Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion of our plan of operation and results of operations should be read in conjunction with the consolidated financial
statements and related notes to the consolidated financial statements included elsewhere in this Annual Report. This discussion contains
forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
These risks and other factors include, among others, those listed under “Cautionary Note Regarding Forward-Looking Statements”
and Part I, Item 1A. “Risk Factors” and those included elsewhere in this report.
Overview
Founded in 2015, ROC is a consistently top-tier
rated U.S.-built, U.S.-owned, and U.S.-operated provider of advanced biometric, facial recognition, and Vision AI solutions. We develop
and deploy innovative technologies that enhance safety, security, and convenience globally, while upholding principles of fairness and
privacy. Our solutions are trusted by U.S. and international military branches, law enforcement agencies, financial technology firms,
and commercial enterprises, with our multimodal capabilities consistently demonstrating robust performance in rigorous government evaluations
and in over 300 million annual identity verification transactions for major financial institutions. We believe our customer-centric approach
and superior algorithms allow us to displace foreign incumbents and offer a transparent alternative to address the growing threat of “Poison
AI” as discussed below.
Factors and Trends Affecting Our Business
and Results of Operations
Several factors and trends affect our business
and results of operations. These include the increasing importance of identity solutions, the evolving nature of biometric technologies,
and our strategic approach to market opportunities.
Financial Considerations and Strategic Investments
We are making strategic investments to capitalize
on market opportunities. ROC’s expenses reflect these investments, which are aimed at driving future growth and enabling us to provide
a platform that supports a wide range of identity-related needs.
Government Policy and Geopolitical Factors
We believe ROC is also well-positioned to benefit
from U.S. federal government policies focused on greater efficiency through technology, and our unique placement as a U.S.-based provider.
Additionally, there is a general aversion to Chinese and Russian technology around the globe, which creates opportunities for ROC. We
believe ROC is particularly well-positioned for winning automated biometric identification system (“ABIS”) contracts around
the world, where there are clear indications of aversion to legacy Western players, primarily due to a history of vendor lock-in and poor
service.
53
The Growing Importance of Identity Solutions
Identity is becoming a critical global currency,
with increasing recognition that robust identity management is essential for security, efficiency, and trust. The increasing focus on
digital identity initiatives highlights the growing significance of effective and comprehensive identity management systems. This trend
increases the demand for effective and comprehensive identity management systems.
Evolution of Biometric Technologies
While specific biometric modalities are becoming
more commoditized, the focus is shifting towards efficiency, plug-and-play capabilities, and multi-biometric systems. The differentiators
around specific accuracy algorithms are becoming less important, with efficiency and the ability to integrate various technologies becoming
key. This shift favors companies like us that offer versatile, data-agnostic, and privacy-protecting solutions. We believe that our ability
to provide a “Swiss Army knife” of identity solutions, capable of addressing diverse use cases, positions us for success in
this evolving market.
Poison AI
“Poison AI” is a shorthand term that
refers to the practice of data poisoning, a type of machine learning attack where malicious data is deliberately introduced into an AI
model’s training dataset to manipulate its behavior or outputs, causing it to malfunction or become biased. An illustrative example
of Poison AI is the Nightshade tool offered by the University of Chicago (https://nightshade.cs.uchicago.edu/whatis.html). Nightshade
allows creators to prevent their digital artwork from being fed into generative AI models without consent by “turn[ing] any image
into a data sample that is unsuitable for model training. More precisely, Nightshade transforms images into “poison” samples,
so that models training on them without consent will see their models learn unpredictable behaviors that deviate from expected norms.”
In the national security field, we believe Poison AI poses a serious and growing risk wherein adversarial state actors seek to intentionally
create security vulnerabilities in AI models that are used in critical U.S. national security missions. As a solution provider to the
U.S. national security community, we believe that our ability to closely manage our training data to prevent the introduction of “poison”
samples would mitigate the risk of Poison AI and differentiate our offerings for our prospective government customers.
Our Strategic Response
ROC’s strategy is aligned with these trends.
