in earnings. The Company estimated the fair value of these potentially issuable warrants using
the Black-Scholes method and the following assumptions:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Closing trade price of Common Stock
|
|
$
|
-
|
|
|
$
|
3.50
|
|
Intrinsic value of conversion option per share
|
|
$
|
-
|
|
|
$
|
3.50
|
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Annual Dividend Yield
|
|
|
-
|
|
|
|
0.0%
|
|
Expected Life (Years)
|
|
|
-
|
|
|
|
5
|
|
Risk-Free Interest Rate
|
|
|
-
|
|
|
|
1.68%-1.69%
|
|
Expected Volatility
|
|
|
-
|
|
|
|
445.01%-453.08%
|
|
Expected volatility was based primarily
on historical volatility. Historical volatility was computed using daily pricing observations for recent periods. The Company believes
this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected
term of these warrants. The Company had no reason to believe future volatility over the expected remaining life of these warrants
was likely to differ materially from historical volatility. The expected life was based on the expected remaining
term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the warrants.
The Company recorded a total of $401,957
debt discount upon the closing of the 2019 Debentures, including $171,425 fair value of the embedded derivative liability, $70,100
fair value of the common stock issued, $78,693 of direct transaction costs incurred, $21,739 related to warrants issuable to the
placement agent, and $60,000 original issue discount. The debt discount is amortized to interest expense over the term of the loan.
Amortization of the debt discount associated with the 2019 Debentures was $99,954 for the year ended December 31, 2019 and was
included in interest expense in the Statements of Operations.
The 2019 Debentures were fully redeemed
on February 26, 2020 for a face value of $600,000 and an early redemption fee of $150,000 resulting in a $280,504 loss on extinguishment
of debt included in the Statement of Operations.
The following table summarizes the 2019
Debentures outstanding as of June 30, 2020 and December 31, 2019:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Convertible Debentures, due September 18, 2020:
|
|
|
|
|
|
|
|
|
Principal value
|
|
$
|
-
|
|
|
$
|
600,000
|
|
Unamortized debt discount
|
|
|
-
|
|
|
|
(302,003
|
)
|
Carrying value of convertible notes
|
|
|
-
|
|
|
|
297,997
|
|
Total short-term carrying value of Convertible Debentures
|
|
$
|
-
|
|
|
$
|
297,997
|
|
Embedded Derivative Liability:
|
|
|
|
Fair value of derivative liability, December 31, 2019
|
|
$
|
171,499
|
|
Gain on extinguishment of debt
|
|
|
(171,499
|
)
|
Fair value of derivative liability, June 30, 2020
|
|
$
|
-
|
|
On March 6, 2020, the Company completed
the offering of $1,992,000 of senior secured convertible debentures (the “2020 Debentures”) and raised $1,992,000 in
gross proceeds from the sale of the 2020 Debentures and 2020 Warrants (defined below). Of this amount, $330,000 was received from
four directors and an entity in which one officer of the Company is a majority owner and co-manager. The Company received $1,747,203
after deducting direct transaction costs. The Company used $750,000 of the net proceeds to redeem the existing 2019 Debentures
prior to maturity, with a face value of $600,000 and an early redemption fee of $150,000. The 2020 Debentures were due eighteen
months following issuance as follows; $932,000 on August 26, 2021, $910,000 on August 28, 2021 and $150,000 on September 6, 2021.
The Company’s capital structure after
the closing had no outstanding variably-priced convertible instruments on its Balance Sheets. The 2020 Debentures were secured
by a blanket lien on all assets of the Company until such time the 2020 Debentures were paid in full or converted in full.
The 2020 Debentures were automatically convertible into shares
of the Company’s common stock upon the earliest to occur of (i) the commencement of trading of the common stock on the Nasdaq,
New York Stock Exchange or NYSE American (an “Uplist”) at the Uplist Conversion Price (defined below); or (ii) at any
time the minimum bid price of the common stock exceeded $25.00 per share for twenty (20) consecutive trading days and the average
trading volume during the 10 trading days prior to the conversion was at least 2,000 shares and the shares were registered under
an effective registration statement or the shares were salable under Rule 144 (“Rule 144”) of the Securities Act of
1933, as amended. The “Uplist Conversion Price” was the lesser of $4.00 or a 30% discount to the public offering price
a share of common stock was offered to the public in a securities offering resulting in the listing of the common stock on the
Nasdaq, New York Stock Exchange or NYSE American.
