(a) The following documents are filed as part of this Report. Portions of Item 15 are submitted as separate sections of this Report:
(b) The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report
None.
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes are an integral part of these statements.
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes are an integral part of these statements.
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE A —THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.
Going Concern and Basis of Presentation
The Company has historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The Company currently requires approximately $735,000 per month to conduct operations, a monthly amount that it has been unable to consistently achieve through revenue generation. During 2021, the Company generated approximately $5,114,000 of revenue, which is below its average monthly requirements. During 2020, the Company raised approximately $24,000,000 from financing activities and at December 31, 2021 had approximately $7,800,000 in cash. With the addition of the Swivel Secure Europe, SA (see Note W), the Company expects $1,000,000 of additional cash flow, based on Swivel Secure’s current recurring revenue and expenses, to provide additional operating income. As of the date of this report, the Company has enough cash and receivables for twelve months of operations.
Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. All share figures and results are reflected on a post-split basis.
Foreign Currency
The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.
Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.
2. Use of Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, accounts receivable, inventory, intangible assets and long-lived assets, and income taxes. To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.
3. Revenue Recognition
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
| ● | 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 |
| ● | Recognize revenue when or as the Company satisfies a performance obligation |
All of the Company's performance obligations, and associated revenues, are generally transferred to customers at a point in time, with the exception of support and maintenance, and professional services, which are generally transferred to the customer over time.
Software licenses
Software license revenue consist of fees for perpetual and subscription licenses for one or more of the Company’s biometric fingerprint solutions or identity access management solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.
Hardware
Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from the Company, and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.
Support and Maintenance
Support and maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its support and maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of prepayment until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and maintenance contracts are one to five years in length and are generally invoiced in advance at the beginning of the term. Support and Maintenance revenue for subscription licenses is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.
Professional Services
Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.
Contracts with Multiple Performance Obligations
Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.
The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.
Accounts receivable from customers are typically due within 30 days of invoicing. The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.
Costs to Obtain and Fulfill a Contract
Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Deferred Revenue
Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12-60 months. Contracts greater than 12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At December 31, 2021 and 2020, amounts in deferred revenue were approximately $633,000 and $702,000, respectively.
4. Business Combinations
In accordance with ASC 805, Business Combinations (ASC 805), the Company recognizes the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets.
The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair value of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
5. Goodwill and acquired intangible assets
Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of December 31st of each year. To date, the Company has not identified any impairment to goodwill.
Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.
6. Cash Equivalents
Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2021 and 2020, cash equivalents consisted of a money market account.
7. Accounts Receivable
Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible.
Accounts receivable at December 31, 2021 and 2020 consisted of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | | | | | | | |
Accounts receivable | | $ | 1,234,411 | | | $ | 561,834 | |
Loss on foreign currency | | | (50,000 | ) | | | - | |
Allowance for doubtful accounts | | | (213,785 | ) | | | (13,785 | ) |
Accounts receivable, net of allowances for doubtful accounts | | $ | 970,626 | | | $ | 548,049 | |
Bad debt expenses (if any) are recorded in selling, general, and administrative expense.
8. Equipment and Leasehold Improvements, Intangible Assets and Depreciation and Amortization
Equipment and leasehold improvements are stated at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method.
The estimated useful lives used to compute depreciation and amortization for financial reporting purposes are as follows:
| | Years | |
Equipment and leasehold improvements | | | | | |
Equipment (years) | | 3 | - | 5 | |
Furniture and fixtures (years) | | 3 | - | 5 | |
Software (years) | | | 3 | | |
Leasehold improvements | | life or lease term | |
Intangible assets other than goodwill consist of patents, trade name, proprietary software, and customer relationships. Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year. Trade names, proprietary software, and customer relationships are amortized over the economic useful life.
9. Impairment or Disposal of Long Lived Assets, including Intangible Assets
The Company reviews long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater.
10. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising expenses for 2021 and 2020 were approximately $527,000 and $494,000, respectively.
11. Research and Development Expenditures
Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are expensed as incurred.
12. Earnings Per Share of Common Stock (“EPS”)
The Company’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options and warrants, when the effect of their inclusion is dilutive.
13. Accounting for Stock-Based Compensation
The Company accounts for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over either a three or four year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates. Options and warrants to outsiders are accounted for under ASC 718.
The following table presents share-based compensation expenses included in the Company’s consolidated statements of operations:
| | Year ended December 31, | |
| | 2021 | | | 2020 | |
| | | | | | | | |
Selling, general and administrative | | $ | 269,368 | | | $ | 705,971 | |
Research, development and engineering | | | 45,347 | | | | 86,124 | |
| | $ | 314,715 | | | $ | 792,095 | |
Valuation Assumptions for Stock Options
In 2020, 28,440 stock options were granted. No options were granted in 2021. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | Year ended December 31, | |
| | 2021 | | | 2020 | |
Weighted average Risk free interest rate | | | - | | | | 0.30 | % |
Expected life of options (in years) | | | - | | | | 4.50 | |
Expected dividends | | | - | | | | 0 | % |
Weighted average Volatility of stock price | | | - | | | | 115 | % |
The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
14. Derivative Liabilities
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company early-adopted the new provisions issued July 2017, for derivative liability instruments under FASB ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Under ASU 2017-11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.
15. Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.
The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
16. Leases
In accordance with ASC 842, Leases (ASC 842), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and classifies them as either operating or finance leases.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether the Company obtains the right to substantially all the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842-20-25-2. For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component.
Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives.
An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.
17. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements.
Effective January 1, 2021, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”) to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S. GAAP. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of ASU 2019-12 did not have a significant impact on the Company’s consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.
NOTE B—REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the years ended December 31, 2021 and 2020:
|
|
North America |
|
|
Africa |
|
|
EMESA* |
|
|
Asia |
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
$ |
1,854,088 |
|
|
$ |
521,751 |
|
|
$ |
105,314 |
|
|
$ |
74,656 |
|
|
$ |
2,555,809 |
|
Hardware |
|
|
278,655 |
|
|
|
698,264 |
|
|
|
265,996 |
|
|
|
42,411 |
|
|
|
1,285,326 |
|
Services |
|
|
1,162,526 |
|
|
|
42,000 |
|
|
|
54,918 |
|
|
|
13,910 |
|
|
|
1,273,354 |
|
Total Revenues |
|
$ |
3,295,269 |
|
|
$ |
1,262,015 |
|
|
$ |
426,228 |
|
|
$ |
130,977 |
|
|
$ |
5,114,489 |
|
|
|
North America |
|
|
Africa |
|
|
EMESA* |
|
|
Asia |
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
$ |
842,307 |
|
|
$ |
- |
|
|
$ |
46,922 |
|
|
$ |
72,809 |
|
|
$ |
962,038 |
|
Hardware |
|
|
267,996 |
|
|
|
- |
|
|
|
144,647 |
|
|
|
29,873 |
|
|
|
442,516 |
|
Services |
|
|
1,296,696 |
|
|
|
44,228 |
|
|
|
68,196 |
|
|
|
23,108 |
|
|
|
1,432,228 |
|
Total Revenues |
|
$ |
2,406,999 |
|
|
$ |
44,228 |
|
|
$ |
259,765 |
|
|
$ |
125,790 |
|
|
$ |
2,836,782 |
|
* EMESA – Europe, Middle East, South America
Revenue recognized during the year ended December 31, 2021 from amounts included in deferred revenue at the beginning of the year was approximately $529,000. Revenue recognized during the year ended December 31, 2020 from amounts included in deferred revenue at the beginning of the year was approximately $290,000. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was $632,655 and $702,336 at December 31, 2021 and 2020, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as at December 31, 2021. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:
|
● |
The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606-10-50-14. |
Deferred revenue represents the Company’s remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized from one to five years.
NOTE C—PISTOLSTAR, INC. ACQUISITION
On June 30, 2020, the Company acquired PistolStar, Inc., a private company based in the United States, which provides enterprise-ready identity access management solutions, including multi-factor authentication, identity-as-a-service, single sign-on and self-service password reset to commercial, government and education customers throughout the United States and internationally.
From April 10, 2020 until the Company acquired PistolStar, it licensed PortalGuard®, PistolStar’s authentication software, which the Company combines with its biometric authentication solutions offered to existing and prospective customers.
The total purchase price of $2.5 million included cash payment of $2.0 million and the issuance of a $500,000 promissory note.
The acquisition of PistolStar was accounted for as a business combination and, in accordance with ASC 805, the Company recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the final purchase price allocation:
Purchase consideration: | | | | |
Total cash paid, net of acquired cash | | $ | 2,000,000 | |
Present value of 4% Promissory note | | | 464,000 | |
Total purchase price consideration | | $ | 2,464,000 | |
| | | | |
Fair value of assets acquired and liabilities assumed: | | | | |
Cash and cash equivalents | | $ | 100,747 | |
Accounts receivable | | | 184,792 | |
Prepaid expenses and other current assets | | | 9,485 | |
Fixed assets | | | 36,467 | |
Intangible assets | | | 1,480,000 | |
Goodwill | | | 1,262,526 | |
Total assets acquired | | | 3,074,017 | |
| | | | |
Accrued expenses and other current liabilities | | | 738 | |
Accrued payroll | | | 19,279 | |
Deferred revenue | | | 590,000 | |
Total fair value of assets acquired and liabilities assumed | | $ | 2,464,000 | |
The promissory note accrued interest at 4% per annum and was payable in four installments over the 12-month period following the closing. The balance of the note at December 31, 2020 was $232,000, net of the unamortized debt discount. On January 21, 2021, the Company paid the $250,000 balance due on the note.
The fair value of the assets acquired and liabilities assumed was less than the purchase price, resulting in the recognition of goodwill. The goodwill reflected the value of the synergies the Company expected to realize and the assembled workforce.
The significant intangible assets identified in the purchase price allocation discussed above include the trade name, proprietary software, and customer relationships. To value the trade name and proprietary software, the Company utilized the Relief from Royalty Method, which quantifies the cost savings associated with asset ownership via a discounted cash flow analysis. To value the customer relationships, the Company utilized the Excess Earnings Method, which isolates the value of the specific intangible asset by discounting its income stream to present value.
The fair value of the assets acquired and liabilities assumed reflected in the tables above is less than the purchase price, resulting in the recognition of goodwill. The goodwill reflects the value of the synergies the Company expects to realize and the assembled workforce.
