BIO KEY INTERNATIONAL INC - Quarter Report: 2020 June (Form 10-Q)

 

Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

  

☒

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

or

☐

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

 

For the Transition Period from              to

 

Commission file number 1-13463

 

BIO-KEY INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE	41-1741861
(State or Other Jurisdiction of Incorporation of Organization)	(IRS Employer Identification Number)

 

3349 HIGHWAY 138, BUILDING A, SUITE E, WALL, NJ  07719

(Address of Principal Executive Offices)

 

(732) 359-1100

(Registrant’s telephone number, including area code)

 

Securities registered pursuance to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	BKYI	Nasdaq Capital Market

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller Reporting Company ☒
		Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

  

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act)  Yes  ☐  No  ☒

 

Number of shares of Common Stock, $.0001 par value per share, outstanding as of August 12, 2020 is 60,434,315.

 

 

 

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES

 

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1	—	Condensed Consolidated Financial Statements (unaudited):
		Balance sheets as of June 30, 2020 (unaudited) and December 31, 2019 (audited)	3
		Statements of operations for the three and six months ended June 30, 2020 and 2019	4
		Statements of Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2020 and 2019	5
		Statements of cash flows for the six months ended June 30, 2020 and 2019	7
		Notes to condensed consolidated financial statements	9
Item 2	—	Management’s Discussion and Analysis of Financial Conditions and Results of Operations.	25
Item 4	—	Controls and Procedures.	33
PART II. OTHER INFORMATION
Item 1A	—	Risk Factors	34
Item 2	—	Unregistered Sales of Equity Securities and Use of Proceeds.	35
Item 6	—	Exhibits.	36
Signatures			37

  

 

		June 30, 2020				December 31, 2019
		(Unaudited)
ASSETS
Cash and cash equivalents		$	886,664			$	79,013
Accounts receivable, net			315,341				126,000
Due from factor			79,634				110,941
Inventory			388,898				429,119
Prepaid expenses and other			98,641				108,397
Investment			516,121				512,821
Total current assets			2,285,299				1,366,291
Resalable software license rights			68,774				73,802
Equipment and leasehold improvements, net			95,545				95,509
Capitalized contract costs, net			176,345				231,519
Deposits and other assets			8,712				8,712
Operating lease right-of-use assets			552,954				566,479
Intangible assets, net			2,147,197				154,386
Goodwill			417,171				-
Total non-current assets			3,466,698				1,130,407
TOTAL ASSETS		$	5,751,997			$	2,496,698
LIABILITIES
Accounts payable		$	668,474			$	844,557
Accounts payable – related party			66,466				188,737
Accrued liabilities			380,462				572,885
Convertible notes payable, net of debt discount and debt issuance costs			2,201,017				2,255,454
Note payable - PistolStar			500,000				-
Deferred revenue			602,779				359,212
Operating lease liabilities, current portion			204,282				170,560
Total current liabilities			4,623,480				4,391,405
Operating lease liabilities, net of current portion			346,064				390,466
Total non-current liabilities			346,064				390,466
TOTAL LIABILITIES			4,969,544				4,781,871
Commitments
STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock — authorized, 170,000,000 shares; issued and outstanding; 22,181,315 and 14,411,432 of $.0001 par value at June 30, 2020 and December 31, 2019, respectively			2,218				1,441
Additional paid-in capital			95,558,928				87,436,402
Accumulated deficit			(94,778,693	)			(89,723,016	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)			782,453				(2,285,173	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)		$	5,751,997			$	2,496,698

 

		Three months ended June 30,								Six months ended June 30,
		2020				2019				2020				2019
Revenues
Services		$	229,503			$	231,993			$	437,026			$	473,603
License fees			23,542				60,300				258,887				143,508
Hardware			54,097				436,090				133,714				662,895
Total revenues			307,142				728,383				829,627				1,280,006
Costs and other expenses
Cost of services			92,672				58,421				163,117				149,250
Cost of license fees			8,255				372,327				18,711				749,543
Cost of hardware			47,527				248,678				90,889				384,683
Total costs and other expenses			148,454				679,426				272,717				1,283,476
Gross profit (loss)			158,688				48,957				556,910				(3,470	)
Operating Expenses
Selling, general and administrative			1,211,928				1,058,671				2,593,327				2,435,704
Research, development and engineering			318,573				301,217				655,462				675,335
Total Operating Expenses			1,530,501				1,359,888				3,248,789				3,111,039
Operating loss			(1,371,813	)			(1,310,931	)			(2,691,879	)			(3,114,509	)
Other income (expense)
Interest income			25,801				54				25,802				124
Government grant – Paycheck Protection Program			340,819				-				340,819				-
Interest expense			(567,516	)			(114,866	)			(2,118,657	)			(114,866	)
Loss on extinguishment of debt			-				-				(499,076	)			-
Total other income (expense), net			(200,896	)			(114,812	)			(2,251,112	)			(114,742	)
Net loss			(1,572,709	)			(1,425,743	)			(4,942,991	)			(3,229,251	)
Deemed dividends related to down-round features			-				-				(112,686	)			-
Net loss available to common stockholders		$	(1,572,709	)		$	(1,425,743	)		$	(5,055,677	)		$	(3,229,251	)
Basic and diluted loss per common share		$	(0.08	)		$	(0.10	)		$	(0.28	)		$	(0.23	)
Weighted Average Common Shares Outstanding:
Basic and diluted			20,864,866				14,117,062				18,030,939				14,048,570

