Intellicheck, Inc. 10-Q/A

Item 1. FINANCIAL STATEMENTS INTELLICHECK, INC. BALANCE SHEETS June 30, December 31, 2021 2020 (Unaudited) (As Restated) ASSETS CURRENT ASSETS: Cash $ 11,939,948 $ 13,121,392 Accounts receivable, net of allowance of $ 5,474 and $ 42,974 at June 30, 2021 and December 31, 2020, respectively 3,409,234 2,119,861 Inventory 374,898 - Other current assets 832,219 340,718 Total current assets 16,556,299 15,581,971 PROPERTY AND EQUIPMENT, net 289,449 138,870 GOODWILL 8,101,661 8,101,661 INTANGIBLE ASSETS, net 430,101 482,591 OPERATING LEASE RIGHT-OF-USE ASSET - 31,131 OTHER ASSETS 8,500 4,250 Total assets $ 25,386,010 $ 24,340,474 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 582,796 $ 46,171 Accrued expenses 2,145,812 1,638,798 Operating lease liability, current portion - 32,620 Equity awards liability 709,355 - Liability for shares withheld 1,244,458 - Deferred revenue, current portion 539,328 402,782 Total current liabilities 5,221,749 2,120,371 NONCURRENT LIABILITIES: Deferred revenue, long-term portion 6,598 8,662 Total liabilities 5,228,347 2,129,033 COMMITMENTS AND CONTINGENCIES (Note 10) - STOCKHOLDERS’ EQUITY: Common stock - $ .001 par value; 40,000,000 shares authorized; 18,634,918 and 18,410,458 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively 18,636 18,410 Additional paid-in capital 145,018,746 141,612,140 Accumulated deficit ( 124,879,719 ) ( 119,419,109 ) Total stockholders’ equity 20,157,663 22,211,441 Total liabilities and stockholders’ equity $ 25,386,010 $ 24,340,474 See accompanying notes to financial statements. 4 INTELLICHECK, INC. STATEMENTS OF OPERATIONS (Unaudited) Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 (As Restated) (As Restated) REVENUES $ 4,797,141 $ 1,842,195 $ 7,659,682 $ 4,957,467 COST OF REVENUES ( 1,468,516 ) ( 209,945 ) ( 1,689,244 ) ( 902,829 ) Gross profit 3,328,625 1,632,250 5,970,438 4,054,638 OPERATING EXPENSES Selling, general and administrative 2,812,773 1,415,336 8,757,935 2,869,891 Research and development 1,352,624 986,312 2,688,865 1,929,611 Total operating expenses 4,165,397 2,401,648 11,446,800 4,799,502 Loss from operations ( 836,772 ) ( 769,398 ) ( 5,476,362 ) ( 744,864 ) OTHER INCOME Gain on forgiveness of unsecured promissory note - - 10,000 - Interest and other income 610 9,125 5,752 11,193 Total other income 610 9,125 15,752 11,193 Net loss $ ( 836,162 ) $ ( 760,273 ) $ ( 5,460,610 ) $ ( 733,671 ) PER SHARE INFORMATION Loss per common share - Basic/Diluted $ ( 0.04 ) $ ( 0.05 ) $ ( 0.29 ) $ ( 0.05 ) Weighted average common shares used in computing per share amounts - Basic/Diluted 18,615,775 16,377,539 18,548,342 16,265,544 See accompanying notes to financial statements. 5 INTELLICHECK, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Three months ended June 30, 2021 (As Restated) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity BALANCE, March 31, 2021 18,593,757 $ 18,594 $ 144,301,535 $ ( 124,043,557 ) $ 20,276,572 Equity compensation - - 650,983 - 650,983 Issuance of common stock, net of costs Issuance of common stock, net of costs, shares Exercise of stock options 25,000 25 46,445 - 46,470 Exercise of warrants 9,000 9 19,791 - 19,800 Issuance of shares for restricted stock grants 7,161 8 ( 8 ) - - Settlement of executive bonuses with issuance of restricted stock units Settlement of executive bonuses with issuance of restricted stock units, shares Shares forfeited in exchange for withholding taxes Shares forfeited in exchange for withholding taxes, shares Net loss - - - ( 836,162 ) ( 836,162 ) BALANCE, June 30, 2021 18,634,918 $ 18,636 $ 145,018,746 $ ( 124,879,719 ) $ 20,157,663 Three months ended June 30, 2020 Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity BALANCE, March 31, 2020 16,209,627 $ 16,210 $ 128,989,744 $ ( 116,908,510 ) $ 12,097,444 Equity compensation - - 103,710 - 103,710 Issuance of common stock, net of costs 1,769,230 1,769 10,567,698 - 10,569,467 Exercise of stock options, net of cashless exercise of 8,958 shares 31,650 32 13,939 - 13,971 Shares withheld for withholding taxes ( 2,012 ) ( 2 ) ( 13,335 ) - ( 13,337 ) Issuance of shares for restricted stock grants 10,325 10 ( 10 ) - - Settlement of executive bonuses with issuance of restricted stock units 9,462 9 53,451 - 53,460 Net loss - - - ( 760,273 ) ( 760,273 ) BALANCE, June 30, 2020 18,028,282 $ 18,028 $ 139,715,197 $ ( 117,668,783 ) $ 22,064,442 See accompanying notes to financial statements. 