Intellicheck, Inc. 10-Q/A

Item 1. FINANCIAL STATEMENTS INTELLICHECK, INC. BALANCE SHEETS September 30, December 31, 2021 2020 (Unaudited) (As Restated) ASSETS CURRENT ASSETS: Cash $ 13,266,031 $ 13,121,392 Accounts receivable, net of allowance of $ 0 and $ 42,974 at September 30, 2021 and December 31, 2020, respectively 2,777,222 2,119,861 Other current assets 869,583 340,718 Total current assets 16,912,836 15,581,971 PROPERTY AND EQUIPMENT, net 430,341 138,870 GOODWILL 8,101,661 8,101,661 INTANGIBLE ASSETS, net 403,856 482,591 OPERATING LEASE RIGHT-OF-USE ASSET - 31,131 OTHER ASSETS 8,500 4,250 Total assets $ 25,857,194 $ 24,340,474 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 231,780 $ 46,171 Accrued expenses 2,445,534 1,638,798 Operating lease liability, current portion - 32,620 Equity awards liability 782,834 - Liability for shares withheld 1,244,458 - Deferred revenue, current portion 1,372,311 402,782 Total current liabilities 6,076,917 2,120,371 NONCURRENT LIABILITIES: Deferred revenue, long-term portion 9,737 8,662 Total liabilities 6,086,654 2,129,033 COMMITMENTS AND CONTINGENCIES (Note 10) - STOCKHOLDERS’ EQUITY: Common stock - $ .001 par value; 40,000,000 shares authorized; 18,643,281 and 18,410,458 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 18,644 18,410 Additional paid-in capital 145,657,327 141,612,140 Accumulated deficit ( 125,905,431 ) ( 119,419,109 ) Total stockholders’ equity 19,770,540 22,211,441 Total liabilities and stockholders’ equity $ 25,857,194 $ 24,340,474 See accompanying notes to financial statements. 3 INTELLICHECK, INC. STATEMENTS OF OPERATIONS (Unaudited) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (As Restated) (As Restated) (As Restated) (As Restated) REVENUES $ 4,831,229 $ 2,698,975 $ 12,490,911 $ 7,656,442 COST OF REVENUES ( 1,510,590 ) ( 293,699 ) ( 3,199,834 ) ( 1,196,528 ) Gross profit 3,320,639 2,405,276 9,291,077 6,459,914 OPERATING EXPENSES Selling, general and administrative 2,930,273 4,514,488 11,688,208 7,384,379 Research and development 1,415,666 907,763 4,104,531 2,837,374 Total operating expenses 4,345,939 5,422,251 15,792,739 10,221,753 Loss from operations ( 1,025,300 ) ( 3,016,975 ) ( 6,501,662 ) ( 3,761,839 ) OTHER INCOME (EXPENSE) Gain on forgiveness of unsecured promissory note - - 10,000 - Interest and other income (expense), net ( 412 ) 6,993 5,340 18,186 Total other income (expense) ( 412 ) 6,993 15,340 18,186 Net loss $ ( 1,025,712 ) $ ( 3,009,982 ) $ ( 6,486,322 ) $ ( 3,743,653 ) PER SHARE INFORMATION Loss per common share - Basic $ ( 0.06 ) $ ( 0.16 ) $ ( 0.35 ) $ ( 0.22 ) Diluted $ ( 0.06 ) $ ( 0.16 ) $ ( 0.35 ) $ ( 0.22 ) Weighted average common shares used in computing per share amounts Basic 18,642,463 18,336,107 18,580,012 16,960,770 Diluted 18,642,463 18,336,107 18,580,012 16,960,770 See accompanying notes to financial statements. 4 INTELLICHECK, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Three months ended September 30, 2021 (As Restated) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity BALANCE, June 30, 2021 18,634,918 $ 18,636 $ 145,018,746 $ ( 124,879,719 ) $ 20,157,663 Equity compensation - - 638,589 - 638,589 Issuance of common stock, net of costs Issuance of common stock, net of costs, shares Exercise of stock options, net of cashless exercise of 82,161 shares Exercise of stock options, net of cashless exercise of 82,161 shares, shares Exercise of stock options, net of cashless exercise of 58,122 shares Exercise of stock options, net of cashless exercise of 58,122 shares, shares Exercise of stock options, net of cashless exercise of 93,570 shares Exercise of stock options, net of cashless exercise of 93,570 shares,shares Exercise of warrants Exercise of warrants, shares Issuance of shares for restricted stock grants 8,363 8 ( 8 ) - - Shares withheld for withholding taxes Shares withheld for withholding taxes, shares Settlement of executive bonuses with issuance of restricted stock units Settlement of executive bonuses with issuance of restricted stock units, shares Exercise of liability awards Net loss - - - ( 1,025,712 ) ( 1,025,712 ) BALANCE, September 30, 2021 18,643,281 $ 18,644 $ 145,657,327 $ ( 125,905,431 ) $ 19,770,540 Three months ended September 30, 2020 (As Restated) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity BALANCE, June 30, 2020 