Intellicheck, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS INTELLICHECK, INC. CONDENSED BALANCE SHEETS (in thousands except share amounts) March 31, 2023 December 31, 2022 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,355 $ 5,196 Short-term investments 4,881 4,880 Accounts receivable, net of allowance of $ 30 and $ 20 at March 31, 2023 and December 31, 2022, respectively 3,527 2,637 Other current assets 753 608 Total current assets 14,516 13,321 PROPERTY AND EQUIPMENT, NET 723 749 GOODWILL 8,102 8,102 INTANGIBLE ASSETS, NET 246 273 OTHER ASSETS 8 8 Total assets $ 23,595 $ 22,453 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 849 $ 358 Accrued expenses 2,475 2,319 Income taxes payable 97 90 Equity awards liability 95 54 Liability for shares withheld 221 221 Deferred revenue, current portion 2,027 906 Total current liabilities 5,764 3,948 OTHER LIABILITIES: Deferred revenue, long-term portion 1 1 Total liabilities 5,765 3,949 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS’ EQUITY: Preferred stock - $ 0.01 par value; 30,000 shares authorized; Series A Convertible preferred stock, zero shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively — — Common stock - $ .001 par value; 40,000,000 shares authorized; 19,215,863 and 18,957,366 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively 19 19 Additional paid-in capital 149,875 149,233 Accumulated deficit ( 132,064 ) ( 130,748 ) Total stockholders’ equity 17,830 18,504 Total liabilities and stockholders’ equity $ 23,595 $ 22,453 See accompanying notes to unaudited condensed financial statements. 3 Index INTELLICHECK, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands except shares and per share amounts) (Unaudited) Three months ended March 31, 2023 2022 REVENUES $ 4,254 $ 3,395 COST OF REVENUES ( 332 ) ( 316 ) Gross profit 3,922 3,079 OPERATING EXPENSES Selling, general and administrative 3,924 2,943 Research and development 1,308 1,604 Total operating expenses 5,232 4,547 Loss from operations ( 1,310 ) ( 1,468 ) OTHER INCOME Interest and other income 1 — Total other income 1 — Net loss before provision for income taxes ( 1,309 ) ( 1,468 ) Provision for income taxes 7 — Net loss $ ( 1,316 ) $ ( 1,468 ) PER SHARE INFORMATION Loss per common share - Basic/Diluted $ ( 0.07 ) $ ( 0.08 ) Weighted average common shares used in computing per share amounts - Basic/Diluted 19,088,752 18,674,493 See accompanying notes to unaudited condensed financial statements. 4 Index INTELLICHECK, INC. CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands except number of shares) (Unaudited) Three months ended March 31, 2023 Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount BALANCE, December 31, 2022 18,957,366 $ 19 $ 149,233 $ ( 130,748 ) $ 18,504 Stock-based compensation — — 642 — 642 Issuance of common stock for vested restricted stock units and earned performance stock units 258,497 — — — — Net loss — — — ( 1,316 ) ( 1,316 ) BALANCE, March 31, 2023 19,215,863 $ 19 $ 149,875 $ ( 132,064 ) $ 17,830 Three months ended March 31, 2022 Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount BALANCE, December 31, 2021 18,660,369 $ 19 $ 146,455 $ ( 126,897 ) $ 19,577 Stock-based compensation – – 829 – 829 Issuance of shares for vested restricted stock grants 14,611 – – – – Net loss – – – ( 1,468 ) ( 1,468 ) BALANCE, March 31, 2022 18,674,980 $ 19 $ 147,284 $ ( 128,365 ) $ 18,938 See accompanying notes to unaudited condensed financial statements 5 In d e x INTELLICHECK, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three months ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 1,316 ) $ ( 1,468 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization 70 69 Stock-based compensation 682 592 Bad debt expense 10 — Change in accrued interest and accretion of discount on short-term investments ( 1 ) — Changes in assets and liabilities: (Increase) in accounts receivable ( 900 ) ( 156 ) (Increase) in other current assets and long term assets ( 145 ) ( 49 ) Increase (decrease) in accounts payable and accrued expenses 712 ( 1,149 ) Increase (decrease) in deferred revenue 1,121 ( 236 ) Net cash provided by (used in) provided by operating activities 233 ( 2,397 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 17 ) ( 131 ) Net cash (used in) investing activities ( 17 ) ( 131 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of insurance financing arrangement 49 — Repayment of insurance financing arrangement ( 106 ) — Net cash (used in) by financing activities ( 57 ) — Net increase (decrease) in cash 159 ( 2,528 ) CASH, beginning of period 5,196 13,651 CASH, end of period $ 5,355 $ 11,123 Supplemental disclosures of cash flow information: Cash paid for interest $ 1 $ — See accompanying notes to unaudited condensed financial statements. 