6 INTELLICHECK, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Six months ended June 30, 2021 (As Restated) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity BALANCE, December 31, 2020 18,410,458 $ 18,410 141,612,140 $ ( 119,419,109 ) $ 22,211,441 Equity compensation - - 1,631,616 - 1,631,616 Exercise of stock options, net of cashless exercise of 58,122 shares and 92,634 shares withheld 206,545 207 1,755,209 - 1,755,416 Exercise of warrants 9,000 9 19,791 - 19,800 Issuance of shares for restricted stock grants 8,915 10 ( 10 ) - - Net loss - - - ( 5,460,610 ) ( 5,460,610 ) BALANCE, June 30, 2021 18,634,918 $ 18,636 145,018,746 $ ( 124,879,719 ) $ 20,157,663 Six months ended June 30, 2020 Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity BALANCE, December 31, 2019 16,041,650 $ 16,042 128,668,583 $ ( 116,935,112 ) $ 11,749,513 Equity compensation - - 189,752 - 189,752 Issuance of common stock, net of costs 1,769,230 1,769 10,567,698 - 10,569,467 Exercise of stock options, net of cashless exercise of 11,409 shares 146,957 147 139,111 - 139,258 Exercise of stock options, net of cashless exercise of shares 146,957 147 139,111 - 139,258 Exercise of warrants 50,000 50 109,950 - 110,000 Issuance of shares for restricted stock grants 12,995 13 ( 13 ) - - Settlement of executive bonuses with issuance of restricted stock units 9,462 9 53,451 - 53,460 Shares forfeited in exchange for withholding taxes ( 2,012 ) ( 2 ) ( 13,335 ) - ( 13,337 ) Net loss - - - ( 733,671 ) ( 733,671 ) BALANCE, June 30, 2020 18,028,282 $ 18,028 139,715,197 $ ( 117,668,783 ) $ 22,064,442 See accompanying notes to financial statements. 7 INTELLICHECK, INC. STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, 2021 2020 (As Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 5,460,610 ) $ ( 733,671 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 83,989 80,756 Equity compensation 5,294,375 189,752 Change in provision for doubtful accounts ( 37,500 ) - Forgiveness of unsecured promissory note ( 10,000 ) - Changes in assets and liabilities: (Increase) decrease in accounts receivable ( 1,251,873 ) 230,285 (Increase) in inventory ( 374,898 ) - (Increase) in other current assets ( 491,501 ) ( 159,797 ) (Increase) decrease in other assets ( 4,250 ) 7,778 Increase in accounts payable and accrued expenses 1,042,150 170,524 Increase (decrease) in deferred revenue 134,482 ( 47,940 ) Net cash used in operating activities ( 1,075,636 ) ( 262,313 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of software license - ( 100,000 ) Capital expenditures ( 182,078 ) ( 32,114 ) Collection of note receivable - 21,699 Net cash used in investing activities ( 182,078 ) ( 110,415 ) CASH FLOWS FROM FINANCING ACTIVITIES: Return of repayment on unsecured promissory note 10,000 - Net proceeds from issuance of common stock - 10,569,467 Loan proceeds on unsecured promissory note - 806,100 Net proceeds from issuance of common stock from exercise of stock options 46,470 139,258 Proceeds from issuance of common stock from exercise of warrants 19,800 110,000 Withholding taxes paid on vesting of restricted stock units - ( 13,335 ) Net cash provided by financing activities 76,270 11,611,490 Net (decrease) increase in cash ( 1,181,444 ) 11,238,762 CASH, beginning of period 13,121,392 3,350,853 CASH, end of period $ 11,939,948 $ 14,589,615 Supplemental disclosure of noncash investing and financing activities: Note payable for software license $ - $ 300,000 Reclassification of stock option awards $ 1,411,108 $ - Settlement of executive bonuses with restricted stock units $ - $ 53,460 See accompanying notes to financial statements. 8 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) (As Restated) 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 ID Check®, a solution 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 nineteen issued patents and four pending patents. Liquidity For the six months ended June 30, 2021, the Company incurred a net loss of $ 5,460,610 and used cash in operations of $ 1,075,636 . As of June 30, 2021, the Company had cash of $ 11,939,948 , working capital of $ 11,334,550 and an accumulated deficit of $ 124,879,719 . 