18,028,282 $ 18,028 139,715,197 $ ( 117,668,783 ) $ 22,064,442 Equity compensation - - 97,157 - 97,157 Exercise of warrants 750 1 1,649 - 1,650 Shares withheld for withholding taxes ( 178,832 ) ( 179 ) ( 1,462,415 ) - ( 1,462,594 ) Exercise of stock options, net of cashless exercise of 82,161 shares 527,214 527 28,823 - 29,350 Issuance of shares for restricted stock grants 7,284 7 ( 7 ) - - Settlement of executive bonuses with issuance of restricted stock units 5,531 6 31,245 - 31,251 Exercise of liability awards - - 3,042,394 - 3,042,394 Net loss - - - ( 3,009,982 ) ( 3,009,982 ) BALANCE, September 30, 2020 18,390,229 $ 18,390 141,454,043 $ ( 120,678,765 ) $ 20,793,668 See accompanying notes to financial statements. 5 INTELLICHECK, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Nine months ended September 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 - - 2,270,205 - 2,270,205 Exercise of warrants 9,000 9 19,791 - 19,800 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 Issuance of shares for restricted stock grants 17,278 18 ( 18 ) - - Net loss - - - ( 6,486,322 ) ( 6,486,322 ) BALANCE, September 30, 2021 18,643,281 $ 18,644 $ 145,657,327 $ ( 125,905,431 ) $ 19,770,540 Nine months ended September 30, 2020 (As Restated) 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 - - 286,909 - 286,909 Issuance of common stock, net of costs 1,769,230 1,769 10,567,698 - 10,569,467 Exercise of warrants 50,750 51 111,599 - 111,650 Exercise of stock options, net of cashless exercise of 93,570 shares 674,171 674 167,934 - 168,608 Shares withheld for withholding taxes ( 180,844 ) ( 181 ) ( 1,475,750 ) - ( 1,475,931 ) Exercise of stock options, net of cashless exercise of shares 674,171 674 167,934 - 168,608 Exercise of liability awards - - 3,042,394 - 3,042,394 Issuance of shares for restricted stock grants 20,279 20 ( 20 ) - - Settlement of executive bonuses with issuance of restricted stock units 14,993 15 84,696 - 84,711 Net loss - - - ( 3,743,653 ) ( 3,743,653 ) BALANCE, September 30, 2020 18,390,229 $ 18,390 141,454,043 $ ( 120,678,765 ) $ 20,793,668 See accompanying notes to financial statements. 6 INTELLICHECK, INC. STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended September 30, 2021 2020 (As Restated) (As Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 6,486,322 ) $ ( 3,743,653 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 126,226 127,143 Equity compensation 6,006,443 3,329,303 Forgiveness of unsecured promissory note ( 10,000 ) - Changes in assets and liabilities: (Increase) in accounts receivable ( 657,361 ) ( 64,228 ) (Increase) in other current assets ( 528,865 ) ( 192,103 ) (Increase) in other assets ( 4,250 ) - Increase in accounts payable and accrued expenses 990,856 361,395 Increase (decrease) in deferred revenue 970,604 ( 128,779 ) Net cash provided by (used in) operating activities 407,331 ( 310,922 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of software license - ( 400,000 ) Capital expenditures ( 338,962 ) ( 36,520 ) Collection of note receivable - 29,017 Net cash used in investing activities ( 338,962 ) ( 407,503 ) 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 46,470 168,608 Proceeds from issuance of common stock from exercise of warrants 19,800 111,650 Withholding taxes paid on exercise of stock options and vesting of restricted stock units - ( 1,475,931 ) Net cash provided by financing activities 76,270 10,179,894 Net increase in cash 144,639 9,461,469 CASH, beginning of period 13,121,392 3,350,853 CASH, end of period $ 13,266,031 $ 12,812,322 Supplemental disclosure of noncash investing and financing activities: Reclassification of stock option awards $ 1,411,108 - Settlement of executive bonuses with restricted stock units $ - $ 84,710 See accompanying notes to financial statements. 7 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 nine months ended September 30, 2021, the Company incurred a net loss of $ ( 6,486,322 ) and had cash provided by operating activities of $ 407,331 . As of September 30, 2021, the Company had cash of $ 13,266,031 , working capital (defined as current assets minus current liabilities) of $ 10,835,919 and an accumulated deficit of $ 125,905,431 . 