The following table presents the final fair values and useful lives of the identifiable intangible assets acquired:
|
|
Amount |
|
|
Estimated useful life (in years) |
|
Trade Name |
|
$ |
130,000 |
|
|
|
15 |
|
|
Proprietary Software |
|
|
420,000 |
|
|
|
5 |
|
|
Customer relationships |
|
|
930,000 |
|
|
8 |
- |
10 |
|
Total identifiable intangible assets |
|
$ |
1,480,000 |
|
|
|
|
|
|
NOTE D—FACTORING
Due from factor consisted of the following as of December 31:
|
|
Original Invoice Value |
|
|
Factored Amount |
|
|
Factored Balance due |
|
Year Ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Factored accounts receivable |
|
$ |
99,000 |
|
|
$ |
49,500 |
|
|
$ |
49,500 |
|
Year Ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Factored accounts receivable |
|
$ |
241,715 |
|
|
$ |
181,262 |
|
|
$ |
60,453 |
|
The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2022. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 per quarter of certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the Factor. Factoring fees range from 2.75% to 15% of the face value of the invoice factored and are determined by the number of days required for collection of the invoice. The cost of factoring is included in selling, general and administrative expenses. The cost of factoring was as follows:
|
|
Years Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Factoring fees |
|
$ |
50,132 |
|
|
$ |
98,748 |
|
NOTE E—FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.
NOTE F—CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to risk primarily consist of cash, and cash equivalents, investment in debt security, and accounts receivables.
The Company maintains its cash and cash equivalents with various financial institutions, which, at times may exceed insured limits. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company was in excess of coverage of approximately $7,057,000 and $16,020,000 at December 31, 2021 and 2020, respectively. The Company has not incurred any losses on these accounts.
The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.
For the year ended December 31, 2021 and 2020, one customer accounted for 13% and 18% of total revenue, respectively.
Three customers accounted for 87% and one customer accounted for 31% of total accounts receivable, as of December 31, 2021 and 2020, respectively.
NOTE G—NOTE RECEIVABLE
During the third quarter 2020, the Company loaned $295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts. The note does not bear any interest if paid within the nine (9) monthly installments beginning December 31, 2020. The note bears a default rate of 5%. Due to the ongoing delays in payment, the Company reserved $100,000 of the note as an allowance. On February 17, 2022, the Company amended the note to modify the payment terms to provide for lower monthly payments, with an updated maturity date on, or before December 6, 2023. A member of our board of directors served as Chief Executive Officer off TTI until August 12, 2020.
|
|
December 31, |
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Note receivable |
|
$ |
295,000 |
|
|
$ |
295,000 |
|
Allowance for doubtful account |
|
|
(100,000 |
) |
|
|
- |
|
Note receivable, net of allowance |
|
|
195,000 |
|
|
|
295,000 |
|
Current portion, net of allowance |
|
$ |
82,000 |
|
|
$ |
295,000 |
|
Noncurrent portion, net of allowance |
|
$ |
113,000 |
|
|
$ |
- |
|
NOTE H—INVENTORY
Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of December 31:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
4,798,203 |
|
|
$ |
221,130 |
|
Fabricated assemblies |
|
|
142,457 |
|
|
|
109,817 |
|
Total inventory |
|
$ |
4,940,660 |
|
|
$ |
330,947 |
|
NOTE I—RESALABLE SOFTWARE LICENSES RIGHTS
On December 31, 2015, the Company purchased third-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize. The Company is amortizing the total cost at the greater of the actual unit cost per license sold or straight line amortization over 10 years. A total of $10,130 and $14,920 was charged to cost of sales during the years ended December 31, 2021 and 2020, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $131,248 has been charged to cost of sales, with a carrying balance of $48,752 and $58,882 as of December 31, 2021 and 2020, respectively.
The Company has classified the balance as non-current until a larger deployment occurs.
Estimated minimum amortization expense based on straight line amortization of the software license rights over the remaining useful life approximates the following:
Years ending December 31 |
|
|
|
|
2022 |
|
$ |
18,000 |
|
2023 |
|
|
18,000 |
|
2024 |
|
|
12,752 |
|
Total |
|
$ |
48,752 |
|
NOTE J—INVESTMENT IN DEBT SECURITY
During 2019, the Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong. The Bond Certificate translated to $512,821 U.S. Dollars on the June 2019 purchase date. The bond had a one-year term which matured in June 2020, bearing interest at 5% per annum. The Company redeemed the bond and recorded interest income of approximately $25,800.
The Company then purchased a new 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in June 2020. The new Bond Certificate translated to $512,821 U.S. Dollars, based on the exchange rate at the purchase date. The Company can invest up to 20,000,000 Hong Kong dollars under the terms of the certificate, bearing interest at 5% per annum. The investment is recorded at amortized cost which approximates fair value was held to maturity. The Company has yet to receive the proceeds and accrued interest from the investment. The Company has sent a legal letter of demand to confirm the status of the bond, and as such, the debt security was classified as noncurrent. In addition, due to the delay in the receipt of the proceeds, the Company recorded a $60,000 reserve.