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. As of the filing of this Form 10-Q, the COVID-19 pandemic, which first began affecting the Company in the first quarter of 2020, has impacted the Company’s business by a temporary decline in revenues from its customers. Though the Company has had an increase in SaaS revenues for the three and six months ended June 30, 2021 over the respective periods in 2020, the COVID-19 pandemic may continue to impact its business directly and/or indirectly for the foreseeable future. The Company is further unable to accurately predict the full impact that the COVID-19 pandemic will have on its results of operations or financial condition due to numerous factors that are not within its control, including the duration and severity of the outbreak together with any potential statewide closures if cases increase, the spread of recently discovered COVID-19 variants, including the Delta variant, and the widespread adoption of vaccination measures. See Part II, Item 1A for more information. 2. SIGNIFICANT ACCOUNTING POLICIES Restatement of Previously Issued Financial Statements On May 16, 2022, management in concurrence with the Company’s Audit Committee of our Board of Directors (the “Audit Committee”), concluded that that the financial statements previously issued as of and for the three and six months period ended June 30, 2021, should no longer be relied upon due to errors in accounting for certain option awards. Accordingly, we are restating our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, Statements of Cash Flows and the related notes as of and for the three and six months ended June 30, 2021. Specifically, the Company determined that a cashless withholding to satisfy personal income tax obligations from certain option awards exercised commencing in the third quarter of 2020 and the first quarter of 2021, caused the underlying options to no longer qualify as equity awards and should have instead been classified as liability awards commencing on the date of exercise. 9 The change in the classification of the awards to liability classified awards requires the Company to remeasure the fair value of the awards at the end of each reporting period they remain outstanding, with the increase or decrease in fair value correspondingly charged or credited to selling, general and administrative expenses in arriving at net income (loss). Furthermore, the Company, due to an administrative error, failed to sell the shares withheld in 2021 and did not remit the equivalent amount of funds to the tax authorities. To date, the Company has not returned the shares or otherwise reimbursed the effected individuals for the shares surrendered. The Company is currently in the process of arranging payment to the individuals, which is expected to be completed during the quarter ending June 30, 2022. These errors resulted in misstatements to our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, and Statements of Cash Flows as of and for the three and six months ended June 30, 2021 as follows: SCHEDULE OF ERRORS RESULTED IN MISSTATEMENTS As of June 30, 2021 As Previously Restatement As Reported Adjustment Restated BALANCE SHEET Equity awards liability $ - 709,355 $ 709,355 Liability for shares withheld $ - 1,244,458 $ 1,244,458 Total current liabilities $ 3,267,936 1,953,813 $ 5,221,749 Total liabilities $ 3,274,534 1,953,813 $ 5,228,347 Common stock (dollars) $ 18,728 ( 92 ) $ 18,636 Additional paid-in capital $ 140,267,314 4,751,432 $ 145,018,746 Accumulated deficit $ ( 118,174,566 ) ( 6,705,153 ) $ ( 124,879,719 ) Total stockholders’ equity $ 22,111,476 ( 1,953,813 ) $ 20,157,663 Common stock (shares) 18,727,552 ( 92,634 ) 18,634,918 For the three months ended June 30, 2021 As Previously Reported Restatement Adjustment As Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 2,714,396 98,377 $ 2,812,773 Total operating expenses $ 4,067,020 98,377 $ 4,165,397 Loss from operations $ ( 738,395 ) ( 98,377 ) $ ( 836,772 ) Net loss $ ( 737,785 ) ( 98,377 ) $ ( 836,162 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ ( 0.04 ) 0.00 $ ( 0.04 ) Weighted average common shares used in computing per share amounts - Basic and Diluted $ 18,708,409 ( 92,634 ) $ 18,615,775 10 For the six months ended June 30, 2021 As Previously Reported Restatement Adjustment As Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 5,095,176 3,662,759 $ 8,757,935 Total operating expenses $ 7,784,041 3,662,759 $ 11,446,800 Loss from operations $ ( 1,813,603 ) ( 3,662,759 ) $ ( 5,476,362 ) Net loss $ ( 1,797,851 ) ( 3,662,759 ) $ ( 5,460,610 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ ( 0.10 ) $ ( 0.19 ) $ ( 0.29 ) Weighted average common shares used in computing per share amounts - Basic and Diluted 18,612,512 ( 64,170 ) 18,548,342 For the three months ended June 30, 2021 As Previously Reported Restatement Adjustment As Restated STATEMENT OF STOCKHOLDERS’ EQUITY Net loss $ ( 737,785 ) ( 98,377 ) $ ( 836,162 ) Common stock (shares) 18,727,552 ( 92,634 ) 18,634,918 Common stock (dollars) $ 18,728 ( 92 ) $ 18,636 Additional paid-in capital $ 140,267,314 4,751,432 $ 145,018,746 Accumulated deficit $ ( 118,174,566 ) ( 6,705,153 ) $ ( 124,879,719 ) Total stockholders’ equity $ 22,111,476 ( 1,953,813 ) $ 20,157,663 For the six months ended June 30, 2021 As Previously Reported Restatement Adjustment As Restated STATEMENT OF STOCKHOLDERS’ EQUITY Exercise of stock options, net of cashless exercise of 58,122 shares and 92,634 shares withheld $ 46,470 1,708,946 $ 1,755,416 Net loss $ ( 1,797,851 ) ( 3,662,759 ) $ ( 5,460,610 ) Common stock (shares) 18,727,552 ( 92,634 ) 18,634,918 Common stock (dollars) $ 18,728 ( 92 ) $ 18,636 Additional paid-in capital $ 140,267,314 4,751,432 $ 145,018,746 Accumulated deficit $ ( 118,174,566 ) ( 6,705,153 ) $ ( 124,879,719 ) Total stockholders’ equity $ 22,111,476 ( 1,953,813 ) $ 20,157,663 For the six months ended June 30, 2021 As Previously Reported Restatement Adjustment As Restated STATEMENT OF CASH FLOWS Net loss $ ( 1,797,851 ) ( 3,662,759 ) $ ( 5,460,610 ) Equity compensation $ 1,631,616 ( 3,662,759 ) $ 5,294,375 Supplemental disclosure of noncash investing and financing activities: Reclassification of stock option awards $ - 1,411,108 $ 1,411,108 The correction of these errors had no net effect on net cash used in operating activities. 11 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 June 30, 2021 and the results of operations, stockholders’ equity and cash flows for the six months ended June 30, 2021 and 2020. 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 six-month period ended June 30, 2021, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2021. As noted in the Explanatory Note, the Company has filed this Form 10-Q/A to amend our Quarterly Report on Form 10-Q for the three and six month periods ended June 30, 2021, originally filed with the SEC on August 11, 2021 (the “Original Form 10-Q”), to restate our Financial Statements and related footnote disclosures as of and for the three and six months ended June 30, 2021. The balance sheet as of December 31, 2020 has been derived from the audited financial statements at that date, as restated, 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, 2020. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company has adopted this standard and did not have a material impact on its financial statements. 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 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. Early adoption is permitted for fiscal years beginning after December 15, 2018, 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 does not expect this standard will have a material impact on its financial statements. 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, and the fair value of stock options granted under the Company’s Equity compensation plan. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates. As discussed above, certain option awards no longer qualify as equity awards and instead are being classified as liability awards. 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. The company determined the fair value of these awards utilizing a Black-Scholes option pricing model. 12 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. ● 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 $ 709,355 worth of Level 2 liabilities as of June 30, 2021 for liability classified stock options. ● 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 June 30, 2021 and 2020. Allowance for Doubtful Accounts The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect customers’ ability to pay. Goodwill Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. Pursuant to ASC Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter (December 31, 2021), or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. There were no impairment charges recognized during either of the six months ended June 30, 2021 and 2020. 13 Intangible Assets Intangible assets include patents, copyrights, intellectual property rights and licensed software. The Company uses the straight-line method to amortize these assets over their estimated useful lives. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC Topic 360. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. There were no impairment charges recognized during either of the six months ended June 30, 2021 and 2020. Income Taxes The Company accounts for income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as of June 30, 2021 and December 31, 2020, due to the uncertainty of the realizability of those assets. Fair Value of Financial Instruments The Company adheres to the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This pronouncement requires that the Company calculate the fair value of financial instruments and include this additional information in the notes to financial statements when the fair value is different than the book value of those financial instruments. The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued expenses. As of June 30, 2021 and December 31, 2020, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature. 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. 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 recorded as a reduction to revenue. Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Furthermore, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. 14 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 and licensed software 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 based on the usage of the hosted subscription services and licensed software, which can vary from month to month. The revenue is typically based either on a formula such as number of locations using the service in a given month multiplied by a fee per location or the number of actual scans in a given month multiplied by a set price per scan based on the contract with the customer. Other Subscription and Support Services The Company also recognizes revenues from other subscription and support services, which 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 entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of locations in a given month multiplied by a fee per location. Equipment Revenue Revenue from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the equipment is received. Non-Recurring Services Revenue The non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as it is provided and the Company’s performance obligation has been satisfied. Extended Warranty Extended warranty revenues 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. 15 Disaggregation of revenue In the following tables, revenue is disaggregated by product and service and the timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue. SCHEDULE OF DISAGGREGATION OF REVENUE For the Three Months Ended June 30, 2021 2020 Products and services Software as a Service (SaaS) $ 3,233,610 $ 1,671,350 Other subscription and support services 3,510 70,703 Equipment 1,425,382 51,754 Non-recurring services 32,200 41,450 Extended warranties on equipment 2,448 5,845 Other 99,991 1,093 $ 4,797,141 $ 1,842,195 Timing of revenue recognition Products transferred at a point in time $ 1,525,373 $ 52,847 Services transferred over time 3,271,768 1,789,348 $ 4,797,141 $ 1,842,195 For the Six Months Ended June 30, 2021 2020 Products and services Software as a Service (SaaS) $ 6,009,317 $ 3,909,769 Other subscription and support services 19,307 149,934 Equipment 1,461,648 835,547 Non-recurring services 53,200 41,450 Extended warranties on equipment 5,604 12,175 Other 110,606 8,592 $ 7,659,682 $ 4,957,467 Timing of revenue recognition Products transferred at a point in time $ 1,572,253 $ 844,139 Services transferred over time 6,087,429 4,113,328 Revenues $ 7,659,682 $ 4,957,467 Contract balances The current portion of deferred revenue at June 30, 2021 and December 31, 2020 was $ 539,328 and $ 402,782 , 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 the satisfaction or partial satisfaction of these contracts. Of this balance, at December 31, 2020, $ 242,738 and $ 334,929 was recognized as revenue for the three and six months ended June 30, 2021, respectively. The long-term portion of deferred revenue was $ 6,598 and $ 8,662 as of June 30, 2021 and December 31, 2020, respectively. The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods. 16 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: SCHEDULE OF REVENUE PERFORMANCE OBLIGATION Remainder 2021 2022 2023 Total Software as a Service (SaaS) $ 414,351 $ 112,615 $ - $ 526,966 Other subscription and support services 5,780 5,507 1,985 13,272 Extended warranties on