 

		Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance as of January 1, 2020			14,411,432			$	1,441			$	87,436,402			$	(89,723,016	)		$	(2,285,173	)
Issuance of common stock pursuant to securities purchase agreements			700,000				70				1,032,430				-				1,032,500
Commitment fee adjustment			-				-				(900,000	)			-				(900,000	)
Beneficial conversion feature			-				-				641,215				-				641,215
Issuance of common stock pursuant to warrant exercises			972,000				97				1,457,903				-				1,458,000
Issuance of common stock for conversion of convertible note payable			2,307,690				231				1,499,769				-				1,500,000
Deemed dividends related to down-round features			-				-				112,686				(112,686	)			-
Share-based compensation			-				-				512,719				-				512,719
Net loss			-				-				-				(3,370,282	)			(3,370,282	)
Balance as of March 31, 2020			18,391,122			$	1,839			$	91,793,124			$	(93,205,984	)		$	(1,411,021	)
Issuance of common stock for directors’ fees			17,140				2				15,005				-				15,007
Issuance of common stock pursuant to securities purchase agreements			251,518				25				145,308				-				145,333
Warrants issued with convertible notes			-				-				1,388,339				-				1,388,339
Warrant issued for consulting fees			-				-				94,655				-				94,655
Legal and commitment fees			-				-				(199,328	)			-				(199,328	)
Issuance of common stock for conversion of convertible note payable			3,521,535				352				2,288,648				-				2,289,000
Share-based compensation			-				-				33,177				-				33,177
Net loss			-				-				-				(1,572,709	)			(1,572,709	)
Balance as of June 30, 2020			22,181,315			$	2,218			$	95,558,928			$	(94,778,693	)		$	782,453

		Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance as of January 1, 2019			13,977,868			$	1,398			$	85,599,140			$	(75,134,316	)		$	10,466,222
Issuance of common stock for directors’ fees			13,820				1				16,505				-				16,506
Share-based compensation			-				-				509,528				-				509,528
Net loss			-				-				-				(1,803,508	)			(1,803,508	)
Balance as of March 31, 2019			13,991,688			$	1,399			$	86,125,173			$	(76,937,824	)		$	9,188,748
Issuance of common stock for directors’ fees			4,235				-				5,505				-				5,505
Issuance of common stock pursuant to securities purchase agreements			300,000				30				449,970				-				450,000
Commitment fee adjustment			-				-				(270,000	)			-				(270,000	)
Share-based compensation			-				-				125,549				-				125,549
Net loss			-				-				-				(1,425,743	)			(1,425,743	)
Balance as of June 30, 2019			14,295,923			$	1,429			$	86,436,197				(78,363,567	)		$	8,074,059

 

		Six Months Ended June 30,
		2020				2019
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss		$	(4,942,991	)		$	(3,229,251	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation			39,919				39,903
Amortization of intangible assets			12,189				6,628
Amortization of software license rights			-				562,150
Amortization of capitalized contract costs			73,660				67,774
Amortization of debt discount			398,929				15,467
Amortization of debt issuance costs			981,529				56,200
Operating leases right-of-use assets			92,632				70,180
Loss on extinguishment of debt			499,076				-
Amortization of beneficial conversion feature			641,215				-
Interest expense capitalized to note payable			96,984				-
Share and warrant-based compensation for employees and consultants			640,551				635,077
Stock based directors’ fees			15,007				22,011
Change in assets and liabilities:
Accounts receivable			(4,549	)			884,132
Due from factor			31,307				(81,886	)
Capitalized contract costs			(18,486	)			(26,861	)
Inventory			40,221				(12,874	)
Resalable software license rights			5,028				35,043
Prepaid expenses and other			19,241				(23,781	)
Accounts payable			(298,797	)			526,233
Accrued liabilities			(192,917	)			166,018
Deferred revenue			(9,601	)			97,652
Operating lease liabilities			(89,787	)			(66,246	)
Net cash used for operating activities			(1,969,640	)			(256,431	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of PistolStar			(2,000,000	)			(1,736	)
Cash acquired from purchase of PistolStar			100,747				-
Proceeds from maturity of investment			512,821				-
Purchase of investment			(516,121	)			-
Capital expenditures			(3,489	)			(28,753	)
Net cash used for investing activities			(1,906,042	)			(30,489	)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes			3,958,000				667,000
Costs to issue convertible notes			(398,412	)			(17,000	)
Proceeds from warrant exercises			1,458,000				-
Repayment of convertible note			(211,984	)			-
Net repayments of related party loans			(122,271	)			-
Net cash provided by financing activities			4,683,333				650,000
NET INCREASE IN CASH AND CASH EQUIVALENTS			807,651				363,080
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			79,013				323,943
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	886,664			$	687,023