The 2020 Debentures were convertible, at
any time, at the option of the holder, into shares of common stock, at a fixed conversion price equal to $4.00 per share.
The embedded conversion
feature was not determined to be a derivative that required bifurcation pursuant to FASB ASC 815, “Derivatives and Hedging”
(“ASC 815”), but was determined to be a beneficial conversion feature that required recognition within equity on the
commitment date. The beneficial conversion feature was recognized at its intrinsic value on the commitment date, limited to the
proceeds allocated to the convertible debt. As such, the Company recorded $649,552 within additional paid-in-capital on the Balance
Sheets for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial conversion
feature was amortized as interest expense over the term of the convertible debt.
In connection with the issuance of
the 2020 Debentures, the Company also issued warrants (“2020 Warrants”) to purchase 498,000 shares of common
stock. Each 2020 Warrant had a three-year (3) term and was immediately exercisable at an exercise price of $7.50 per share.
If at any time after six months following the issuance date and prior to the expiration date the Company failed to maintain
an effective registration statement (the “Registration Statement”) with the SEC covering the resale of the shares
of common stock underlying the 2020 Warrants, the 2020 Warrants could have been exercised by means of a “cashless
exercise,” until such time as there was an effective Registration Statement. Each 2020 Warrant contained customary
adjustment provisions in the event of a stock split, reverse stock split or recapitalization. 2020 Warrants for 82,500 shares
were issued to four directors and an entity in which one officer of the Company is a majority owner. The
2020 Warrants were determined to meet equity classification pursuant to FASB ASC 480, “Distinguish by Liabilities from
Equity” and ASC 815. As such, the relative fair value of the 2020 Warrants was recorded as additional paid-in-capital
on the Balance Sheets, which was determined to be $1,063,239, on the issuance date. The debt discount arising from
recognition of the 2020 Warrants was amortized as interest expense over the term of the convertible debt.
On June 22, 2020, the Company cancelled the 2020 Warrants for
twenty-three of the twenty-five warrant holders and issued to the holders of the cancelled 2020 Warrants an aggregate of 179,200
shares of Common Stock. Of this amount, 33,000 shares of Common stock were issued to four directors and an entity in which one
officer of the Company is a majority owner and co-manager. 2020 Warrants to purchase an aggregate of 81,700 shares of Common Stock
at an exercise price of $4.59 per share remain outstanding. Also on such date, the 2020 Debentures were automatically converted
into an aggregate of 637,513 shares of common stock and warrants to purchase 573,479 shares of common stock. Of this amount, 105,567
shares of common stock and warrants to purchase 105,567 of shares of common stock were issued to four directors and an entity in
which one officer of the Company is a majority owner and co-manager. See Note 8 – Stock options, Restricted Stock and Warrants.
In connection with the 2020 Debentures,
the Company entered into an agreement with a non-exclusive financial advisor and placement agent for a term of twelve months commencing
in January 2020. Upon execution of the agreement, the Company issued 5,000 fully vested restricted shares of the Company’s
common stock and recorded $32,500 included in general and administrative expense in the accompanying Statements of Operations.
On March 6, 2020, in connection with this agreement a cash compensation of $152,960 was made by the Company and an additional 12,285
shares of the Company’s common stock were issued. These amounts were included in the debt discount for the 2020 Debentures
noted above.
In February 2020, the Company entered into
an agreement with a non-exclusive financial advisor and placement agent terminating the later of April 30, 2020 or upon closing
a successful private placement. The agreement automatically extended for periods of thirty days until terminated in writing. The
Company agreed to pay 10% of the gross proceeds raised by the financial advisor and placement agent and agreed to issue an amount
of restricted shares equal to 4% of the total securities sold in the private placement divided by the last reported closing price
of the stock on the closing date of the private placement. On March 6, 2020, in connection with this agreement cash compensation
of $25,000 was paid by the Company and 1,923 shares of the Company’s common stock were issued. These amounts were included
in the debt discount for the 2020 Debentures noted above.
The Company recorded a total of $1,992,000
debt discount upon the closing of the 2020 Debentures, including the $649,552 intrinsic value of the beneficial conversion option,
$34,412 relative fair value of the common stock issued to the placement agents, $244,797 of direct transaction costs incurred and
$1,063,239 related to the 2020 Warrants. The debt discount was amortized to interest expense over the term of the loan.