We recognize that having a great algorithm alone is no longer sufficient. Customers demand a full stack of capabilities, the ability to
turn features on and off, and accommodation of complex demands. Our approach involves:
●
Full-Stack Capability : We are focused on owning the full stack of identity capabilities, offering comprehensive platforms that address a wide range of customer needs. This approach is evident in our development of products like ROC ABIS, ROC Watch, and ROC Enroll.
●
Modularity and Configurability : We design our systems to be modular and configurable, allowing us to adapt to specific customer requirements and integrate seamlessly with other technologies. This is crucial in a market where identity solutions must be flexible and adaptable.
●
Broad View of Identity : Unlike competitors who view identity narrowly as biometrics, we adopt a broader perspective that includes biometrics, license plates, person entities, and real-time video. This comprehensive view enables us to provide more holistic solutions and address a wider range of use cases.
●
Platform Approach : We are building a platform that offers both comprehensive solutions and individual components, recognizing that customers have diverse needs and require varying levels of integration. This strategy allows us to compete effectively with “all or nothing” approaches.
54
Revenue
Our revenue consists of the sale of access to
its software platforms, maintenance services and professional services.
Cost of Sales
Cost of sales consists primarily of the purchase
price of goods and cost of services rendered.
Operating Expenses
Operating expenses consist of selling, general and administrative expenses,
and research and development.
Research and Development
Research and development represent costs incurred by us for the discovery
and development of our product and include:
●
external research and development expenses incurred under agreements with third party independent contractors and consultants;
●
salaries, payroll taxes, employee benefits expenses for individuals involved in research and development efforts; and
●
research supplies
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist
of personnel-related costs, including salaries, benefits and stock-based compensation expense, for our personnel in executive, finance
and accounting, human resources, business operations and other administrative functions, investor relations activities, legal fees related
to corporate matters, fees paid for accounting and tax services, consulting fees and facility-related costs.
Other Income
Other income consists primarily of rebates earned under our corporate
credit card program.
Results of Operations
Comparison of the Years Ended December 31,
2025 and 2024
Revenue
The following table sets forth our financial results
for the periods indicated. All information is derived from the statements of income for the fiscal years ended December 31, 2025 and December
31, 2024.
Year Ended
December 31,
Change
2025
2024
Amount
%
ROC SDK
$ 5,781,624
$ 5,958,212
$ (176,588 )
(3 )%
ROC Watch
5,800,915
1,326,607
4,474,308
337 %
ROC ABIS
343,608
352,692
(9,084 )
(3 )%
ROC Enroll
174,391
40,200
134,191
334 %
R&D Contracts
4,879,141
6,026,991
(1,147,850 )
(19 )%
Total Revenue
$ 16,979,679
$ 13,704,702
$ 3,274,977
24 %
Cost of sales
3,868,297
1,747,038
2,121,259
121 %
Gross Profit
$ 13,111,382
$ 11,957,664
$ 1,153,718
10 %
Gross Margin
77 %
87 %
Revenue increased by $3,274,977, or 24%, for the
year ended December 31, 2025, compared to the year ended December 31, 2024. The increase was driven by growth in product revenues, primarily
from ROC Watch, partially offset by a decrease in Government R&D services revenue.
55
Operating Expenses
The following table sets forth selected operating
data for the periods indicated. All information is derived from the statements of earnings for the fiscal years ended December 31, 2025,
and December 31, 2024, and we provide additional explanation below.
Years Ended
December 31,
Change
2025
2024
Amount
%
Selling, general and administrative
$ 8,338,815
$ 7,542,742
$ 796,073
11 %
Research and development
6,771,614
5,683,836
1,087,778
19 %
Operating Expenses
$ 15,110,429
$ 13,226,578
$ 1,883,851
14 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by $796,073, or 11%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was primarily driven
by higher labor costs associated with continued investment in our business development and administrative functions to support the growth
of our product offerings and markets served and our continued focus on operational execution.
Research and Development
Research and development expenses increased by
$1,087,778, or 19%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase was primarily driven
by higher labor costs associated with growth in R&D headcount, partially offset by the capitalization of costs related to internally
developed software.