		Six Months Ended June 30,
		2020				2019
Cash paid for:
Interest		$	—			$	—
Income taxes		$	—			$	—
Noncash investing and financing activities
Accounts receivable acquired from PistolStar		$	184,792			$	—
Prepaid expenses acquired from PistolStar		$	9,485			$	—
Equipment acquired from PistolStar		$	36,467			$	—
Intangible assets acquired from PistolStar		$	2,005,000			$	—
Goodwill related to PistolStar acquisition		$	417,171			$	—
Issuance of note payable for PistolStar acquisition		$	500,000				—
Accrued expenses acquired from PistolStar		$	494			$	—
Deferred revenue acquired from PistolStar		$	253,168			$	—
Right-of-use asset addition under ASC 842		$	79,107			$	602,937
Operating lease liability addition under ASC 842		$	79,107			$	590,342
Issuance of common stock pursuant to securities purchase agreements		$	277,833			$	180,000
Warrants issued with convertible notes		$	1,388,339			$	-
Debt discount issued with convertible note		$	551,250			$	40,000
Deemed dividends related to down-round features		$	112,686			$	—
Issuance of common stock for conversion of note payable		$	3,789,000			$	—
Beneficial conversion feature		$	641,215			$	—
Legal and commitment fees related to debt and equity included in accounts payable		$	122,714			$	—

 

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as passwords, tokens, keys,  smart cards, PKI, credit card, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at December 31, 2019 was derived from the audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on May 14, 2020, and the 8-K/A disclosing the financial statements of PistolStar, Inc. (“PistolStar”) filed on July 28, 2020.

 

New Significant Accounting Policies

 

Business Combinations

In accordance with ASC 805, Business Combinations (ASC 805), the Company recognizes the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets.

 

The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair value of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

 

Goodwill and acquired intangible assets

Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of December 31^st of each year. To date, the Company has not identified any impairment to goodwill.

 

Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

 

 

Recently Issued Accounting Pronouncements

  

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update to the standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt ASU 2018-15 prospectively or retrospectively. The Company has assessed that ASU 2018-15 currently does not have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company is currently assessing the impact ASU 2016-13 will have on its condensed consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

 

Reclassification

 

Reclassifications occurred to certain prior year amounts in order to conform to the current year classifications.  The reclassifications have no effect on the reported net loss.

 

2.	GOING CONCERN

 

The Company has incurred significant losses to date, and at June 30, 2020 had an accumulated deficit of approximately $95 million. In addition, broad commercial acceptance of the Company’s technology is critical to the Company’s success and ability to generate future revenues. At June 30, 2020, the Company’s total cash and cash equivalents were approximately $887,000, as compared to approximately $79,000 at December 31, 2019.

 

The Company has financed operations in the past through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. With its new acquisition, the Company estimates that it currently requires approximately $680,000 per month to conduct operations, a monthly amount that it has been unable to achieve consistently through revenue generation.

 

In July of 2020, the Company raised approximately $22.8 million, after deducting the underwriting discounts and commissions and estimated offering expenses.  The Company used approximately $4.2 million of the net proceeds of the Offering to satisfy all outstanding amounts due under convertible promissory notes previously issued to Lind Global Macro Fund, L.P. and there are no longer any remaining amounts due. We anticipate using these funds to help fulfill two contracts in Africa. Our ability to execute and deliver on these contracts in Africa, our ability to expand into Asia, Africa and other foreign markets, the duration and severity of the current coronavirus COVID-19 pandemic and its effect on our business operations, sales cycles, personnel, and the geographic markets in which we operate, delays in the development of products and statements of assumption underlying any of the foregoing will affect our ability to achieve profitability.

 

Due to several factors, including our history of losses and limited revenue, our independent auditors have included an explanatory paragraph in their opinion related to our annual financial statements as to the substantial doubt about our ability to continue as a going concern. Our long-term viability and growth will depend upon the successful commercialization of our technologies and expansion of operations, and to pursue merger or acquisition candidates. As we move forward, we will reevaluate our going concern, based on our ability to generate a profit.

 

 

3.	REVENUE FROM CONTRACTS WITH CUSTOMERS

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:

 

	●	Identify the contract with a customer
	●	Identify the performance obligations in the contract
	●	Determine the transaction price
	●	Allocate the transaction price to performance obligations in the contract
	●	Recognize revenue when or as the Company satisfies a performance obligation

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three month periods ended June 30, 2020 and June 30, 2019:

 

 

 

 

 

The following table summarizes revenue from contracts with customers for the six month periods ended June 30, 2020 and June 30, 2019:

 

 

 

 

*EMEA – Europe, Middle East, Africa

 

 

All of the Company’s performance obligations, and associated revenue, are generally transferred to customers at a point in time, with the exception of support and maintenance, and professional services, which are generally transferred to the customer over time.

 

Software licenses

 

Software license revenue consist of fees for perpetual and software as a service (SaaS) software licenses for one or more of the Company’s biometric fingerprint solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.

 

Hardware

Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from the Company, and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.

 

Support and Maintenance

Support and Maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its Support and Maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of invoice until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and Maintenance contracts are up to one year in length and are generally invoiced either annually or quarterly in advance. Support and Maintenance revenue for SaaS license is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.

 

Professional Services

Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.

 

Contracts with Multiple Performance Obligations

Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.  The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.

 

The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software.  These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.

 

Accounts receivable from customers are typically due within 30 days of invoicing.  The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.

 

Costs to Obtain and Fulfill a Contract

Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are included as capitalized contract costs on the balance sheet.   The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

 

Transaction Price Allocated to the Remaining Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as at June 30, 2020. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:

 

●

The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606-10-50-14.