6 In d e x INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS (All dollar amounts are rounded to thousands, except share data) (Unaudited) 1. NATURE OF BUSINESS Business Intellicheck, Inc. (the “Company” or “Intellicheck”) is a prominent technology company that is engaged in developing, integrating and marketing identity verification solutions to address challenges that include commercial retail and banking fraud prevention. Intellicheck’s products include solutions for preventing identity fraud across any industry delivered via smartphone, tablet, POS integration or other electronic devices. Intellicheck continues to develop and release innovative products based upon its rich patent portfolio consisting of eighteen (18) U.S. and one Canadian patents, as well as three U.S. patents pending. Liquidity For the three months ended March 31, 2023, the Company incurred a net loss of $( 1,316 ) and generated cash from operations of $ 233 . As of March 31, 2023, the Company had cash and cash equivalents of $ 5,355 , short-term investments of $ 4,881 , working capital (defined as current assets minus current liabilities) of $ 8,752 and an accumulated deficit of $( 132,064 ). Based on the Company’s business plan and cash resources, Intellicheck expects its existing and future resources and revenues generated from operations to satisfy its working capital requirements for at least the next 12 months from the date of filing. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s financial position at March 31, 2023 and the results of operations, stockholders’ equity and cash flows for the three months ended March 31, 2023 and 2022. All such adjustments are of a normal and recurring nature. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements. Results of operations for the three-month period ended March 31, 2023, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2023. The balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. References in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”). For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to measure credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all 7 In d e x future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company concluded that the adoption of this standard did not have a material impact on its financial statements because of the short-term nature of it's outstanding accounts receivable and there have been no significant forward-looking economic conditions identified by the company that would impact its short-term investments. Use of Estimates The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, allowance for doubtful accounts, revenue recognition (including breakage revenue) and the fair value of stock options under the Company’s stock-based compensation plan. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates. ASC 718 establishes fair value as the measurement objective in accounting for equity payment arrangements and requires all companies to apply a fair-value based measurement method in accounting for all equity payment transactions with employees. Research and Development Research and development expenses are expensed as incurred and consist primarily of employee-related expenses (such as salaries, taxes, benefits and stock-based compensation), allocated overhead costs and outside services costs related to the development and improvement of the Company's SaaS applications. Allowance for Doubtful Accounts Effective January 1, 2023 Intellicheck is required to apply the new standard ASU 2016-13, codified as ASC 326. This impacts how the allowance for doubtful accounts is being calculated. Prior to ASC-326, Intellicheck would not recognize a bad debt expense until the loss from customer non-payment was probable of occurring. Under the new model, Intellicheck’s allowance for doubtful accounts reflects the Company’s estimate of all expected future losses from its current customer balances. Under the new guidance we have applied a loss rate method which takes historical data as the basis for calculating the allowance amount, along with accounting for other factors like current and forecasted market conditions, and potential future impacts to the industry. In estimating whether accounts receivable can be collected, the Company performs evaluations of customers and continuously monitors collections and payments and estimates an allowance for credit losses based on collections experience to date and any specific collection issues that have been identified. The allowance for credit losses is recorded in the period in which revenue is recorded or when collection risk is identified. Cash and Cash Equivalents We classify as cash equivalents time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase. Our cash and cash equivalents consist primarily of cash on deposits with banks and is maintained with major financial institutions in the United States. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000, however amounts may exceed FDIC insured limits. Short-term investments Short-term investments include investments in U.S. treasury notes. Debt investments with original maturities at the date of purchase greater than approximately three months but less than a year are classified as short-term investments, as they represent the investment of cash available for current operations. All short-term investments that the company holds are classified as "held-to-maturity". See Note 3 for more detail and a breakdown of the Company's short-term investments. Property and Equipment Property and equipment are recorded at cost and are depreciated over their estimated useful lives ranging from three to seven years using the straight-line method. See Note 4. 