Other Income and Expenses
Years ended
December 31,
Change
2025
2024
Amount
%
Interest income
$ 1
$ 644
$ (643 )
(100 )%
Interest expense
(80,982 )
(1,594 )
(79,388 )
4,980 %
Other Expense
(2,020 )
(43,134 )
41,114
(95 )%
Other income
20,281
14,843
5,438
37 %
Total Other Income (Expense)
$ (62,720 )
$ (29,241 )
$ (33,479 )
114 %
Total other expense increased by $33,479 for the
year ended December 31, 2025, compared to the year ended December 31, 2024. The increase was primarily driven by a $79,388 increase in
interest expense, partially offset by a $41,114 decrease in other expense.
Net Loss Attributable to Common Stockholders
Loss for the year ended December 31, 2025, and
2024 was $2,676,846 and $697,678, respectively, primarily attributable to the items discussed above and the impact of income tax provision
items.
56
Long-Term Liquidity and Capital Resources
As of December 31, 2025, we had cash and cash
equivalents of $0.3 million and a working capital deficit of $1.5 million. In 2026, we completed our initial public offering, in which
we issued and sold shares of common stock, resulting in net proceeds to the Company of approximately $21.5 million, including net proceeds
from the partial exercise of the overallotment option, after deducting underwriting discounts, commissions, and offering expenses.
As previously disclosed in our Registration Statement
on Form S-1, as amended (File No. 333-291913), which was declared effective by the SEC on January 30, 2026, management had concluded as
of September 30, 2025 that substantial doubt existed about the Company’s ability to continue as a going concern. At that time, the
Company had cash of $72,151, limited borrowing capacity, and estimated it would require approximately $10 million of additional funding
over the twelve-month look-forward period. Following the completion of our initial public offering and the resulting improvement in our
liquidity, management has concluded that the conditions that previously raised substantial doubt have been alleviated and substantial
doubt no longer exists as of December 31, 2025.
We believe that our available cash resources,
including the net proceeds from our initial public offering, together with expected cash flows from operations, will be sufficient to
fund our planned operations and meet our obligations for at least twelve months from the date these financial statements are issued. Our
future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of our product development
and sales and marketing activities, the pace of customer acquisition, and general market conditions. We may seek additional equity or
debt financing in the future to fund our growth strategy, though there can be no assurance that such financing will be available on acceptable
terms, or at all.
Cash flow activity below is a vital financial
metric that represents the net amount of cash moving into and out of a business. The table below provides details about cash flow performance
for the year ended December 31, 2025, compared to the year ended December 31, 2024.
Year ended
December 31,
Change
2025
2024
Amount
%
Net cash (used in) provided by:
Operating activities
$ (997,670 )
$ 21,428
$ (1,019,098 )
(4,756 )%
Investing activities
(726,582 )
(46,825 )
(679,757 )
(1,452 )
Financing activities
1,268,376
(863,287 )
2,131,663
247 %
Net decrease in cash
$ (455,876 )
$ (888,684 )
$ 432,808
49 %
Operating Activities
Net cash provided by (used in) operating activities
was $(997,670) and $21,428 for the years ended December 31, 2025 and 2024, respectively. This increase in cash used in operations is primarily
due to a higher net loss partially offset by changes in our non-cash working capital and non-cash expenses.
57
Investing Activities
Net cash provided by (used in) investing activities
was ($726,582) and ($46,825) for the years ended December 31, 2025 and 2024, respectively. The increase in cash used in investing activities
was primarily due to an increase in spending related to capitalized software in the year ended December 31, 2025, as compared to December
31, 2024.
Financing Activities
Net cash provided by (used in) financing activities
was $1,268,376 and $(863,287) for the years ended December 31, 2025 and 2024, respectively. The increase in cash provided from financing
activities is primarily attributable to the net proceeds from the line of credit offset by a decrease in distributions.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent
assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ materially from these estimates. We consider the following
accounting estimates to be critical because they involve significant management judgment and the resulting reported amounts could differ
materially under different assumptions or conditions. For a complete description of our significant accounting policies, see Note 2 to
our consolidated financial statements included elsewhere in this Annual Report.