 

At June 30, 2020 deferred revenue represents our remaining performance obligations related to support and maintenance, all of which is expected to be recognized within one year.

 

Revenue recognized during the three and six months ended June 30, 2020 from amounts included in deferred revenue at the beginning of the period was approximately $36,000 and $108,000 respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was $602,779 and $359,212 at June 30, 2020 and December 31, 2019, respectively.

 

4.	PistolStar, Inc. acquisition

 

On June 30, 2020, the Company entered into a stock purchase agreement pursuant to which it acquired PistolStar, Inc., a private company based in the United States, that provides enterprise-ready identity access management solutions, including multi-factor authentication, identity-as-a-service, single sign-on and self-service password reset to commercial, government and education customers throughout the United States and internationally.

 

From April 10, 2020 until we acquired PistolStar, we licensed PortalGuard®, PistolStar’s authentication software, which the Company combines with its biometric authentication solutions offered to existing and prospective customers.

 

The total purchase price of $2.5 million included cash payments of $2.0 million and the issuance of a $500,000 promissory note.

 

The acquisition of PistolStar has been accounted for as a business combination and, in accordance with ASC 805, the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the preliminary purchase price allocation as of June 30, 2020:

 

 

The promissory note, which was issued to the previous owner of PistolStar, carries interest at 4% per annum and is payable in four installments over the 12-month period following the closing.

 

 

In the three months ended June 30, 2020, acquisition-related expenses were immaterial. Acquisition-related expenses have been included primarily in general and administrative expenses in the condensed consolidated statements of operations. The operating results of PistolStar will be included in the condensed consolidated statements of operations beginning on July 1, 2020.

 

The significant intangible assets identified in the purchase price allocation discussed above include customer relationships, which are amortized over their respective useful lives on a straight-line basis when the pattern in which their economic benefits will be consumed cannot be reliably determined. To value the developed technology asset, the Company utilized the income approach, specifically a discounted cash-flow method known as the multi-period excess earnings method. Customer relationships represent the underlying relationships with certain customers to provide ongoing services for products sold. The Company utilized the income approach, specifically the distributor method, a subset of the excess-earnings method to value the customer relationships.

 

The fair value of the assets acquired and liabilities assumed reflected in the tables above is less than the purchase price, resulting in the recognition of goodwill. The goodwill reflects the value of the synergies the Company expects to realize and the assembled workforce.

 

The following table presents the preliminary fair values and useful lives of the identifiable intangible assets acquired:

 

 

Pro Forma Financial Information (unaudited)

 

The following unaudited pro forma information presents the combined results of operations of the Company and PistolStar for the three and six month periods ended June 30, 2020 as if the acquisition of PistolStar had been completed on January 1, 2020. These pro forma financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations such as fair value adjustments (step-downs) for deferred revenue, increased amortization for the fair value of acquired intangible assets and adjustments to eliminate transaction costs incurred by the Company and PistolStar.

 

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and PistolStar. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred as of January 1, 2020, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts):

 

 

5.	ACCOUNTS RECEIVABLE

 

Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible.

 

As a result of the payment delays from a large customer, the Company has reserved $1,720,000 at June 30, 2020 and December 31, 2019, which represents 100% of the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. Additionally, the Company sold a license to a Chinese reseller in December 2018. Revenue was recognized in accordance with ASC 606 in the amount of $1.1 million in 2018. As of December 31, 2019, the second payment due to be paid in March 2019 for $555,555 was still outstanding and payable. As of December 31, 2019, the Company wrote off the amount directly to bad debt expense as it was determined not to be collectible.

 

 

Accounts receivable at June 30, 2020 and December 31, 2019 consisted of the following: 

 

 

 

 

6.	SHARE BASED COMPENSATION

 

The following table presents share-based compensation expenses included in the Company’s unaudited condensed interim consolidated statements of operations:

 

   

     

 

7.

FACTORING

 

Due from factor consisted of the following as of: 

 

  

 

The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) expiring on October 31, 2020. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 per quarter of certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the Factor. Factoring fees range from 2.75% to 15% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. The cost of factoring is included in selling, general and administrative expenses. The cost of factoring was as follows:  

 

 

 

 

8.

INVENTORY

 

Inventory is stated at the lower of cost, determined on a first in, first out basis, or net realizable value, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of: 

 

 

 

9.	RESALABLE SOFTWARE LICENSE RIGHTS

 

On November 11, 2015, the Company entered into a license agreement for the rights to all software and documentation regarding the technology currently known as or offered under the FingerQ name. The license agreement grants the Company the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sub-licenses of the licensed technology to end users. The license rights have been granted to the Company in perpetuity, with a stated number of end-user resale sub-licenses allowed under the contract for a total of $12,000,000.

 

The Company initially determined the software license rights to be a finite lived intangible asset, and estimated that the software license rights shall be economically used over a 10-year period, with a weighting towards the beginning years of that time-frame. The license rights were acquired during the fourth quarter of 2015, but the usage of such rights in the Company’s products was not generally available until January 2017. Accordingly, amortization began in the first quarter of 2017.