8 In d e x Goodwill Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Pursuant to ASC 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter on December 31st, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform step one of the quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. The Company performed its annual impairment test of goodwill in the fourth quarter for the year ended December 31, 2022. For the three months ended March 31, 2023 and 2022, the Company determined no triggering events existed and as such no impairment charge was required. Intangible Assets Intangible assets include patents, copyrights, and developed technology. The Company amortizes these assets on a straight-line basis over their estimated useful lives, as it represents the pattern of economic benefits consumed. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC 360. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. There were no impairment charges recognized during the three months ended March 31, 2023 and 2022. Advertising Costs Advertising costs, which are charged to expense as incurred, were $ 199 and $ 149 for the three months ended March 31, 2023 and 2022, respectively. These costs are recorded as a component of selling, general and administrative expenses on the Statements of Operations. Retirement Plan The Company has a retirement savings 401(k) plan ("Retirement Plan"). The Retirement Plan permits eligible employees to make voluntary contributions to a trust, up to a maximum of 35 % of compensation, subject to certain limitations. The Company has elected to contribute a matching contribution equal to 50 % of the first 6 % of an eligible employee’s deferral election. The Company’s matching contributions were $ 27 and $ 29 for the three months ended March 31, 2023 and 2022, respectively. These costs were recorded as a component of selling, general and administrative expenses on the Statements of Operations. Shipping Costs The Company’s shipping and handling costs related to sales are included in cost of revenues for all periods presented. All other shipping and handling costs are included as a component of selling, general and administrative expenses on the Statements of Operations. Income Taxes The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as of March 31, 2023 and December 31, 2022, as it is more likely than not these assets may not be fully realized due to the uncertainty of the realizability of those assets. 9 In d e x Fair Value of Financial Instruments The Company adheres to the provisions of ASC 820, “Fair Value Measurement” which requires the Company to calculate the fair value of financial instruments and include this additional information in the notes to financial statements when the fair value of those financial instruments is different than the book value. The Company’s financial instruments include cash and cash equivalents, short-term investments, accounts receivable, other current assets, accounts payable and accrued expenses. At March 31, 2023 and December 31, 2022, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature. Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows: • Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities. The Company's Level 1 assets consisted primarily of cash and cash equivalents as well as short-term investments totaling $ 10.2 and $ 10.1 million as of March 31, 2023 and December 31, 2022 respectively. • Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies. The Company had $ 95 and $ 54 of Level 2 liabilities as of March 31, 2023 and December 31, 2022 respectively, for the liability-classified stock options. The fair value of these awards were determined by utilizing a Black-Scholes option pricing model. • Level 3—Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when the fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. The Company had no Level 3 assets or liabilities as of March 31, 2023 and December 31, 2022. Revenue Recognition and Deferred Revenue General Most license fees and services revenue are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with the Company’s software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access the Company’s software. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company measures revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of the Company’s services as they are performed. Substantially all customer contracts provide that the Company is compensated for services performed to date. During 2021, the Company adopted an additional revenue model where customers purchase a predetermined number of transactions for the term of the contract. Revenue for these transactions is recognized on a per transaction basis. The Company estimates the amount of unused transactions at the end of each contract period and recognizes a portion of that revenue as breakage revenue each reporting period. If the Company expects the customer to use all transactions in the specified service period, the Company will recognize the transaction price as revenue in the specified service period as the promised units of service are transferred to the customer. Alternatively, if the Company expects that the customer cannot or will not use all transactions in the specified service period (referred to as “breakage”), the Company will recognize the estimated breakage amount as revenue ratably over the service period in proportion to the revenue that the Company will recognize for actual transactions used by the customer in the service period. Actual results could differ from estimates and as such differences may be material to the financial statements. 