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 nine months ended September 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 COVID-19 variants, including the Delta variant, and the widespread adoption of vaccination measures including recently approved booster regimens. 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 nine months ended September 30, 2021 and 2020, 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 nine months ended September 30, 2021 and 2020. 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. 8 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 surrendered 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 withheld. 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 nine months ended September 30, 2021 and 2020, as follows: SCHEDULE OF ERRORS RESULTED IN MISSTATEMENTS As of September 30, 2021 As Previously Restatement As Reported Adjustment Restated BALANCE SHEET Equity awards liability $ - 782,834 $ 782,834 Liability for shares withheld $ - 1,244,458 $ 1,244,458 Total current liabilities $ 4,049,625 2,027,292 $ 6,076,917 Total liabilities $ 4,059,362 2,027,292 $ 6,086,654 Common stock (dollars) $ 18,736 ( 92 ) $ 18,644 Additional paid-in capital $ 140,905,895 4,751,432 $ 145,657,327 Accumulated deficit $ ( 119,126,799 ) ( 6,778,632 ) $ ( 125,905,431 ) Total stockholders’ equity $ 21,797,832 ( 2,027,292 ) $ 19,770,540 Common stock (shares) 18,735,915 ( 92,634 ) 18,643,281 For the three months ended September 30, 2021 As Previously Restatement As Reported Adjustment Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 2,856,794 73,479 $ 2,930,273 Total operating expenses $ 4,272,460 73,479 $ 4,345,939 Loss from operations $ ( 951,821 ) ( 73,479 ) $ ( 1,025,300 ) Net loss $ ( 952,233 ) ( 73,479 ) $ ( 1,025,712 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ ( 0.05 ) ( 0.01 ) $ ( 0.06 ) Weighted average common shares used in computing per share amounts -Basic and Diluted 18,735,097 ( 92,634 ) 18,642,463 For the nine months ended September 30, 2021 As Previously Restatement As Reported Adjustment Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 7,951,970 3,736,238 $ 11,688,208 Total operating expenses $ 12,056,501 3,736,238 $ 15,792,739 Loss from operations $ ( 2,765,424 ) ( 3,736,238 ) $ ( 6,501,662 ) Net loss $ ( 2,750,084 ) ( 3,736,238 ) $ ( 6,486,322 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ ( 0.15 ) ( 0.20 ) $ ( 0.35 ) Weighted average common shares used in computing per share amounts - Basic and Diluted 18,653,823 ( 73,811 ) 18,580,012 9 For the three months ended September 30, 2020 As Previously Restatement As Reported Adjustment Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 1,472,094 3,042,394 $ 4,514,488 Total operating expenses $ 2,379,857 3,042,394 $ 5,422,251 Income (loss) from operations $ 25,419 ( 3,042,394 ) $ ( 3,016,975 ) Net income (loss) $ 32,412 ( 3,042,394 ) $ ( 3,009,982 ) PER SHARE INFORMATION Income (loss) per common share Basic and Diluted $ 0.00 ( 0.16 ) $ ( 0.16 ) Weighted average common shares used in computing per share amounts - Basic 18,336,107 - 18,336,107 Diluted 18,764,994 ( 428,887 ) 18,336,107 For the nine months ended September 30, 2020 As Previously Restatement As Reported Adjustment /Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 4,341,985 3,042,394 $ 7,384,379 Total operating expenses $ 7,179,359 3,042,394 $ 10,221,753 Loss from operations $ ( 719,445 ) ( 3,042,394 ) $ ( 3,761,839 ) Net loss $ ( 701,259 ) ( 3,042,394 ) $ ( 3,743,653 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ ( 0.04 ) ( 0.18 ) $ ( 0.22 ) Weighted average common shares used in computing per share amounts - Basic and Diluted 16,960,770 - 16,960,770 For the three months ended September 30, 2021 As Previously Restatement As Reported Adjustment Restated STATEMENT OF STOCKHOLDERS’ EQUITY Net loss $ ( 952,233 ) ( 73,479 ) $ ( 1,025,712 ) Common stock (shares) 18,735,915 ( 92,634 ) 18,643,281 Common stock (dollars) $ 18,736 ( 92 ) $ 18,644 Additional paid-in capital $ 140,905,895 4,751,432 $ 145,657,327 Accumulated deficit $ ( 119,126,799 ) ( 6,778,632 ) $ ( 125,905,431 ) Total stockholders’ equity $ 21,797,832 ( 2,027,292 ) $ 19,770,540 10 For the nine months ended September 30, 2021 As Previously Restatement As Reported Adjustment 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 $ ( 2,750,084 ) ( 3,736,238 ) $ ( 6,486,322 ) Common stock (shares) 18,735,915 ( 92,634 ) 18,643,281 Common stock (dollars) $ 