NOTE K—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of December 31:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Equipment |
|
$ |
831,784 |
|
|
$ |
789,760 |
|
Furniture and fixtures |
|
|
164,079 |
|
|
|
164,079 |
|
Software |
|
|
32,045 |
|
|
|
32,045 |
|
Leasehold improvements |
|
|
25,135 |
|
|
|
25,135 |
|
|
|
|
1,053,043 |
|
|
|
1,011,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
(983,875 |
) |
|
|
(929,226 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69,168 |
|
|
$ |
81,793 |
|
Depreciation was $54,649 and $85,751 for 2021 and 2020, respectively. Amounts are recorded in selling, general, and administrative expense as well as in cost of services.
NOTE L—INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31:
|
|
2021 |
|
|
|
|
|
|
12/31/21 |
|
|
2020 |
|
|
|
|
|
|
12/31/20 |
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name |
|
$ |
130,000 |
|
|
$ |
(12,960 |
) |
|
$ |
117,040 |
|
|
$ |
130,000 |
|
|
$ |
(4,333 |
) |
|
$ |
125,667 |
|
Proprietary software |
|
|
420,000 |
|
|
|
(126,000 |
) |
|
|
294,000 |
|
|
|
420,000 |
|
|
|
(42,000 |
) |
|
|
378,000 |
|
Customer relationships |
|
|
930,000 |
|
|
|
(155,000 |
) |
|
|
775,000 |
|
|
|
930,000 |
|
|
|
(51,667 |
) |
|
|
878,333 |
|
Patents and patents pending |
|
|
365,080 |
|
|
|
(253,043 |
) |
|
|
112,037 |
|
|
|
365,080 |
|
|
|
(232,934 |
) |
|
|
132,146 |
|
Total |
|
$ |
1,845,080 |
|
|
$ |
(547,003 |
) |
|
$ |
1,298,077 |
|
|
$ |
1,845,080 |
|
|
$ |
(330,934 |
) |
|
$ |
1,514,146 |
|
Aggregate amortization expense for 2021 and 2020 was approximately $216,000 and $120,000, respectively. Estimated minimum amortization expense based on straight line amortization of the software license rights for each of the next five years and thereafter approximates the following:
Years ending December 31 |
|
|
|
|
2022 |
|
$ |
215,000 |
|
2023 |
|
|
213,000 |
|
2024 |
|
|
209,000 |
|
2025 |
|
|
165,000 |
|
2026 |
|
|
121,000 |
|
Thereafter |
|
|
375,077 |
|
Total |
|
$ |
1,298,077 |
|
NOTE M—ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
254,433 |
|
|
$ |
87,015 |
|
Compensated absences |
|
|
293,297 |
|
|
|
227,147 |
|
Accrued legal and accounting fees |
|
|
95,738 |
|
|
|
83,738 |
|
Franchise taxes |
|
|
40,000 |
|
|
|
- |
|
Employee expenses reimbursement |
|
|
76,000 |
|
|
|
67,000 |
|
Sales tax payable |
|
|
18,548 |
|
|
|
17,544 |
|
Factoring fees |
|
|
495 |
|
|
|
5,495 |
|
Other |
|
|
50,486 |
|
|
|
20,548 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
828,997 |
|
|
$ |
508,487 |
|
NOTE N—RELATED PARTY TRANSACTIONS
Non-Interest-Bearing Advances
During the 2019 fiscal year, the Company received a series of non-interest-bearing advances from Mr. Wong Kwok Fong, and Mr. Michael DePasquale, to pay current liabilities. The balance of the advances as at December 31, 2019 was $74,737 and $114,000, respectively, which were both repaid in full during 2020.
NOTE O—CONVERTIBLE NOTES PAYABLE
There was no balance outstanding for convertible notes payable as of December 31, 2021 and 2020. Details for Notes that were either converted or redeemed during the 2020 fiscal year were as follows:
Securities Purchase Agreement dated July 10, 2019
On July 10, 2019, the Company issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”). At closing, a total of $2,550,000 was funded. The original issue discount was $510,000. The principal amount due of the Original Note was due and payable as follows: $918,000 was due 180 days after funding, $1,071,000 was due 270 days after funding, and the remaining balance due 12 months after the date of funding.
The Original Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor in shares of common stock at a fixed conversion price of $12.00 per share.
In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 250,000 shares of common stock at a fixed exercise price of $12.00 per share, paid a $50,000 commitment fee, and issued 33,334 shares of common stock in payment of a $400,000 due diligence fee. The Company also paid banker fees of $193,500 and legal fees of $71,330. The valuation of the warrant of $595,662 was recorded to debt discount and was amortized over the life of the Original Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.
On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original Note and included an additional $729,000 in interest due to the debt restructuring. The principal amount was due and payable in full on April 13, 2020. The Amended Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor into shares of common stock at a fixed conversion price of $5.20 per share. The Company accounted for the transaction as a debt extinguishment and, therefore, the balance of the fees and unamortized discount associated with the Original Note were written off and included as loss on extinguishment of debt. On the day of the amendment, the closing stock price for the day was $6.08, which resulted in a beneficial conversion of $0.88 per share outstanding or $641,215 to be amortized to interest expense over the term of the Amended Note, as adjusted for any debt conversion.