On June 22, 2020, upon the Company’s
consummation of the public offering (See Note 7 – Stockholders’ Equity) and the Company’s commencement of trading
on Nasdaq, the 2020 Debentures were automatically converted at $3.22, the QPI Discounted Price. As a result, the unamortized debt
discount was fully amortized and included in interest expense in the accompanying Statements of Operations. Amortization of the
debt discount associated with the 2020 Debentures was $1,868,183 and $1,992,000 for the three and six months ended June 30, 2020,
respectively, and was included in interest expense in the accompanying Statements of Operations. Interest expense for the three
and six months ended June 30, 2020 was $43,202 and $60,802, respectively.
On January 30, 2020 the Company issued
an unsecured promissory note payable to a stockholder of the Company with a face value of $75,000 and an interest rate of 10% per
annum payable in full on March 30, 2020, subject to the Company’s right to extend payment until May 29, 2020. On February
28, 2020, the holder of the $75,000 promissory note which was to become due in March 2020 purchased $80,000 of the 2020 Debentures
and 2020 Warrants, which was paid by exchanging the promissory note and paying an additional $5,000. This is included in the $1,992,000
gross proceeds raised. Interest expense in relation to the unsecured promissory note of $0 and $1,250 was recorded for the three
and six months ended June 30, 2020, respectively.
NOTE 6 – TERM NOTE
On May 17, 2020, the Company entered into
a paycheck protection program term note for $72,400 (the “SBA Loan”) with PNC Bank, N.A. under the recently enacted
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) pursuant to the Paycheck Protection Program (the
“PPP”), which is administered by the U.S. Small Business Administration. The SBA Loan is scheduled to mature on May
17, 2022, bears interest at a rate of 1.00% per annum and is subject to the terms and conditions applicable to loans administered
by the U.S. Small Business Administration under the CARES Act. Pursuant to the CARES Act and the PPP, all or a portion of the principal
amount of the SBA Loan is subject to forgiveness so long as, over the eight-week period following the receipt by the Company of
the proceeds of the SBA Loan, the Company uses those proceeds for payroll costs, payment on rent obligations, utility costs, and
costs of certain employee benefits as per Section 1106 of the CARES Act. As of June 30, 2020, the amount outstanding on the SBA
Loan was $72,400 classified as Long-Term Liabilities and included in the accompanying Statement of Balance Sheets.
NOTE 7 – STOCKHOLDERS’ EQUITY
The
Company expensed $21,683 and $98,938 in costs related to restricted stock awards for the three and six months ended June 30, 2020,
respectively. For the three and six months ended June 30, 2019, the Company expensed $118,846 and $84,220, respectively, relative
to restricted common stock.
On June 17, 2020, the Company entered into
an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the underwriters
(the “Representative”), for an underwritten public offering (the “Offering”)
of an aggregate of 2,173,913 Units consisting of one share (each a “Share” and collectively, the “Shares”)
of the Company’s common stock, and a warrant to purchase one share of Common Stock (each a “Warrant” and collectively,
the “Warrants”) at an exercise price equal to $4.60 per share of Common Stock. The public offering price was $4.60
per Unit and the underwriters agreed to purchase 2,173,913 Units at an 8.0% discount to the public offering price. The Company
granted the Representative a 45-day option to purchase up to 326,087 Shares and/or Warrants for 326,087 shares of Common Stock
to cover over-allotments, if any. The Offering closed on June 22, 2020 resulting in gross proceeds of $10.0 million, before
deducting underwriting discounts and commissions and other offering expenses. Also, on June 22, 2020, the Representative partially
exercised its over-allotment option to purchase 50,000 Shares and 325,987 Warrants for gross proceeds of $232,759. The net proceeds
in relation to the Offering and including the over-allotment option were $9,023,046. Additionally, the Company issued 30,000 shares
of common stock for consulting services related to the Offering, with a fair value of $124,800 accounted for in Additional Paid
in Capital and included in the accompanying Statement of Balance Sheets.
Of the 2,173,913 Units purchased in the
Offering, 17,800 Units were purchased by two directors of the Company.
Pursuant to the Underwriting Agreement,
the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative,
warrants to purchase up to a total of 173,913 shares of Common Stock (the “Representative’s Warrants”). The Representative’s
warrants are exercisable at $5.06 per share, are initially exercisable 180 days after the effective date of the Offering and have
a term of three years from their initial exercise date. See Note 8 – Stock Options, Restricted Stock and Warrants.
In connection to the closing of the Offering and the related
automatic conversion of the 2020 Debentures the Company issued 637,513 shares of common stock related to the principal amount outstanding
of $1,992,000 and interest expense of $60,802 and issued 179,200 shares of common stock related to the cancellation of the 2020
Warrants (see Note 5 – Convertible Debt).