10 In d e x Invoicing is based on schedules established in customer contracts. Payment terms are generally established from 30 to 60 days from the invoice date. Product returns are estimated and recorded as a reduction to revenue, however, such amounts have been immaterial. Nature of goods and services The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each: Software as a Service (SaaS) Software as a service (SaaS) for hosted subscription services allows customers to access a set of data for a predetermined period of time. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time, under the fixed pricing model, based on the usage of the hosted subscription services, which can vary from month to month. Under the per-scan revenue model, the customer requires access to our hosted subscription service but revenue is recognized each time the customer scans an identity document. Equipment Revenue Revenue from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the equipment is received. When sales of equipment occur, we recognize shipping and handling costs with the sales of equipment that are recognized as revenue. Other Revenue Other Revenues, which historically have not been material, consist primarily of revenues from other subscription and support services, and extended warranties. The Company’s revenues from other subscription and support services includes jurisdictional updates to certain commercial customers and support services particularly to its Defense ID® customers. These subscriptions require continuing service or post contractual customer support and performance. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs. Accordingly, the revenue should be recognized over time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of locations in a given month multiplied by a fee per location. Extended warranty revenues are generated when a warranty is provided to the customer separately of other performance obligations when the equipment is sold. As the customer obtains access at a point in time and continues to have access for the remainder of the warranty term, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs. The related revenue is recognized ratably over the specified term of the warranty period. The extended warranty is separate to the Company’s standard warranty of usually one year that it receives from its vendor. 11 In d e x Disaggregation of revenue In the following tables, revenue is disaggregated by product and service and the timing of revenue recognition. For the Three Months Ended March 31, 2023 2022 Products and services Software as a Service (SaaS) $ 4,228 $ 3,353 Equipment 15 36 Other 11 6 $ 4,254 $ 3,395 Timing of revenue recognition Products transferred at a point in time $ 26 $ 40 Services transferred over time 4,228 3,355 $ 4,254 $ 3,395 Contract balances The current portion of deferred revenue at March 31, 2023, December 31, 2022 and December 31, 2021 was $ 2,027 , $ 906 and $ 1,266 , respectively, and primarily consists of revenue that is recognized over time for software license contracts and hosted subscription services. The changes in these balances are related to purchases of a predetermined number of transactions, partially offset by the satisfaction or partial satisfaction of these contracts. Of the December 31, 2022 balance, $ 342 was recognized as revenue in the three months ended March 31, 2023. The noncurrent deferred revenue balances were $ 1 , $ 1 and $ 8 as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively. Accounts Receivable Accounts Receivable, net of allowance for doubtful accounts, at March 31, 2023, December 31, 2022 and January 1, 2020 was $ 3,527 , $ 2,637 , and $ 2,192 , respectively. The allowance for doubtful accounts at March 31, 2023, December 31, 2022 and December 31, 2021 was $ 30 , $ 20 and $ 3 , respectively. Transaction price allocated to the remaining performance obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period: Remainder 2023 2024 2025 Total Software as a Service (SaaS) $ 2,025 $ — $ — $ 2,025 Other 2 1 — 3 $ 2,027 $ 1 $ — $ 2,028 All consideration from contracts with customers is included in the amounts presented above. 12 In d e x Business Concentrations and Credit Risk Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company maintains cash with two financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. The Company’s sales are principally made to large retail customers, financial institutions concentrated in the United States of America and to U.S. government entities. The Company performs ongoing credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends, and other information. During the three-month period ended March 31, 2023, the Company made sales to three customers that accounted for approximately 39 % of total revenues, 16 %, 13 % and 10 %, respectively. The revenue was primarily associated with commercial identity sales customers. These three customers represented 54 % of total accounts receivable at March 31, 2023, 28 %, 16 % and 10 %, respectively. During the three-month period ended March 31, 2022, the Company made sales to three customers that accounted for approximately 53 % of total revenues, 23 %, 19 % and 11 %, respectively. These three customers, in addition to one other customer, represented 63 % of total accounts receivable at March 31, 2022, 33 %, 10 %, 1 % and 19 %, respectively. That revenue was also associated with commercial