 

Through December 31, 2018, the license rights were amortized over the greater of the following amounts: 1) an estimate of the economic use of such license rights, 2) the amount calculated by the straight line method over ten years or 3) the actual cost basis of sales usage of such rights. After re-evaluation of the expected timeline of future license transactions, commencing January 1, 2019, the Company changed its amortization methodology to the greater of the straight-line methodology or actual unit cost per license sold based on net remaining software licenses as of January 1, 2019. The Company categorized the amortization expense under Cost of Sales as it more closely reflected the nature of the license right arrangement and the use of the technology.

 

During the fourth quarter of 2019, the Company re-evaluated the recoverability of the carrying amount of the balance of license rights, and concluded that there were no significant undiscounted cash flows expected to be generated from the future sale of the license rights. Accordingly, an impairment charge of $6,957,516 was recorded in the fourth quarter of 2019, which reduced the carrying amount of the FingerQ license rights down to zero. Throughout 2019, the Company attempted to sell the technology into the mobile market in Asia, but due to, among other things, the trade tension between the US and China, management concluded that the future amortization would not represent an accurate cost to the ongoing business, without corresponding revenue. A total of $281,076 and $174 was charged to cost of sales during the three-month period ended June 30, 2019 for amortization and the cost basis of the actual sales, respectively. A total of $562,150 and $350 was charged to cost of sales during the six-month period ended June 30, 2019 for amortization and the cost basis of the actual sales, respectively.

 

On December 31, 2015, the Company purchased third-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize. The Company is amortizing the total cost over the same methodology described above with the greatest of the two approaches being the actual unit cost per license sold. A total of $0 and $8,739 was charged to cost of sales during the three month periods ended June 30, 2020 and 2019, respectively. A total of $5,028 and $34,693 was charged to cost of sales during the six month periods ended June 30, 2020 and 2019, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $111,226 has been charged to cost of sales, with a carrying balance of $68,774 and $73,802 as of June 30, 2020 and December 31, 2019, respectively.

 

 

10.	INVESTMENT

 

During 2019, the Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong. The Bond Certificate translated to $512,821 U.S. Dollars on June 2019 purchase date. The bond had a one-year term which matured in June 2020, bearing interest at 5% per annum. The Company redeemed the bond and recorded interest income of approximately $25,800. The Company then purchased a new 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in June 2020. The new Bond Certificate translated to $516,121 U.S. Dollars, based on the exchange rate at purchase date.  The Company can invest up to 20,000,000 Hong Kong dollars under the terms of the certificate, bearing interest at 5% per annum. The bond is classified on the balance sheet as an investment. The investment is recorded at amortized cost which approximates fair value, and is currently planned to be held to maturity.

 

11.	Related Party TRANSACTIONS

 

The Company has received a series of non-interest-bearing advances from Mr. Wong Kwok Fong, a director of the Company, and Mr. Michael DePasquale, the Company’s Chief Executive Officer, to pay current liabilities. The balance of the advances as at June 30, 2020 was $66,466 and $0, respectively, and as of December 31, 2019 was $74,737 and $114,000, respectively. The balance owed is due on demand.

 

Sales Incentive Agreement with TTI

 

On March 25, 2020, the Company entered into a sales incentive agreement Technology Transfer Institute (“TTI”). One of the Company’s board members is the Chief Executive Officer of TTI. Terms of the agreement include the following:

 

1.

The term of the agreement is one year unless notice to terminate (as defined) is given. The agreement will be automatically extended for additional one-year terms unless terminated.

2.

For each $5,000,000 in revenue (up to a maximum of $20,000,000) TTI generates during the first year that generates net income of at least 20% (as defined), the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 500,000 shares of common stock.

3.

In the event that TTI generates revenue in excess of $20,000,000 during the first year, the Company will issue TTI a five-year warrant to purchase 100,000 shares of Common Stock at an exercise price of $1.50 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000).

 

In no event will the Company be obligated to issue more than 2,000,000 shares of common stock or warrants to purchase more than 500,000 shares of common stock pursuant to this agreement. 

 

There has been no revenue generated nor sales incentive fees paid during the three and six months ended June 30, 2020.

 

12.	Convertible NOTES PAYABLE

 

Convertible notes payable as of June 30, 2020 and December 31, 2019 consist of the following:

 

 

 

Securities Purchase Agreement dated July 10, 2019

 

On July 10, 2019, the Company issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”). At closing, a total of $2,550,000 was funded. The original issue discount was $510,000. The principal amount due of the Original Note was due and payable as follows: $918,000 was due 180 days after funding, $1,071,000 was due 270 days after funding, and the remaining balance due 12 months after the date of funding.

 

The Original Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor in shares of common stock at a fixed conversion price of $1.50 per share. The Company had the right to prepay the Original Note in full at any time without penalty in which event, the Investor had the option of converting 25% of the outstanding principal amount of the Note into shares of common stock.

 

In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 2,000,000 shares of common stock at a fixed exercise price of $1.50 per share, paid a $50,000 commitment fee, and issued 266,667 shares of common stock in payment of a $400,000 due diligence fee. The Company also paid banker fees of $193,500 and legal fees of $71,330. The valuation of the warrant of $595,662 was recorded to debt discount and was amortized over the life of the Original Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

 

On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original Note. The principal amount was due and payable in full on April 13, 2020. The Amended Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor into shares of common stock at a fixed conversion price of $0.65 per share. Due to the debt restructuring, the balance of the Amended Note was increased by an additional $729,000 in interest. The Company accounted for the transaction as a debt extinguishment, and therefore, the balance of the fees and unamortized discount associated with the Original Note were written off and included as loss on extinguishment of debt. On the day of the conversion, the closing stock price for the day was $0.76, which resulted in a beneficial conversion of $0.11 per share outstanding or $641,215 to be amortized to interest expense over the term of the Amended Note as adjusted for any debt conversion.