Revenue Recognition
We recognize revenue in accordance with ASC 606,
Revenue from Contracts with Customers. While the application of the five-step revenue recognition model is described in Note 2 to our
consolidated financial statements included elsewhere in this Annual Report, the estimates and judgments involved in revenue recognition
represent a critical accounting policy for the following reasons.
Certain of our contracts, particularly government
R&D service arrangements, require us to recognize revenue over time based on progress toward completion. We measure progress using
an input method, and the determination of the appropriate measure of progress requires management judgment regarding the estimated effort
or costs necessary to satisfy the performance obligation relative to actual effort or costs incurred to date. Changes in these estimates,
such as revisions to the total expected level of effort, could result in a material change in the amount of revenue recognized in a given
period. If our estimates of total effort to complete a performance obligation were to increase, revenue recognized in the current and
future periods would decrease, and vice versa.
In instances where our contracts include multiple
performance obligations, we exercise judgment in determining the standalone selling price for each obligation. We establish standalone
selling prices by evaluating market data for comparable services and considering our historical pricing practices. The aggregate standalone
selling price of all performance obligations is calculated, and each individual obligation’s proportionate share of the total is
determined. This ratio is then applied to the overall contract price to allocate the transaction price among the performance obligations
accordingly. If the relative standalone selling price allocated to a given performance obligation were to change, the timing and amount
of revenue recognized for that obligation could differ materially from current reported amounts.
Allowance for Expected Credit Losses
We maintain an allowance for expected credit losses
on our accounts receivable based on our assessment of the collectability of customer accounts. This assessment requires significant management
judgment applied to specific customer balances and circumstances. In evaluating collectability, we consider factors including the age
of the receivable balance, the customer’s payment history and current creditworthiness, the nature of the customer relationship,
communications with the customer regarding outstanding balances, and broader economic conditions that may affect our customers’
ability to pay. Given the concentration of our revenue among a limited number of customers, the credit risk associated with any individual
customer balance can be significant relative to our total receivables.
The allowance for expected credit losses was $161,723
and $60,040 for the years ended December 31, 2025 and 2024, respectively. The increase reflects management’s assessment of evolving
customer-specific circumstances over the course of 2025 for new and existing customer balances. Because our allowance is based in part
on judgment applied to individual customer balances rather than a formulaic calculation, different assumptions regarding the likelihood
and timing of collection from specific customers could result in a materially different allowance and a corresponding change in selling,
general and administrative expense in the period of the revision.
58
Stock-Based Compensation
We account for stock-based compensation in accordance
with ASC 718, Compensation - Stock Compensation. We estimate the fair value of stock option awards at the date of grant using the Black-Scholes
option-pricing model. This model requires management to make several significant assumptions, each of which can materially affect the
resulting fair value and, consequently, the amount of compensation expense recognized over the vesting period.
Expected volatility is a particularly significant
input because the Company did not have a public trading history during the periods in which our outstanding options were granted. We therefore
estimated expected volatility based on the historical volatility of comparable publicly traded peer companies. The selection of peer companies
and the measurement period used to calculate their historical volatility involve judgment, and different peer groups or measurement periods
could yield materially different volatility estimates. A higher assumed volatility increases the estimated fair value of the option and
the resulting expense, while a lower volatility decreases it.
Due to our limited historical data related to
employee stock option exercise behavior, we use the simplified method permitted by Staff Accounting Bulletin No. 110 to estimate the expected
term for our stock options. The risk-free interest rate is based on U.S. Treasury securities with maturities consistent with the expected
term, and we assume a dividend yield of zero. As our public trading history develops, we expect to transition to using our own historical
volatility data and actual exercise behavior to inform these assumptions, which could result in materially different fair values for future
grants. For additional information regarding the assumptions used in our stock-based compensation calculations, see Note 8 to our consolidated
financial statements included elsewhere in this Annual Report.
Capitalized Software Development Costs
We account for costs incurred in the development
of software to be sold, leased, or otherwise marketed in accordance with ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed.