In connection to the 2020 Debentures (see
Note 5 – Convertible Debt) the Company issued 19,208 restricted shares of common stock to the placement agents in connection
with the private placement.
In May 2020, the Company rescinded and
cancelled an aggregate of 19,401 shares of common stock that the Company had approved for issuance but were not yet issued and
outstanding shares.
On April 16, 2020, the Company granted Mr. White a restricted
stock award of 37,500 restricted shares of the Company’s common stock in lieu of $150,000 in deferred salary. Of this amount,
$119,041 was accrued in prior years, and the remaining amount was expensed in payroll expenses included in the accompanying Statement
of Operations. The restricted stock award vests in full one-year from the date of grant, subject to Mr. White’s continued
services as an officer and employee of the Company on the vesting date.
During the six months ended June 30, 2019,
the Company granted a total of 24,000 restricted stock awards to five directors of the Company for their services. The restricted
stock awards vested in equal quarterly installments over a one-year period. On February 27, 2019, three directors resigned from
the Company’s Board of Directors, effective March 1, 2019. This resulted in a cancellation of 6,400 shares related to the
portion of the unvested restricted stock awards these directors had received.
On March 15, 2019, we engaged an advisor
to provide consulting services under an Investor Relations and Advisory Agreement (the "Agreement"). Pursuant to the
Agreement, we agreed to pay in advance of services a monthly fee of $5,000 in shares of restricted common stock to the consulting
firm for consulting services. The number of shares to be issued will be calculated based on the closing price of our common shares
on the first day of each month or the preceding day, if the first were to fall on a weekend or holiday. However, if the stock were
to trade below $4.60 per share, the calculation would be based on $4.60. The shares shall not have registration rights, and the
shares may be sold subject to Rule 144. During the six months ended June 30, 2020, the Company
issued 3,335 shares of restricted common stock for a total expense of $17,181 related to these services. During the six months
ended June 30, 2019, the Company issued 1,426 shares of restricted common stock for a total expense of $15,000 related to these
services.
NOTE 8 – STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS
On December 17, 2003, the Company
adopted the 2003 Stock Option Plan (the “2003 Plan”). Under the 2003 Plan, the Company is authorized to grant options
to purchase up to 360,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other
agents and advisors.
During 2013, the Company adopted a new
incentive compensation plan (the “2013 Plan”). Under the 2013 Plan, the Company is authorized to grant awards of stock
options, restricted stock, restricted stock units and other stock-based awards up to an aggregate of 400,000 shares of common stock. The
2013 Plan is intended to permit certain stock options granted to employees under the 2013 Plan to qualify as incentive stock options. All
options granted under the 2013 Plan, which are not intended to qualify as incentive stock options are deemed to be non-qualified
stock options.
On November 14, 2017, the Executive Committee
of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) which covers the
potential issuance of 260,000 shares of common stock. The 2017 Plan provides that directors, officers, employees, and consultants
of the Company will be eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s
Compensation Committee. The Compensation Committee may adopt rules and regulations to carry out the terms of the 2017 Plan. The
2017 Plan terminates on November 14, 2027 unless sooner terminated.
The 2017 Plan is administered by the Compensation
Committee which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms
of each grant, including the vesting thereof, subject to the provisions of the plan.
In connection with incentive stock options,
the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant
(or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The
aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise incentive stock options
under all plans of the Company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise
any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be non-qualified
stock options, including prices, duration, transferability and limitations on exercise.
The Company issued non-qualified stock
options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the
related service or product is provided.
Determining the appropriate fair value
of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model
to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates
and involve inherent uncertainties and judgements.
The following table presents the weighted-average
assumptions used to estimate the fair value of the stock options granted during the six months ended June 30, 2020:
Risk Free Interest Rate
|
|
|
1.78
|
%
|
Expected Volatility
|
|
|
453.91
|
%
|
Expected Life (in years)
|
|
|
5.0
|
|
Dividend Yield
|
|
|
0
|
%
|
Weighted average estimated fair value of
|
|
|
|
|
options during the period
|
|
$
|
5.00
|
|
The following table summarizes the activities for the Company’s
unvested stock options for the six months ended June 30, 2020:
Effective January 2020, the Company awarded
its Chief Financial Officer incentive stock options exercisable for 4,000 shares of common stock with an exercise price of $3.505
vesting quarterly over a one-year period and expiring on January 7, 2025 with a fair value of $13,716.