 

On April 12, 2020, and May 6, 2020, the Company entered into amendments (the “Amendments”) to the Amended Note. The Amendments extended the maturity date to June 12, 2020 and extended the Investor’s right to convert the Amended Note into shares of the Company’s common stock at a price of $0.65 per share through June 12, 2020. All other provisions of the Amended Note remained the same.

 

Until the second anniversary of the closing, the Investor has the right to purchase up to 20% of the securities the Company issues in any future private placement, subject to certain exceptions for, among other things, strategic investments.

 

On June 10, 2020, the Investor converted the last of the remaining principal into shares of common stock for payment in full, and as of June 30, 2020, the remaining principal balance is $0. The Amended Note amount of $3,789,000 was converted into 5,829,225 shares of common stock.

 

 

January 2020 Note

 

On January 13, 2020, the Company issued a $157,000 principal amount secured 10% convertible redeemable note (the “January 2020 Note”) to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $1.50 per share. The January 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. At the closing, the Company agreed to issue 650,000 shares of common stock in lieu of payment of a $75,000 commitment fee which would be reduced to 50,000 shares if the January 2020 Note is repaid prior to the maturity date. The Company paid $7,000 of legal fees for the January 2020 Note.

 

On June 12, 2020, the January 2020 Note was paid in full for $211,984. The 600,000 shares were returned to the Company in July 2020.

 

 

February 2020 Note

 

On February 13, 2020, the Company issued a $126,000 principal amount secured 10% convertible redeemable note (the “February 2020 Note”) to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $1.15 per share.  On March 12, 2020, the Original Note was amended to reduce the conversion price to $0.65 per share, which reduced the conversion price of the February Note to $0.65 and resulted in an additional deemed dividend expense of $70,998. The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%.   The Company issue 50,000 shares of common stock to the investor in lieu of payment of a $57,500 commitment fee. The Company paid $6,000 of legal fees in connection with the issuance of February 2020 Note.

 

This February 2020 Note was paid in full on July 10, 2020 by payment of $170,442.

 

The February 2020 Note, net of unamortized debt issuance costs consisted of:

 

 

May 2020 Note

 

On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “May 2020 Note”). At closing, $2,100,000 was funded. The principal amount is due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding. The Note is convertible at a fixed convertible price of $1.16 per share. In connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 114,943 shares to the Investor priced at $1.16 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent. In connection with the closing of the May 2020 Note, the Company issued a five-year warrant to the investor to purchase 1,900,000 shares of common stock at a fixed exercise price of $1.16 and was immediately exercisable. The valuation of the warrant of $876,937 was recorded to debt discount and is being amortized over the life of the May 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in-capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in the interest expense on the statement of operations.

 

Following the completion of the underwritten offering consummated in July 2020, all outstanding amounts due under the May 2020 Note were paid in full.

 

The May 2020 Note, net of unamortized debt issuance costs consisted of:

 

 

 

June 2020 Note

 

On June 29, 2020, the Company issued a $1,811,250 principal amount senior secured convertible note (the “June 2020 Note”).  At closing, $1,575,000 was funded. The principal amount is due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date with the remaining balance due on the twelfth month after the date of funding. The Note is convertible at a fixed convertible price of $1.16 per share. In connection with the issuance of the June 2020 Note, the Company paid a $100,000 due diligence fee by issuing 136,575 shares to the Investor priced at $0.7322 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent.

 

In connection with the closing of the June 2020 Note, the Company issued a five-year warrant to the Investor to purchase 1,425,000 shares of common stock at a fixed exercise price of $1.16 per share, and was immediately exercisable. The Company paid a placement fee of 7% of the gross proceeds to a placement agent. The valuation of the warrant of $511,402 was recorded to debt discount and is being amortized over the life of the June 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

 

Following the completion of the underwritten offering consummated in July 2020, all outstanding amounts relating to the June 2020 Note were paid in full. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.

 

The June 2020 Note, net of unamortized debt issuance costs consisted of:

 

 

 

13.

LEASES

 

The Company’s leases office space in New Jersey, Hong Kong, Minnesota, and New Hampshire with lease termination dates of 2023, 2020, 2022, and 2022, respectively. The leases include non-lease components with variable payments. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases, for the three months ended and as of:

 

 

Supplemental cash flow information related to leases were as follows, for the six months ended June 30, 2020:

 

 

Maturities of operating lease liabilities were as follows:

 

 

 

14.	EARNINGS (LOSS) PER SHARE - COMMON STOCK (“EPS”)

 

The Company’s basic EPS is calculated using net loss available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.

 

The reconciliation of the numerator of the basic and diluted EPS calculations was as follows for both of the following three and six month periods ended June 30, 2020 and 2019:

 

 

Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

 

 

The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the net losses for the three and six months ended June 30, 2020 and 2019:

 

 

  

 

15.	STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. As of June 30, 2020, 100,000 shares of preferred stock have been designated as Series A-1 Convertible Preferred Stock and 105,000 shares of preferred stock have been designated as Series B-1 Convertible Preferred Stock. There was no preferred stock outstanding as of June 30, 2020 or December 31, 2019.