identity sales customers. Net Loss Per Share Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive effect of outstanding options, warrants and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net loss per share excludes all anti-dilutive shares. In periods of a net loss, all common stock equivalents are considered anti-dilutive. Three Months Ended March 31, 2023 2022 Numerator: Net Loss $ ( 1,316 ) $ ( 1,468 ) Denominator: Weighted average common shares – Basic/Diluted 19,088,752 18,674,493 Net Loss per share – Basic/Diluted $ ( 0.07 ) $ ( 0.08 ) The following table summarizes the common stock equivalents excluded from loss per diluted share because their effect would be anti-dilutive: Three Months Ended March 31, 2023 2022 Stock options 1,500,284 496,424 Restricted stock 156,347 424,942 Performance stock units — 228,498 1,656,631 1,149,864 13 In d e x 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Short-term investments include investments in U.S. treasury notes. Short-term investments with original maturities of approximately three months or less from the date of purchase are classified within cash and cash equivalents. Debt investments with original maturities at the date of purchase greater than approximately three months but less than one year are classified as short-term investments, as they represent the investment of cash available for current operations. All short-term investments that the company holds are classified as "held-to-maturity". The Company has accounted for and disclosed the purchase of its short-term investments in accordance with ASC 320 ("Investments - Debt Securities"). The following table summarizes the fair value of cash and cash equivalents, and short-term investments as well as any gross unrealized holding gains and losses as of March 31, 2023. Due to the nature of these assets and the short-term nature of the U.S. treasury notes being held to maturity, both these cash and cash equivalents and short-term investments fall under the Level 1 fair value hierarchy as referenced in Note 2. As of March 31, 2023 Amortized cost Gross unrealized holding gains Gross unrealized holding losses Estimated fair value Cash and cash equivalents $ 5,355 $ — $ — $ 5,355 U.S. treasury notes (1) 4,881 45 ( 2 ) 4,924 Total cash, cash equivalents and short-term investments $ 10,236 $ 45 $ ( 2 ) $ 10,279 (1) These U.S. treasury notes are classified as "held-to-maturity" as they were purchased in December 2022 and mature in July 2023. Since these securities are intended to be held until maturity and mature in less than a year from its purchase date, any unrealized gains or losses are not realized until its maturity date and the amortized cost of these securities can be found on this Form 10-Q's balance sheet under Current Assets - "Short-term investments". Any coupon payments from these short-term investments fall under "Interest and other (expense) income" on the Company's Statement of Operations. The Company did no t hold any securities that were in an unrealized loss position for more than 12 months as of March 31, 2023 and 2022. There were no material realized gains or losses on these short-term investments during the quarters ended March 31, 2023 and March 31, 2022. 4. PROPERTY AND EQUIPMENT Property and equipment is summarized as follows: March 31, 2023 December 31, 2022 Computer equipment and software $ 1,814 $ 1,796 Furniture and fixtures 139 139 Office equipment 614 614 2,567 2,549 Less – Accumulated depreciation ( 1,844 ) ( 1,800 ) $ 723 $ 749 Depreciation expense for the three months ended March 31, 2023 and 2022 amounted to $ 43 and $ 42 respectively. 14 In d e x 5. INTANGIBLE ASSETS The changes in the carrying amount of intangible assets for the three months ended March 31, 2023 were as follows: Net balance at December 31, 2022 $ 273 Deduction: Amortization expense ( 27 ) Net balance at March 31, 2023 $ 246 The following tables set forth the components of intangible assets as of March 31, 2023 and December 31, 2022: As of March 31, 2023 Estimated Useful Life Adjusted Carrying Amount Accumulated Amortization Net Patents and copyrights 2 - 17 years $ 375 $ ( 282 ) $ 93 Developed technology 5 years 400 ( 247 ) 153 $ 775 $ ( 529 ) $ 246 As of December 31, 2022 Estimated Useful Life Adjusted Carrying Amount Accumulated Amortization Net Patents and copyrights 2 - 17 years $ 375 $ ( 275 ) $ 100 Developed technology 5 years 400 ( 227 ) 173 $ 775 $ ( 502 ) $ 273 The following summarizes amortization of intangible assets included in the accompanying statements of operations: Three Months Ended March 31, 2023 2022 Cost of sales $ 24 $ 24 General and administrative 3 3 $ 27 $ 27 6. DEBT Revolving Line of Credit On February 6, 2019, the Company entered into a revolving credit facility with Citi Personal Wealth Management that allows for borrowings up to the lesser of (i) $ 2,000 or (ii) the collateralized balance in the Company’s existing fixed income investment account with Citi Personal Wealth Management subject to certain limitations. The facility bears interest at a rate consistent of Citi Personal Wealth Management’s Base Rate ( 8.00 % and 7.50 % at March 31, 2023 and December 31, 2022, respectively) minus 2 %. Interest is payable monthly and as of March 31, 2023 and December 31, 2022, there were no amounts outstanding and unused availability under this facility was $ 2,000 . The Company is not subject to any financial covenants related to this revolving line of credit. 