equipment 2,502 2,256 930 5,688 $ 422,633 $ 120,378 $ 2,915 $ 545,926 All consideration from contracts with customers is included in the amounts presented above. Business Concentrations and Credit Risk During the three and six-month periods ended June 30, 2021, the Company made sales to two customers that accounted for approximately 62 % and 57 % of total revenues, respectively. The revenue was associated with commercial identity sales customers. These customers represented 70 % of total accounts receivable at June 30, 2021. During the three and six month periods ended June 30, 2020, the Company made sales to four customers that accounted for approximately 44 % and 54 % of total revenues, respectively. The revenue was 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 the periods of a net loss, all common stock equivalents are considered anti-dilutive. SCHEDULE OF EARNINGS PER SHARE BASIC AND DILUTED Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Numerator: Net loss $ ( 836,162 ) $ ( 760,273 ) $ ( 5,460,610 ) $ ( 733,671 ) Denominator: Weighted average common shares – Basic/Diluted 18,615,775 16,377,539 18,548,342 16,265,544 Net loss per share – Basic/Diluted $ ( 0.04 ) $ ( 0.05 ) $ ( 0.29 ) $ ( 0.05 ) 17 The following table summarizes the common stock equivalents excluded from loss per diluted share because their effect would be anti-dilutive to the net loss: SUMMARY OF COMMON STOCK EQUIVALENTS EXCLUDED FROM LOSS PER DILUTED SHARE Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Stock options 502,424 1,263,257 502,424 1,263,257 Warrants - 13,430 - 13,430 Restricted stock 409,765 7,284 409,765 7,284 Performance stock units 233,848 - 233,848 - Antidilutive securities excluded from computation of earnings per share amount 1,146,037 1,283,971 1,146,037 1,283,971 3. INTANGIBLE ASSETS The changes in the carrying amount of intangible assets for the six months ended March 31, 2021 were as follows: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS Net balance at December 31, 2020 $ 482,591 Deduction: Amortization expense ( 52,490 ) Net balance at June 30, 2021 $ 430,101 The following summarizes amortization of intangible assets included in the accompanying statements of operations: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS AMORTIZATION EXPENSE Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Cost of sales $ 23,676 $ 23,676 $ 47,353 $ 34,019 General and administrative 2,569 2,569 5,137 5,137 Amortization of intangible assets $ 26,245 $ 26,245 $ 52,490 $ 39,156 4. DEBT Promissory Note On April 15, 2020, the Company received an advance of $ 10,000 from the U.S. Small Business Administration (“SBA”) as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company repaid this EIDL advance on December 7, 2020. The Company has not imputed interest on this advance as the rate was determined to be a below-market rate due to the scope exception in ASC 835-30-15-3(e) for government-mandated interest rates. On December 27, 2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“the Economic Aid Act”) which relieves companies of their obligations to repay EIDL advances. As a result of this ruling, the SBA returned this advance, plus interest to the Loan Servicer on February 18, 2021, which was immediately returned to the Company and included in Other Income on the Statements of Operations. Revolving Line of Credit On February 6, 2019, the Company entered into a revolving credit facility with Citibank that allows for borrowings up to the lesser of (i) $ 2,000,000 or (ii) the collateralized balance in the Company’s existing fixed income investment account with Citibank subject to certain limitations. The facility bears interest at a rate consistent of Citibank’s Base Rate ( 4.75 % at June 30, 2021) minus 2%. Interest is payable monthly and as of June 30, 2021, there were no amounts outstanding and unused availability under this facility was $ 2,000,000 . 18 5. ACCRUED EXPENSES Accrued expenses are comprised of the following: SCHEDULE OF ACCRUED EXPENSES June 30, 2021 December 31, 2020 Professional fees $ 178,800 $ 123,787 Payroll and related 1,120,187 604,302 Incentive bonuses 668,759 834,910 Other 178,066 75,799 Accrued expenses $ 2,145,812 $ 1,638,798 6. INCOME TAXES The Company’s available net operating loss (“NOL”) at December 31, 2020 was approximately $ 17 million. The federal and state NOLs are available to offset future taxable income and begin to expire in 2021. 