Under this guidance, software development costs incurred prior to the establishment of technological feasibility are expensed as research
and development. Costs incurred after technological feasibility is established and before the product is available for general release
are capitalized.
The determination of when technological feasibility
has been established requires significant management judgment. Technological feasibility is established upon completion of a detailed
program design or, in the absence of a detailed program design, upon completion of a working model. Through December 31, 2024, based on
our development process and the level of development risk inherent in our products, technological feasibility was generally not established
until products were available for general release, and accordingly all software development costs were expensed as incurred. Beginning
in 2025, we commenced development of a new software project for which technological feasibility was established prior to general release,
resulting in the capitalization of $0.7 million in eligible development costs during the year ended December 31, 2025.
This estimate is critical
because the point at which technological feasibility is deemed to have been achieved directly determines whether development costs are
capitalized as an asset or expensed in the current period, and the difference can be material. If we were to conclude that technological
feasibility was established earlier in the development cycle, a greater amount of costs would be capitalized, reducing research and development
expense and increasing reported operating income. Conversely, if technological feasibility were determined to occur later, fewer costs
would be capitalized and current period expense would increase. Once capitalized, these costs are subject to ongoing recoverability assessment.
At each balance sheet date, we compare the unamortized capitalized costs of each product to the net realizable value of that product,
and any excess of unamortized cost over net realizable value is written down and charged to cost of sales. Given the rapid pace of technological
change in our industry, there is inherent uncertainty in estimating both the future revenue streams that support recoverability and the
estimated economic life over which capitalized costs will be amortized once the related product is available for general release.
Deferred Tax Asset
Valuation Allowance
We recognize deferred
tax assets to the extent that we believe it is more likely than not that these assets will be realized. In evaluating the recoverability
of our deferred tax assets, we consider all available positive and negative evidence, including our history of operating losses, the lack
of taxable income in recent periods, the nature and timing of future reversal of existing taxable and deductible temporary differences,
tax planning strategies, and forecasted future taxable income. As of December 31, 2025, we were in a net deferred tax liability position
of $13,703. We maintained a valuation allowance against our net deferred tax assets to the extent that it is not more likely than not
that such assets will be realized. In determining the required valuation allowance, we consider all available evidence, including the
future reversal of existing taxable temporary differences.
59
The determination of
whether a valuation allowance is necessary, and the amount of any such allowance, requires significant management judgment. The most significant
factor in our assessment was our cumulative loss history, which represents objectively verifiable negative evidence that is difficult
to overcome without sufficient positive evidence of future profitability. While the completion of our IPO in 2026 improved our liquidity
position, the realization of our deferred tax assets ultimately depends on generating sufficient taxable income in future periods. If
our assessment of future taxable income were to change, for example as a result of sustained profitability or the execution of significant
new contracts, we could determine that some or all of the valuation allowance is no longer required. A full or partial release of the
valuation allowance would result in a corresponding income tax benefit and an increase in net income in the period of the release, which
could be material. Conversely, to the extent we generate additional net operating losses or other deferred tax assets, we would expect
to maintain the full valuation allowance until positive evidence supports a different conclusion. For additional information regarding
our deferred tax assets and the related valuation allowance, see Note 9 to our consolidated financial statements included elsewhere in
this Annual Report.
Emerging Growth Company
Accounting Election
Section 102(b)(1) of the JOBS Act exempts emerging
growth companies from being required to comply with new or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect not to take advantage
of the extended transition period and to comply with the requirements that apply to non-emerging growth companies, and any such election
to not take advantage of the extended transition period is irrevocable. We expect to be an emerging growth company and will have the benefit
of the extended transition period. We intend to take advantage of the benefits of this extended transition period. As a result, our consolidated
financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates
for new or revised accounting standards that are applicable to public companies. See Note 2 to our consolidated financial statements included
elsewhere in this Annual Report for a discussion of recently issued accounting pronouncements and their expected impact on our financial
statements.
Recent Accounting Pronouncements
The recent accounting pronouncements that are
material to our financial statements are disclosed in Note 2 of our consolidated financial statements included elsewhere in this Annual
Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.