18,736 ( 92 ) $ 18,644 Additional paid-in capital $ 140,905,895 4,751,432 $ 145,657,327 Accumulated deficit $ ( 119,126,799 ) ( 6,778,632 ) $ ( 125,905,431 ) Total stockholders’ equity $ 21,797,832 ( 2,027,292 ) $ 19,770,540 Three months ended September 30, 2020 As Previously Restatement As Reported Adjustment Restated STATEMENT OF STOCKHOLDERS’ EQUITY Exercise of liability awards $ - 3,042,394 $ 3,042,394 Net income (loss) $ 32,412 ( 3,042,394 ) $ ( 3,009,982 ) Accumulated deficit $ ( 117,636,371 ) ( 3,042,394 ) $ ( 120,678,765 ) Additional paid-in capital $ 138,411,649 3,042,394 $ 141,454,043 Total stockholders’ equity $ 20,793,668 - $ 20,793,668 Nine months ended September 30, 2020 As Previously Restatement As Reported Adjustment Restated STATEMENT OF STOCKHOLDERS’ EQUITY Exercise of liability awards $ - 3,042,394 $ 3,042,394 Net loss $ ( 701,259 ) ( 3,042,394 ) $ ( 3,743,653 ) Accumulated deficit $ ( 117,636,371 ) ( 3,042,394 ) $ ( 120,678,765 ) Additional paid-in capital $ 138,411,649 3,042,394 $ 141,454,043 Total stockholders’ equity $ 20,793,668 - $ 20,793,668 11 For the nine months ended September 30, 2021 As Previously Restatement As Reported Adjustment Restated STATEMENT OF CASH FLOWS Net loss $ ( 2,750,084 ) ( 3,736,238 ) $ ( 6,486,322 ) Equity compensation $ 2,270,205 3,736,238 $ 6,006,443 Supplemental disclosure of noncash investing and financing activities: Reclassification of stock option awards $ - 1,411,108 $ 1,411,108 For the nine months ended September 30, 2020 As Previously Restatement As Reported Adjustment Restated STATEMENT OF CASH FLOWS Net loss $ ( 701,259 ) ( 3,042,394 ) $ ( 3,743,653 ) Equity compensation $ 286,909 3,042,394 $ 3,329,303 The correction of the errors had no effect on net cash used in operating activities for either period. 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 September 30, 2021 and the results of operations, stockholders’ equity and cash flows for the nine months ended September 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 nine-month period ended September 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 nine months ended September 30, 2021, originally filed with the SEC on November 11, 2021 (the “Original Form 10-Q”), to restate our Financial Statements and related footnote disclosures as of and for the three and nine months ended September 30, 2021 and 2020. 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. 12 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. 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 $ 782,834 worth of Level 2 liabilities as of September 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 September 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 nine months ended September 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, 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 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 nine months ended September 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 September 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 September 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. 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 September 30, 2021 2020 Products and services Software as a Service (SaaS) $ 3,245,274 $ 2,451,381 Other subscription and support services 3,282 36,346 Equipment 1,470,333 176,061 Non-recurring services 12,000 29,000 Extended warranties on equipment 1,405 5,058 Other 98,935 1,129 Revenues $ 4,831,229 $ 2,698,975 Timing of revenue recognition Products transferred at a point in time $ 1,569,268 $ 177,190 Services transferred over time 3,261,961 2,521,785 Revenues $ 4,831,229 $ 2,698,975 For the Nine Months Ended September 30, 2021 2020 Products and services Software as a Service (SaaS) $ 9,254,591 $ 6,361,150 Other subscription and support services 22,588 186,280 Equipment 2,931,980 1,011,608 Non-recurring services 65,200 70,450 Extended warranties on equipment 7,009 17,232 Other 209,543 9,722 $ 12,490,911 $ 7,656,442 Timing of revenue recognition Products transferred at a point in time $ 3,141,523 $ 1,021,330 Services transferred over time 9,349,388 6,635,112 Revenues $ 12,490,911 $ 7,656,442 Contract balances The current portion of deferred revenue at September 30, 2021 and December 31, 2020 was $ 1,372,311 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, $ 48,378 