15 In d e x Insurance Financing Arrangement On June 2022, the Company entered into a financing arrangement related to insurance premiums totaling $ 319 with an interest rate of 4.05 %. The monthly loan payments of $ 32 were to be paid to HUB International New England over a period of 10 months. As of March 31, 2023, the Company had no remaining commitments related to this financing arrangement. On February 2023, the Company entered into a financing arrangement related to insurance premiums totaling $ 49 with an interest rate of 9.47 %. The monthly loan payments of $ 5 are to be paid to IPFS of New York, LLC over a period of 11 months. As of March 31, 2023, the Company had $ 42 in remaining commitments related to this financing arrangement which is included in the "Other current liabilities" line on the balance sheet as of March 31, 2023. The Company is not subject to any financial covenants related to this insurance financing arrangement. 7. ACCRUED EXPENSES Accrued expenses are comprised of the following: March 31, 2023 December 31, 2022 Professional fees $ 38 $ 259 Payroll and related 1,137 1,040 Incentive bonuses 1,181 846 Other 119 174 $ 2,475 $ 2,319 8. INCOME TAXES Our available net operating loss (“NOL”) as of March 31, 2023 was approximately $ 20.3 million, of which $ 10.9 million expires between 2035 and 2037. In accordance with the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), U.S. NOLs arising in a tax year ending after 2017 will not expire. ASC 740 requires evaluation of uncertain tax positions and as of March 31, 2023, the Company has no material uncertain tax positions. The Company’s interim income tax provision consists of U.S. federal and state income taxes based on the estimated annual effective tax rate that the Company expects for the full year together with the tax effect of discrete items. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of March 31, 2023, the Company was in a pre-tax loss position, and is anticipated to remain so throughout the year. The effective tax rate for the three months ended March 31, 2023 is different from the tax benefit that would result from applying the statutory tax rates primarily due to the recognition of valuation allowances. 9. STOCKHOLDERS' EQUITY Stock-based Compensation To retain and attract qualified personnel necessary for the success of the Company, the Company adopted the 2015 Omnibus Incentive Plan (the “Plan”) covering up to 5,236,000 of the Company’s common shares, pursuant to which officers, directors, key employees and consultants to the Company are eligible to receive incentive stock options, nonqualified stock options and restricted stock units. All the equity compensation plans prior to Company’s 2015 Omnibus Incentive Plan have been closed. The Compensation Committee of the Board of Directors administers this Plan and determines the terms and conditions of stock options granted, including the exercise price. This Plan generally provides that all stock options will expire within ten years of the date of grant. Incentive stock options granted under this Plan must be granted at an exercise price that is not less than the fair market value per share at the date of the grant and the exercise price must not be less than 110 % of the fair market value per share at the date of the grant for grants to persons owning more than 10 % of the voting stock of the Company. This Plan also entitles non-employee directors to receive grants of non-qualified stock options as approved by the Board of Directors. 16 In d e x The Company accounts for the issuance of stock-based awards to employees in accordance with ASC Topic 718, which requires that the cost resulting from all stock-based compensation payment transactions be recognized in the financial statements. This pronouncement establishes fair value as the measurement objective in accounting for stock-based compensation payment arrangements and requires all companies to apply a fair value based measurement method in accounting for all stock-based compensation payment transactions with employees. All stock-based compensation is included in operating expenses as follows: Three Months Ended March 31, 2023 2022 Compensation cost recognized: Selling, general & administrative $ 595 $ 427 Research & development 87 165 $ 682 $ 592 Stock Options The Company uses the Black-Scholes option pricing model to value the options on the grant date. The table below presents the weighted average expected life of the stock options in years. The Company uses the simplified method for all restricted stock units and stock options to estimate the expected life of the option and assumes that stock options will be exercised evenly over the period from vesting until the awards expire. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on U.S. Treasury yield curve in effect on the grant date. Options, generally, vest from one year to four years . The compensation expense is recognized over the requisite service period on a straight-line basis, reduced by forfeitures as they occur. Certain option awards are classified as liability awards. The fair value of these awards are determined at each reporting period utilizing a Black-Scholes option pricing model, and the associated compensation expense (credit) for the reporting period is recorded. The Company increased stock-based compensation expense by approximately $ 40 and decreased by approximately $( 237 ) for the three months ended March 31, 2023 and 2022, respectively, as a result of the change in fair value of these awards. On March 29, 2023, Jeffrey Ishmael, Chief Financial Officer (“CFO”) of the Company, entered into an “Option Cancellation Agreement” with the Company for the purpose of surrendering for cancellation a tranche of “Incentive Stock Options” (ISOs). These ISOs were tied directly with Mr. Ishmael’s 2022 Bonus compensation as indicated in Mr. Ishmael’s original employment agreement as referenced in the Company’s Current Report on Form 8-K, filed with the SEC on May 9, 2022. The in-the-money ISOs were surrendered for cancellation in exchange for a new equity incentive grant in the form of restricted stock units (RSUs) that were to immediately vest on the same date as the cancelled options on March 31, 2023. The Company recorded an incremental compensation expense of $ 103 related to the modification of these equity awards for the three months ended March 31, 2023 Stock option activity under the 2015 Plan during the period indicated below is as follows: Number of Shares Subject to Issuance Weighted- average Exercise Price Weighted- average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2022 1,120,244 $ 3.68 3.50 years $ 84 Granted 502,507 3.02 – – Forfeited, cancelled, or expired ( 122,467 ) 2.45 – – Outstanding at March 31, 2023 1,500,284 $ 2.72 2.32 years $ 247 Exercisable at March 31, 2023 353,523 $ 5.69 1.65 years $ 247 17 In d e x The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on March 31, 2023. This amount changes based upon the fair market value of the Company’s stock. Restricted Stock Units The Company issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of common stock of the Company. During the three months ended March 31, 2023, the Company issued RSUs to certain directors as compensation. RSU agreements can vest immediately or with the passage of time. The vesting of all RSUs is contingent on continued board and employment services. The compensation expense incurred by the Company for RSUs is based on the closing market price of the Company’s common stock on the date of grant, is amortized on a straight-line basis over the requisite service period and charged to operating expenses with a corresponding increase to additional paid-in capital, reduced by forfeitures when they occur. Restricted stock unit activity during the period indicate below is as follows: Number of Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2022 214,892 $ 8.43 Granted 126,228 2.49 Forfeited or surrendered ( 15,120 ) 10.46 Vested and settled in shares ( 169,653 ) 3.85 Outstanding at March 31, 2023 156,347 $ 8.40 Performance Stock Units On August 7, 2020, the Company issued 265,942 Performance Stock Units (PSUs) to its officers and certain employees as compensation ("PSU Plan"). 50 % of the PSUs were to vest based on the Company’s market price and 50 % were to vest based on the Company’s Adjusted EBITDA. Both the conditions were to occur over a specified time frame and were contingent on continued employment services. On November 4, 2021, the Company amended its PSU Plan so that 100 % of the PSUs will vest based on the Company’s market price as the sole vesting criteria. As a result of this amendment, the Adjusted EBITDA performance metric is no longer a vesting criteria. The fair value of these awards with a market condition was estimated, at the date of grant, using the Monte Carlo Simulation model with compensation expense being determined on the closing market price of the Company’s common stock on the date of grant and is amortized ratably on a straight-line basis over the requisite service period. With the amendment mentioned above such that the Company's market price is the sole vesting criteria for these awards, compensation expense is charged to operating expenses with a corresponding increase to additional paid-in capital and is not reversed if the vesting criteria is not met. As of March 31, 2023, 50 % of the outstanding PSUs as of December 31, 2022 met the vesting criteria and were considered to be earned and are expected to be settled in shares of common stock upon the Compensation Committee's of the Board of the Directors certification of achievement of the market-based performance 18 In d e x metric. The remaining 50 % of the outstanding PSUs did not meet the vesting criteria and were considered to be forfeited as of March 31, 2023. Number of Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2022 177,688 $ 7.91 Forfeited ( 88,844 ) 7.91 Vested and settled in shares ( 88,844 ) 7.91 Outstanding at March 31, 2023 — $ 7.91 As of March 31, 2023, there was $ 2,573 of total unrecognized compensation costs, related to all unvested stock options, RSUs and PSUs. These costs are expected to be recognized as compensation expense over a weighted-average period of approximately 1.89 years. The Company had 912,410 shares available for future grants under the Company's equity compensation plans at March 31, 2023. 10. COMMITMENTS AND CONTINGENCIES The Company is not aware of any infringement by the Company’s products or technology on the proprietary rights of others. The Company is not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material effect on its business. 19 In d e x