On April 12, 2020 and May 6, 2020, the Company entered into amendments (the “Amendments”) to the Amended Note. The Amendments extended the maturity date to June 12, 2020 and extended the Investor’s right to convert the Amended Note into shares of the Company’s common stock at a price of $5.20 per share through June 12, 2020. All other provisions of the Amended Note remained the same.
On June 10, 2020, the investor converted the last of the remaining principal into shares of common stock for payment in full, and the remaining principal balance was $0. The Amended Note amount of $3,789,000 was converted into 728,654 shares of common stock in 2020.
January 2020 Note
On January 13, 2020, the Company issued a $157,000 principal amount secured 10% convertible redeemable note (the “January 2020 Note”) to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $12.00 per share. At the closing, the Company agreed to issue 81,250 shares of common stock in lieu of payment of a $75,000 commitment fee which was reduced to 6,250 shares as the January 2020 Note was repaid prior to the maturity date.
On June 12, 2020, the January 2020 Note was paid in full by payment of $211,984.
February 2020 Note
On February 13, 2020, the Company issued a $126,000 principal amount secured 10% convertible redeemable note (the “February 2020 Note”) to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $9.20 per share. On March 12, 2020, the Original Note was amended to reduce the conversion price to $5.20 per share, which reduced the conversion price of the February Note to $5.20 and resulted in a deemed dividend of $70,998. The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. The Company issued 6,250 shares of common stock to the investor in lieu of payment of a $57,500 commitment fee. The Company paid $6,000 of legal fees in connection with the issuance of February 2020 Note. The February 2020 Note was paid in full on July 10, 2020 by payment of $170,442.
May 2020 Note
On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “May 2020 Note”). At closing, $2,100,000 was funded. The principal amount was due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding. The May 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor priced at $9.28 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent. In connection with the closing of the May 2020 Note, the Company issued a five-year warrant to the investor to purchase 237,500 shares of common stock at a fixed exercise price of $9.28 and was immediately exercisable. The valuation of the warrant of $876,937 was recorded to debt discount and was amortized over the life of the May 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in-capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount were included in the interest expense on the statement of operations.
Following the completion of the underwritten offering in July 2020, the principal balance of $2,415,000 was paid in full during the third quarter of 2020. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $1,218,163 in July 2020.
June 2020 Note
On June 29, 2020, the Company issued a $1,811,250 principal amount senior secured convertible note (the “June 2020 Note”). At closing, $1,575,000 was funded. The principal amount was due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date with the remaining balance due on the twelfth month after the date of funding. The June 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the June 2020 Note, the Company paid a $100,000 due diligence fee by issuing 17,071 shares to the Investor priced at $5.86 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent.
In connection with the closing of the June 2020 Note, the Company issued a five-year warrant to the Investor to purchase 178,125 shares of common stock at a fixed exercise price of $9.28 per share and was immediately exercisable. The valuation of the warrant of $511,402 was recorded to debt discount and is was amortized over the life of the June 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.
Following the completion of the underwritten offering in July 2020, the principal balance of $1,811,250 was paid in full during the third quarter of 2020. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.
NOTE P—LEASES
The Company’s leases office space in New Jersey under a lease terminating in 2023 and Hong Kong, Minnesota, and New Hampshire with lease termination dates in 2022. The property leased in China is paid monthly as used, without a formal agreement. The leases include non-lease components with variable payments. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases were:
|
|
Year ended December 31, 2021 |
|
|
Year ended December 31, 2020 |
|
Lease cost |
|
|
|
|
|
|
|
|
Operating lease cost |
|
$ |
255,892 |
|
|
$ |
239,192 |
|
Short-term lease cost |
|
|
- |
|
|
|
- |
|
Total lease cost |
|
$ |
255,892 |
|
|
$ |
239,192 |
|
|
|
|
|
|
|
|
|
|
Balance sheet information |
|
|
|
|
|
Operating right-of-use assets |
|
$ |
254,100 |
|
|
$ |
487,325 |
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities, current portion |
|
$ |
177,188 |
|
|
$ |
234,309 |
|
Operating lease liabilities, non-current portion |
|
|
86,974 |
|
|
|
264,163 |
|
Total operating lease liabilities |
|
$ |
264,162 |
|
|
$ |
498,472 |
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years) – operating leases |
|
|
1.45 |
|
|
|
2.26 |
|
Weighted average discount rate – operating leases |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
256,977 |
|
|
$ |
235,186 |
|
|
|
|
|
|
|
|
|
|
Maturities of operating lease liabilities were as follows as of December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
$ |
187,594 |
|
|
|
|
|
2023 |
|
|
89,225 |
|
|
|
|
|
Total future lease payments |
|
$ |
276,819 |
|
|
|
|
|
Less: imputed interest |
|
|
(12,657 |
) |
|
|
|
|
Total |
|
$ |
264,162 |
|
|
|
|
|
NOTE Q—COMMITMENTS AND CONTINGENCIES
Sales Incentive Agreement with TTI
On March 25, 2020, the Company entered into a sales incentive agreement Technology Transfer Institute (“TTI”). Terms of the agreement include the following:
| 1. | The original term of the agreement was one year and has been automatically extended for an additional one-year term. |
| 2. | For each $5,000,000 in revenue (up to a maximum of $20,000,000) the Company generates from contracts sourced by TTI which are executed during the original term and generate net income of at least 20% (as defined) within eighteen months after the date such contract is executed, the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock. |
| 3. | In the event that the Company generates revenue in excess of $20,000,000 from contracts sourced by TTI which are executed during the original term and generate net income of at least 20% (as defined) within eighteen months after the date such contract is executed, the Company will issue TTI a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $12.00 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000). |
In no event will the Company be obligated to issue more than 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement.