 

 

Warrants

 

Securities Purchase Agreement dated November 13, 2014:

 

As part of a Securities Purchase Agreement, dated November 13, 2014, by and between the Company and a number of private and institutional investors, the Company issued to certain private investors warrants to purchase 996,877 shares of common stock.  The warrants expired in November 2019.

 

Securities Purchase Agreement dated September 23, 2015:

 

On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 69,445 shares of common stock in connection with the issuance of a promissory note. The warrants were immediately exercisable at an initial exercise price of $3.60 per share and have a term of five years. 

 

The 2015 Warrants have a "full ratchet" anti-dilution adjustment provision which is triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than $3.60 per share. The anti-dilution adjustment provision is not triggered by certain "exempt issuances" which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

 

Anti-dilution adjustments were triggered as follows:

 

1.

On August 24, 2018 the Company issued warrants to certain investors which triggered the anti-dilution provisions included in the 2015 Warrants. As a result, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants was increased from 69,445 to 166,668 shares, and the exercise price was reduced from $3.60 to $1.50 per share.

 

2.

On February 14, 2020, the February 2020 Note was issued at a conversion price of $1.15 that triggered the anti-dilution provisions included in these warrants. In addition, the amendments to the Original Note reduced the conversion price of the Original Note to $0.65 which also triggered the anti-dilution provision of the 2015 Warrants. As a result of the forgoing transactions, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants increased to 384,618, the exercise was reduced to $0.65 per share, and the Company recorded a non-cash deemed dividend in amount of $41,688.

 

Referral Fee:

 

The Company issued a warrant to an investor for 125,000 shares for a business referral valued at $94,655 during the three months ended June 30, 2020.

  

Common Stock

 

On March 21 and 28, 2019, the Company issued 13,820 shares of common stock to its directors in payment of board and board committee fees valued at $16,506.  There were no shares of common stock issued in payment of board and board commitment fees in the three months ended March 31, 2020. 

 

On April 2, 2020, the Company issued 6,850 shares of common stock to its directors in payment of meeting fees valued at $5,001. 

 

On May 12, 2020, the Company issued 7,077 shares of common stock to its directors in payment of meeting fees valued at $7,003. 

 

On May 14, 2020, the Company issued 1,632 shares of common stock to its directors in payment of committee meeting fees valued at $1,501.

 

On June 8, 2020, the Company issued 1,581 shares of common stock to its directors in payment of committee meeting fees valued at $1,502.

 

See Note 12 - Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued for fees in connection with the agreements.

 

Issuances of Stock Options

 

On April 2, 2020, the Company issued a stock option to a new employee for 5,000 shares with a three-year vesting period, seven year term, and exercise price of $0.73 per share. 

 

The fair value of the option at date of issuance was estimated on the date of grant at $2,267 using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate: 0.36%, expected life of options in years: 4.5, expected dividends: 0, volatility of stock price: 83%.

 

 

16.	FAIR VALUES OF FINANCIAL INSTRUMENTS

 

Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and due from factor, are carried at, or approximate, fair value because of their short-term nature. The carrying values of the convertible debt and operating lease obligation approximated their fair values as of June 30, 2020 and December 31, 2019 as the interest rates approximated market.

 

17.	MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

 

For the three months ended June 30, 2020 and 2019, one customer accounted for 41% and two customers accounted for 59% of revenue, respectively. For the six months ended June 30, 2020 and 2019, three customers accounted for 60% and 58% of revenue, respectively.

 

Three customers accounted for 13%, 12% and 10% of current accounts receivable, respectively as of June 30, 2020. At December 31, 2019, three customers accounted for 18%, 16% and 14% of current accounts receivable, respectively.

 

18.	PAYMENT PROTECTION PROGRAM TERM NOTE

 

On April 20, 2020, the Company entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the Paycheck Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration.

 

The Company received total proceeds of approximately $341,000 which will be used in accordance with the requirements of the CARES Act.  The Company will apply to SVB for forgiveness of amounts due on the SVB Note to the extent they are used for eligible payroll costs, rent obligations, and covered utility payments incurred during the “covered period” following disbursement under the SVB Note.  Until the six-month anniversary of the date of the SVB Note (the “Deferral Expiration Date”), neither principal nor interest is due and payable. On the Deferral Expiration Date, the outstanding principal of the SVB Note that is not forgiven will convert to an amortizing term loan at an interest rate of 1% per annum requiring equal monthly payments of principal and interest through November 20, 2022.

 

The Company has performed initial calculations for the SVB Note forgiveness according to the terms and conditions of the SBA’s  Loan Forgiveness Application (Revised June 16, 2020) and, based on such calculations, expects that the SVB Note will be forgiven in full. In addition, the Company has determined that it is probable the Company will meet all the conditions of the SVB Note forgiveness. As such, the Company has decided that the SVB Note should be accounted for as a government grant which analogizes with International Accounting Standards (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”, however, based on certain interpretations, it is analogous to “probable” in U.S. GAAP under FASB ASC 450-20-20, which is the definition the Company has applied to its expectations of the SVB Note forgiveness. In addition, in accordance with the provisions of IAS 20, government grants shall be recognized in profit or loss on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e. qualified expenses). Therefore, the Company recognized the funding during the periods when qualified expenses were incurred. 