Effective January 2020, the Company awarded
four directors non-qualified stock options exercisable for 40,000 shares in the aggregate, for services rendered to the Company
in 2019 with an exercise price of $3.505 vesting immediately and expiring on January 7, 2025 with a fair value of $137,160.
Effective January 2020, the Company awarded
five of its directors non-qualified stock options exercisable for 50,000 shares in the aggregate, for services to be rendered to
the Company in 2020 with an exercise price of $3.505 vesting quarterly over a one-year period and expiring on January 7, 2025 with
a fair value of $171,451.
On April 16, 2020, the Company
approved a three-year extension of the expiration date for certain options previously granted to Patrick White, the
Company’s President and Chief Executive Officer and to Norman Gardner, the Company’s Chairman. As a result,
140,000 options previously granted to Mr. White now expire on August 15, 2025 and 90,000 options previously granted to Mr.
Gardner now expire on June 29, 2025. All other terms with respect to the option grants remain the same. The Company applied
FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and calculated a change in fair
value of $153,913.
On April 16, 2020, the Company awarded
a director non-qualified stock options for 3,000 shares of common stock for services rendered to the Company with an exercise price
of $4.025 vesting immediately and expiring on April 16, 2025, with a fair value of $11,811.
On May 27, 2020, the Company awarded two
directors non-qualified stock options for 8,000 shares of common stock for services rendered to the Company with an exercise price
of $5.295 vesting immediately and expiring on May 27, 2025, with a fair value of $41,435.
During the three months ended June 30,
2020 and 2019, the Company expensed $267,865 and $126,077, respectively, with respect to options. During the six months ended June
30, 2020 and 2019, the Company expensed $485,470 and $249,788, respectively, with respect to options.
As of June 30,
2020, there was $131,362 unrecognized compensation cost related to outstanding stock options expected to vest over the weighted
average of 0.5 years.
The following table summarizes the activities
for the Company’s warrants for the six months ended June 30, 2020:
The Company issued three-year 2020 Warrants
to purchase 498,000 shares of common stock to the purchasers of the 2020 Debentures (see Note 5 – Convertible Debt). The
2020 Warrants have an exercise price of $7.50 per share, and may be exercised cashlessly if the Company fails to maintain an effective
registration statement at any time beginning six months after issuance. Of this amount, 2020 Warrants to purchase 82,500 shares
were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager.
On June 22, 2020, 2020 Warrants to purchase
448,000 shares of common stock were cancelled (including 2020 Warrants for 82,500 shares that had been issued to four directors
and an entity in which one officer of the Company is a majority owner and co-manager) and warrants to purchase 573,479 shares of
common stock were issued upon closing of the Offering and conversion of the 2020 Debentures, with an exercise price of $4.60 and
an expiration term of five years. Of this amount, warrants to purchase 105,567 of shares of common stock were issued to four directors
and an entity in which one officer of the Company is a majority owner and co-manager.
As a result of the Offering, the per share
exercise price for the outstanding but unexercised 2020 Warrants to purchase shares of common stock related to the two warrant
holders who did not cancel their 2020 Warrants, has been adjusted from $7.50 to $4.59 and the number of shares of common stock
underlying the outstanding but unexercised 2020 Warrants increased from an aggregate of 50,000 to 81,700 shares of common stock.
On May 27, 2020, the Company awarded four
non-employees warrants for 11,000 shares of common stock for services rendered to the Company with an exercise price of $5.295
vesting immediately and expiring on May 27, 2023, with a fair value of $53,835.
On June 18, 2020, in connection with the
Offering, the Representative provided a partial exercise notice of the over-allotment option to purchase 50,000 additional shares
of common stock and additional warrants to purchase 325,987 shares of common stock.
On June 22, 2020, in connection with the
Offering, the Company issued warrants to purchase 2,499,900 shares of common stock, with a five-year term and an exercise price
of $4.60, including the additional warrants pursuant to the over-allotment option exercise noted above.
In connection with the Offering, on June
22, 2020 the Company issued warrants to the Representative to purchase up to a total of 173,913 shares of common stock. The warrants
are exercisable during the three-year period commencing 180 days from June 22, 2020. The warrants are exercisable at a per share
price equal to $5.06 per share with a fair value of $522,515 netted in Additional Paid-In Capital included in the accompanying
Statement of Balance Sheets.
For the three months ended June 30, 2020,
one customer represented 99% of revenues. For the six months ended June 30, 2020, two customers represented an aggregate of 97%
of revenues.