There has been no revenue generated nor sales incentive fees paid during the periods ended December 31, 2021 and 2020.
Litigation
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of December 31, 2021, the Company was not a party to any pending lawsuits.
NOTE R— EQUITY
1. Preferred Stock
Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications.
2. Common Stock
Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective at the opening of trading on November 20, 2020.
Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.
Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.
Issuances of Common Stock
On June 18, 2021, the stockholders approved the Employee Stock Purchase Plan. Under the terms of this plan, 789,000 shares of common stock are reserved for issuance to employees and officers of the Company at 85% of the lower of the closing price of the common stock as reported on the Nasdaq Capital Market at the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares under the plan funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. On December 31, 2021, 19,484 shares were issued to employees which resulted in a $10,680 non-cash compensation expense for the Company.
On July 23, 2020, the Company completed an underwritten public offering of shares of common stock and warrants resulting in net proceeds of approximately $22.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. 4,264,313 shares of common stock were issued as a result of this offering, and a further 797,038 shares of common stock were issued upon the exercise of 512,500 prefunded warrants and 284,538 warrants exercised in conjunction with the offering.
On March 30, 2020, the Company issued 121,500 shares of common stock upon exercise of warrants at $12.00 per share, resulting in proceeds of $1,458,000 to the Company.
See Note O Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued for fees in connection with the agreements during fiscal 2020.
Issuances of Restricted Stock
Restricted stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Restricted stock is expensed ratably over the term of the restriction period.
The Company issued 13,125 shares of restricted common stock to certain employees of the Company and 1,250 of shares of restricted common stock were forfeited during fiscal year 2021. These shares vest in equal annual installments over a three-year period from the date of grant and had a fair value on the date of issuance of $44,025.
The Company issued 38,250 and 3,125 shares of restricted common stock in August and November of 2020, respectively to certain employees and directors of the Company. These shares vest in equal annual installments over a three-year period from the date of grant and had a fair value on the date of issuance of $198,900, and $11,250, respectively.
Restricted stock compensation for the years ended December 31, 2021 and 2020 was $71,819 and $23,764, respectively.
Issuances to Directors, Executive Officers & Consultants
During the year ended December 31, 2021, the Company issued 7,828 shares of common stock to its directors in lieu of payment of board fees, valued at $25,536.
During the year ended December 31, 2020, the Company issued 5,270 shares of common stock to its directors in lieu of payment of board fees, valued at $28,511.
Employees’ exercise options
During 2021 and 2020, no employee stock options were exercised.
3. Warrants
There were no warrants issued during fiscal 2021.
Warrants Issued for Services:
During the second quarter of 2020, the Company issued a warrant to purchase 15,625 shares of common stock to an investor in payment for a business referral valued at $94,655.
During the third quarter of 2020, the Company issued a warrant to purchase 3,125 shares of common stock to a former employee for a business referral valued at $12,921.
Warrants Issued with Convertible Notes:
See Note O Convertible Notes Payable for warrants issued with convertible notes in connection with the agreements during fiscal 2020.
Valuation Assumptions for Warrants:
The Company records the warrants at their fair value which is determined using the Black-Scholes valuation model on the date of the grant. The fair value of each warrant was estimated with the following assumptions:
| | Year ended December 31, | |
| | 2021 | | | 2020 | |
Weighted average Risk free interest rate | | | - | % | | | 0.33 | % |
Weighted average price | | $ | - | | | $ | 9.25 | |
Weighted average exercise period | | | - | | | | 5 | |
Weighted average Volatility of stock price | | | - | % | | | 110 | % |
The warrant volatility for each issuance is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected exercise period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the years to maturity.
A summary of warrant activity is as follows:
| | Total Warrants | | | Weighted average exercise price | | | Weighted average remaining life (in years) | | | Aggregate intrinsic value | |
| | | | | | | | | | | | | | | | |
Outstanding, as of December 31, 2019 | | | 423,559 | | | | 12.80 | | | | 3.94 | | | | — | |
Granted – public offering | | | 4,264,313 | | | | 5.20 | | | | | | | | | |
Granted – prefunded warrants from the public offering | | | 512,500 | | | | 0.08 | | | | | | | | | |
Granted – other | | | 434,375 | | | | 9.25 | | | | | | | | | |
Increase due to trigger of anti-dilution provision feature | | | 27,244 | | | | 5.20 | | | | | | | | | |
Exercised – public offering | | | (284,538 | ) | | | 5.20 | | | | | | | | | |
Exercised – prefunded warranted from the public offering | | | (512,500 | ) | | | 0.08 | | | | | | | | | |
Exercised – other | | | (121,500 | ) | | | 12.00 | | | | | | | | | |
Forfeited | | | — | | | | — | | | | | | | | | |
Expired | | | (54,066 | ) | | | 6.86 | | | | | | | | | |
Outstanding, as of December 31, 2020 | | | 4,689,387 | | | | 6.04 | | | | 4.48 | | | | — | |
Granted | | | — | | | | — | | | | | | | | | |
Exercised | | | — | | | | — | | | | | | | | | |
Forfeited | | | — | | | | — | | | | | | | | | |
Expired | | | — | | | | — | | | | | | | | | |
Outstanding, as of December 31, 2021 | | | 4,689,387 | | | | 6.04 | | | | 3.48 | | | | — | |
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $2.21, $3.52 and $4.00 as of December 31, 2021, 2020 and 2019, respectively, which would have been received by the warrant holders had all warrant holders exercised their options as of that date. There were no in-the-money warrants exercisable as of December 31, 2021, 2020 and 2019.