7. EQUITY COMPENSATION The Company accounts for the issuance of equity awards to employees in accordance with ASC Topic 718, which requires that the cost resulting from all equity payment transactions be recognized in the financial statements. This pronouncement 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. All equity compensation is included in operating expenses for the periods as follows: SCHEDULE OF STOCK BASED COMPENSATION Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Compensation cost recognized: Selling, general & administrative $ 650,958 $ 96,958 $ 4,922,750 $ 176,247 Research & development 98,402 6,752 371,625 13,505 Share-based Compensation Expense $ 749,360 $ 103,710 $ 5,294,375 $ 189,752 Stock Options The Company uses the Black-Scholes option pricing model to value the options on the grant date. For the awards which were modified and are no longer classified as equity awards, the Company uses the share price as of each reporting period to calculate the fair value of the options. The table below presents the weighted average expected life of the options in years. The expected life computation is based on the time to option expiration. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. As discussed above, certain option awards no longer qualify as equity awards and instead are classified as liability awards. The fair values of these awards are determined at each reporting period utilizing a Black-Scholes option pricing model, and the associated compensation expense for the reporting period is recorded. The Company recorded $ 3,662,759 of additional compensation expense in the six months ended June 30, 2021 as a result of this award reclassification. Stock option activity under the 2015 Stock Option Plan (the “Plan”) during the period indicated below were as follows: SCHEDULE OF STOCK OPTION ACTIVITY Number of Shares Subject to Issuance Weighted- average Exercise Price Weighted- average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2020 637,882 $ 2.50 2.55 years $ 5,686,421 Granted 221,843 10.38 Exercised ( 357,301 ) 2.34 Outstanding at June 30, 2021 502,424 $ 6.09 3.50 years $ 1,602,561 Exercisable at June 30, 2021 135,860 $ 2.72 2.39 years $ 767,728 19 The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on June 30, 2021. This amount changes based upon the fair market value of the Company’s stock. Restricted Stock Units The Company issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of common stock of the Company. During the six months ended June 30, 2021, the Company issued RSUs to its officers and certain employees and to certain directors as compensation. RSU agreements can vest immediately or with the passage of time. The vesting of all RSUs is contingent on continued board and employment services. The compensation expense incurred by the Company for RSUs is based on the closing market price of the Company’s common stock on the date of grant and is amortized ratably on a straight-line basis over the requisite service period and charged to general and administrative expense with a corresponding increase to additional paid-in capital. SCHEDULE OF RESTRICTED STOCK UNITS OUTSTANDING Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding at December 31, 2020 1,754 $ 11.40 $ - Granted 416,926 10.55 Vested and settled in shares ( 8,915 ) 8.97 Outstanding at June 30, 2021 409,765 $ 10.59 $ 11,375 Performance Stock Units On August 7, 2020, the Company issued 265,942 Performance Stock Units (PSUs) to its officers and certain employees as compensation. For these PSU agreements, 50 % vest based on the Company’s market price and 50 % vest based on its Adjusted EBITDA performance metric. Both the conditions are to occur over a passage of a specified time and is contingent on continued employment services. For the market condition, compensation expense is based on a Geometric Brownian Motion valuation model based on the closing market price of the Company’s common stock on the date of grant and is amortized ratably on a straight-line basis over the requisite period. For the performance condition, the Company reviews the probability of achieving this goal on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for this performance metric is amortized over the anticipated service period. If these criteria are not met, no compensation cost is recognized and any previously recognized compensation cost would be reversed. For both conditions, compensation expense is charged to