and $ 383,162 was recognized as revenue for the three and nine months ended September 30, 2021, respectively. The long-term portion of deferred revenue was $ 9,737 and $ 8,662 as of September 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) $ 550,647 $ 812,288 $ 3,136 $ 1,366,071 Other subscription and support services 3,086 5,649 2,602 11,337 Extended warranties on equipment 1,097 2,324 1,219 4,640 $ 554,830 $ 820,261 $ 6,957 $ 1,382,048 All consideration from contracts with customers is included in the amounts presented above. Business Concentrations and Credit Risk During the three and nine-month periods ended September 30, 2021, the Company made sales to two customers that accounted for approximately 60 % and 58 % of total revenues, respectively. The revenue was associated with commercial identity sales customers. These customers represented 28 % of total accounts receivable at September 30, 2021. During the three and nine month periods ended September 30, 2020, the Company made sales to two customers that accounted for approximately 46 % and 37 % 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Numerator: Net loss $ ( 1,025,712 ) $ ( 3,009,982 ) $ ( 6,486,322 ) $ ( 3,743,653 ) Denominator: Weighted average common shares – Basic and Diluted 18,642,463 18,336,107 18,580,012 16,960,770 Net loss per share – Basic and Diluted $ ( 0.06 ) $ ( 0.16 ) $ ( 0.35 ) $ ( 0.22 ) 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Stock options 502,424 653,882 502,424 653,882 Warrants - 12,680 - 12,680 Restricted stock 408,657 4,499 408,657 4,499 Performance stock units 228,498 265,942 228,498 265,942 1,139,579 937,003 1,139,579 937,003 3. INTANGIBLE ASSETS The changes in the carrying amount of intangible assets for the nine months ended September 30, 2021 were as follows: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS Net balance at December 31, 2020 $ 482,591 Deduction: Amortization expense ( 78,735 ) Net balance at September 30, 2021 $ 403,856 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Cost of sales $ 23,676 $ 23,677 $ 71,029 $ 57,696 General and administrative 2,569 2,568 7,706 7,705 Amortization of intangible assets $ 26,245 $ 26,245 $ 78,735 $ 65,401 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 had 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 September 30, 2021) minus 2%. Interest is payable monthly and as of September 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 September 30, 2021 December 31, 2020 Professional fees $ 144,050 $ 123,787 Payroll and related 1,131,424 604,302 Incentive bonuses 1,100,808 834,910 Other 69,252 75,799 Accrued expenses $ 2,445,534 $ 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Compensation cost recognized: Selling, general & administrative $ 613,667 $ 3,130,905 $ 5,536,418 $ 3,307,152 Research & development 98,401 8,646 470,025 22,151 Share-based compensation expenses $ 712,068 $ 3,139,551 $ 6,006,443 $ 3,329,303 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 $ 3,736,238 of additional compensation expense in the nine months ended September 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 September 30, 2021 502,424 $ 6.09 3.25 years $ 1,548,558 Exercisable at September 30, 2021 135,859 $ 2.72 2.14 years $ 743,173 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 September 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 nine months ended September 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 428,831 10.49 Vested and settled in shares ( 17,278 ) 8.68 Forfeited ( 4,650 ) 11.50 Outstanding at September 30, 2021 408,657 $ 10.56 $ 7,905 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 ( 37,444 ) 7.91 Outstanding at September 30, 2021 228,498 $ 7.91 $ - 20 As of September 30, 2021, there was $ 4,712,464 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 2.25 years. The Company had 1,467,554 shares available for future grants under the Plan at September 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. As of September 30, 2021, the Company had no remaining warrants available to exercise. During the nine months ended September 30, 2021, there were 9,000 warrants exercised at an exercise price of $ 2.20 per share. 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. COMMITMENTS AND CONTINGENCIES 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. 21