4. Securities Purchase Agreement dated September 23, 2015
On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock in connection with the issuance of a promissory note. The warrants were immediately exercisable at an initial exercise price of $28.80 per share and had a term of five years. The 2015 Warrants expired in September 2020.
The 2015 Warrants had a “full ratchet” anti-dilution adjustment provision. The anti-dilution adjustment provision was triggered in the first quarter of 2020 from the February 2020 Note and amendments to the Original Note. As a result of the forgoing transactions, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants increased to 48,078, the exercise price was reduced to $5.20 per share, and the Company recorded a non-cash deemed dividend in amount of $41,688.
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NOTE S—STOCK OPTIONS
2004 Stock Option Plan
On October 12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the “2004 Plan”). The 2004 Plan was not presented to stockholders for approval and thus incentive stock options were not available under this plan. Under the terms of this plan, 20,834 shares of common stock were reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85% of fair market value. The term of stock options granted may not exceed ten years. Options issued under the 2004 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 2004 Plan expired in October 2014.
2015 Stock Option Plan
On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan initially reserved 187,500 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. In 2019, the stockholders approved an amendment to the 2015 Plan which increases the number of shares of common stock authorized for issuance under the 2015 Plan from 83,334 shares to 187,500 shares and also effected certain changes in light of the Tax Cuts and Jobs Act of 2017 and its impact on Section 162(m) of the United States Internal Revenue Code of 1986, as amended. In 2021, the stockholders approved an amendment to the 2015 to increase the shares of common stock authorized for issuance under the 2015 Plan from 187,500 shares to 789,000 shares together with other technical changes. In 2021, the stockholders approved an amendment to the 2015 to increase the shares of common stock authorized for issuance under the 2015 Plan from 187,500 shares to 789,000 shares together with other technical changes. The term of stock options granted under the 2015 Plan, may not exceed ten years, exercise prices may not be below 100-110% of fair market value, and vesting occurs over time periods set forth in written agreements with the recipients. In the event of a change in control, certain stock awards issued under the 2015 Plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025.
Non-Plan Stock Options
Periodically, the Company has granted options outside of the 2004 and 2015 Plans to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.
Stock Option Activity
Information summarizing option activity is as follows:
| | Number of Options | | | Weighted average | | | Weighted average remaining | | | Aggregate | |
| | 2004 Plan | | | 2015 Plan | | | Non Plan | | | Total | | | exercise price | | | life (in years) | | | intrinsic value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding, as of December 31, 2019 | | | 3,906 | | | | 70,991 | | | | 144,070 | | | | 218,967 | | | $ | 20.08 | | | | 5.00 | | | $ | 0 | |
Granted | | | — | | | | 28,440 | | | | — | | | | 28,440 | | | | 5.04 | | | | | | | | | |
Exercised | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | |
Forfeited | | | — | | | | (4,545 | ) | | | — | | | | (4,545 | ) | | | 17.34 | | | | | | | | | |
Expired | | | (3,906 | ) | | | (703 | ) | | | (10,979 | ) | | | (15,588 | ) | | | 29.17 | | | | | | | | | |
Outstanding, as of December 31, 2020 | | | — | | | | 94,183 | | | | 133,091 | | | | 227,274 | | | $ | 17.61 | | | | 3.87 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | — | | | | — | | | | — | | | | — | | | ‐— | | | | | | | | | |
Exercised | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | |
Forfeited | | | — | | | | (3,291 | ) | | | — | | | | (3,291 | ) | | | 3.87 | | | | | | | | | |
Expired | | | — | | | | (84 | ) | | | (11,438 | ) | | | (11,522 | ) | | | 39.13 | | | | | | | | | |
Outstanding, as of December 31, 2021 | | | — | | | | 90,808 | | | | 121,653 | | | | 212,461 | | | $ | 16.65 | | | | 3.03 | | | $ | 0 | |
Vested or expected to vest at December 31, 2021 | | | | | | | | | | | | | | | 206,283 | | | $ | 16.98 | | | | 2.95 | | | $ | 0 | |
Exercisable at December 31, 2021 | | | | | | | | | | | | | | | 186,538 | | | $ | 18.04 | | | | 2.73 | | | $ | 0 | |
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The options outstanding and exercisable at December 31, 2021 were in the following exercise price ranges:
| | | | | | Options Outstanding | | | Options Exercisable | |
Range of exercise prices | | | Number of shares | | | Weighted average exercise price | | | Weighted average remaining life (in years) | | | Number exercisable | | | Weighted average exercise price | |
$ | 4.08 | - | 5.20 | | | | 24,940 | | | $ | 5.19 | | | | 5.64 | | | | 8,402 | | | $ | 5.17 | |
$ | 5.21 | - | 15.68 | | | | 49,669 | | | | 12.17 | | | | 3.79 | | | | 40,284 | | | | 12.85 | |
$ | 15.69 | - | 39.36 | | | | 137,852 | | | | 20.34 | | | | 2.27 | | | | 137,852 | | | | 20.34 | |
$ | 4.08 | - | 39.36 | | | | 212,461 | | | | | | | | | | | | 186,538 | | | | | |
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $2.21, $3.52 and $4.00 as of December 31, 2021, 2020 and 2019, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. There were no in-the-money options exercisable as of December 31, 2021, 2020 and 2019.