selling, general and administrative and research and development expense with a corresponding increase to additional paid-in capital. SCHEDULE OF PERFORMANCE STOCK UNITS Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding at December 31, 2020 265,942 $ 7.91 $ - Forfeited ( 32,094 ) 7.91 Outstanding at June 30, 2021 233,848 $ 7.91 $ - 20 As of June 30, 2021, there was $ 5,330,023 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options, RSUs and PSUs, which is expected to be recognized over a weighted average period of approximately 2.46 years. The Company had 1,471,526 shares available for future grants under the Plan at June 30, 2021. Warrants All previously granted warrants were issued with an exercise price that was equal to or above the fair market value of the Company’s common stock on the date of grant. During the six months ended June 30, 2021, there were 9,000 warrants exercised at an exercise price of $ 2.20 per share. As of June 30, 2021, the Company had no remaining warrants available to exercise. 8. COMMON STOCK On June 23, 2020, the Company completed a public offering of 1,769,230 shares of its common stock, offered to the public at $ 6.50 per share. Net proceeds to the Company from this offering were approximately $ 10,710,000 after deducting underwriting discounts and commissions paid by the Company. Direct offering costs totaling approximately $ 141,000 were recorded as a reduction to the net proceeds and included in additional paid-in-capital on the statement of stockholders’ equity. 9. LEGAL PROCEEDINGS 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. 10. COMMITMENTS AND CONTINGENCIES Appointment of New President The Board has appointed Garrett Gafke as the Company’s President. With the appointment of Mr. Gafke as President, Bryan Lewis is continuing as the Company’s Chief Executive Officer. In connection with becoming the Company’s President, Mr. Gafke and the Company have entered into an employment agreement, dated March 23, 2021 (the “Agreement”). The Agreement with Mr. Gafke provides for certain severance payments in the event Mr. Gafke is terminated without cause including pay for six (6) months if Mr. Gafke is terminated without cause less than 12 months after March 23, 2021 and pay for twelve (12) months if Mr. Gafke is terminated without cause after March 23, 2022. Severance and Change-in-Control Agreements On November 25, 2020, Bill White, the Chief Financial Officer and Chief Operating Officer entered into a severance agreement with the Company (the “Agreement”). The Agreement provides that in consideration of his services and pursuant to the Agreement, in the event that Mr. White’s employment is terminated without “cause” (as such term is defined in the Agreement), Mr. White will receive a 24-month continuation of salary payments, continuation of certain eligible medical benefits under the COBRA program, and a lump sum payment equal to any quarterly bonus target applicable during the quarter of termination plus any prior completed quarterly bonus which has not yet been determined (if any). In addition, the Agreement provides that upon such termination without cause, the Company will accelerate the vesting of all of Mr. White’s outstanding but unvested stock options or other equity incentives. This Agreement expires on November 29, 2023 and replaces an amended severance agreement previously executed by Mr. White and the Company on November 29, 2017. The Company’s employment agreement dated February 1, 2018 (the “Agreement”) with Bryan Lewis, the Chief Executive Officer provides for certain severance payments in the event Mr. Lewis is terminated without cause including pay for six (6) months if Mr. Lewis is terminated without cause less than 12 months after February 1, 2018, pay for twelve (12) months if Mr. Lewis is terminated without cause between one (1) and five (5) years after February 1, 2018, and pay for eighteen (18) months if Mr. Lewis is terminated without cause after the fifth anniversary of this Agreement, in addition to reimbursement for certain living expenses and relocation advances and expenses in certain situations. Each of the agreements requires the executive to devote substantially all his time and efforts to our business and contains non-competition and nondisclosure covenants of the officer for the term of his employment and for a one-year period thereafter. Each agreement provides that we may terminate the agreement for cause. 21