The weighted average fair value of options granted during the year ended December 31, 2020 was $3.16 per share. The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was $0 as no options were exercised in either year. The total fair value of shares vested during the years ended December 31, 2021 and 2020 was $252,874 and $899,750, respectively.
As of December 31, 2021, future forfeiture adjusted compensation cost related to nonvested stock options is $75,035 and will be recognized over an estimated weighted average period of 0.86 years.
NOTE T—INCOME TAXES
There was no provision for federal or state taxes as at December 31, 2021 and 2020.
The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at December 31:
| | 2021 | | | 2020 | |
| | | | | | | | |
Accrued compensation | | $ | 135,000 | | | $ | 81,000 | |
Accounts receivable allowance | | | 75,000 | | | | 474,000 | |
Stock-based compensation | | | 1,149,000 | | | | 1,073,000 | |
Basis differences in fixed assets | | | (10,000 | ) | | | (14,000 | ) |
Basis differences in intangible assets | | | 75,000 | | | | 65,000 | |
Net operating loss and credit carryforwards | | | 14,467,000 | | | | 13,337,000 | |
Valuation allowances | | | (15,891,000 | ) | | | (15,016,000 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.
As of December 31, 2021, the Company has federal net operating loss carryforwards of approximately $61 million. Approximately $46 million are subject to expiration between 2021 and 2037, and $15 million net operating loss carryforwards have no expiration date. These net operating loss carryforwards are subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company.
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A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is presented below.
| | 2021 | | | 2020 | |
| | | | | | | | |
Federal statutory income tax rate | | | 21 | % | | | 21 | % |
Permanent differences | | | - | | | | (9 | ) |
Effect of net operating loss | | | (21 | ) | | | (12 | ) |
| | | | | | | | |
Effective tax rate | | | — | % | | | — | % |
The Company has not been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from 2018 through 2021 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense incurred during the years ended December 31, 2021 and 2020.
NOTE U—PROFIT SHARING PLAN
The Company has established a savings plan under section 401(k) of the Internal Revenue Code. All employees of the Company, after completing one day of service, are eligible to enroll in the 401(k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no contributions during the years ended December 31, 2021 and 2020.
NOTE V—EARNINGS PER SHARE (EPS)
The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of preferred stock.
The reconciliation of the numerator of the basic and diluted EPS calculations for the following fiscal years ended December 31:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Basic Numerator: |
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(5,065,781 |
) |
|
$ |
(9,673,987 |
) |
Deemed dividend from trigger of anti-dilution provision feature |
|
|
- |
|
|
|
(112,686 |
) |
Net loss available to common stockholders (basic and diluted EPS) |
|
$ |
(5,065,781 |
) |
|
$ |
(9,786,673 |
) |
The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to net losses.
|
|
Years ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
- |
|
|
|
1,002 |
|
Restricted stock |
|
|
- |
|
|
|
3,098 |
|
Potentially dilutive securities |
|
|
- |
|
|
|
4,100 |
|
Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:
|
|
Years ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
212,461 |
|
|
|
223,899 |
|
Warrants |
|
|
4,689,387 |
|
|
|
4,689,387 |
|
Total |
|
|
4,901,848 |
|
|
|
4,913,286 |
|
NOTE W—SUBSEQUENT EVENTS
On March 8, 2022, the Company completed the acquisition of 100% of the issued and outstanding capital stock of Swivel Secure Europe, SA pursuant to the terms of a stock purchase agreement. The aggregate purchase price consisted of a base purchase price of $1.75 million, subject to closing adjustments based on the closing date working capital, indebtedness and unpaid transaction expenses, and an earn-out of up to $500,000. At the closing, the Company made a cash payment of $1.27 million and issued 269,060 shares of common stock of which 89,687 shares were held back by the Company to secure certain indemnification obligations under the stock purchase agreement.
On March 10, 2022, the Company issued 6,360 shares of common stock to its directors in payment of board fees. Additionally, the Company issued an aggregate of 848 shares of common stock to its directors in payment of board committee fees.
On March 11, 2022, the Company issued 932 shares of common stock to its directors in payment of board committee fees. The Company issued an aggregate of 274,250 shares of restricted common stock to employees and the board of directors which vest in equal annual installments over a three-year period from the date of grant.
The Company has reviewed subsequent events through the date of this filing.
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