 

19.	SUBSEQUENT EVENTS

 

Refer to Note 12 - Convertible Notes Payable for subsequent events related to the notes.

 

On July 31, 2020, warrants were exercised for 211,000 shares of common stock.

 

On August 12, 2020, warrants were exercised for 475,500 shares of common stock.

 

Underwriting agreement

 

On July 20, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the several underwriters named therein (the “Underwriters”) with respect to the issuance and sale of: (i) 29,130,000 shares (the “Shares”) of common stock, $0.0001 par value per share (“Common Stock”), (ii) pre-funded warrants to purchase 4,100,000 shares of Common Stock at an exercise price of $0.01 per share (the “Pre-Funded Warrants”), and (iii) warrants to purchase an aggregate of 33,230,000 shares of Common Stock at an exercise price of $0.65 per share (the “Common Warrants” and, together with the Pre-Funded Warrants, the “Warrants” and, together with the Shares and the Pre-Funded Warrants, the “Securities”), in an underwritten public offering (the “Offering”) pursuant to the Underwriting Agreement.

 

Each Share was sold together with a Common Warrant to purchase one share of Common Stock, at a combined price to the public of $0.65 per share of Common Stock and accompanying Warrant. Each Pre-Funded Warrant was sold together with a Common Warrant to purchase one share of Common Stock, at a combined price to the public of $0.64 per Pre-Funded Warrant and accompanying Warrant.

 

 

Each Pre-Funded Warrant is immediately exercisable upon issuance and will expire when exercised in full. The Common Warrants have a term of five years and are immediately exercisable. If a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), registering the issuance of the shares of Common Stock underlying the Common Warrants is not effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, the holders of the Common Warrants may, in their sole discretion, elect to exercise their Common Warrants through a cashless exercise. The exercise of the Common Warrants is subject to certain beneficial ownership limitations. The warrants were issued pursuant to the terms of a warrant agency agreement between the Company and Broadridge Issuer Solutions, Inc., as warrant agent.

 

Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 45-day option to purchase up to an additional 4,984,500 shares of Common Stock and/or 4,984,500 Warrants to cover over-allotments, if any (the “Over-Allotment”). On July 21, 2020, the Underwriter exercised its Over-Allotment option in full on both the Common Stock and the Warrants.

 

Pursuant to the Underwriting Agreement, the Company paid the Underwriter a cash fee equal to 8% of the aggregate gross proceeds sold in the Offering and also agreed to reimburse the Underwriter for reasonable out-of-pocket expenses related to the Offering, including the reasonable fees and expenses of counsel to the Underwriters, in the aggregate maximum amount of up to $80,000.

 

The Underwriting Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. The representations, warranties and agreements made by the parties in the Underwriting Agreement were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties, and should not be deemed to be a representation, warranty or agreement to or in favor of any party. In addition, the assertions embodied in any representations, warranties and agreements contained in the Underwriting Agreement may be subject to qualifications with respect to knowledge and materiality different from those applicable to security holders generally. Moreover, such representations, warranties and agreements should not be relied on as accurately representing the current state of the Company’s affairs at any time.

 

The Securities were offered by the Company pursuant to an effective registration statement on Form S-1, as amended, which was originally filed with the Securities and Exchange Commission on July 9, 2020, and was declared effective on July 20, 2020 (File No. 333-239782) (the “Registration Statement”), and registration statement on Form S-1MEF (File No. 333-239966). The Company filed a final prospectus with the SEC on July 22, 2020 in connection with the sale of the Securities.

  

The Offering and the Over-Allotment option closed on July 23, 2020. The net proceeds of the Offering including the full exercise of the Over-Allotment were approximately $22.8 million, after deducting the underwriting discounts and commissions and estimated offering expenses.  The Company used approximately $4.2 million of the net proceeds of the Offering to satisfy all outstanding amounts due under convertible promissory notes previously issued.  The prefunded warrants were exercised on July 23, 2020 and July 27, 2020 resulting in an increase of common stock of 4,100,000 shares.  Total shares of common stock outstanding increased by 38,214,500 for the underwriting transaction through date of this report.

 

Nasdaq Capital Market listing requirements

 

On May 18, 2020 the Company received a notice (the “Notice”) from the Staff of the Listing Qualifications Department (the “Staff”) of The Nasdaq Capital Market LLC (“Nasdaq”) indicating the Company was not in compliance with Nasdaq Listing Rule 5550(b)(1) because, the Company did not have a minimum of $2,500,000 in stockholders’ equity for continued listing on Nasdaq (the “Stockholders’ Equity Requirement”). On July 10, 2020, the Company’s  plan to regain compliance with the Stockholders’ Equity Requirement previously submitted to the Nasdaq was accepted and Nasdaq granted us an extension of 180 calendar days from the date of the Notice (November 16, 2020) for to provide evidence of compliance.

 

As discussed above , on July 23, 2020, the Company completed an underwritten public offering resulting in net cash proceeds of approximately $22.8 million which was used, in part, to repay approximately $4.2 million of outstanding convertible promissory notes. Accordingly, as of the date of this report the Company believes that it has satisfied compliance with the Stockholders’ Equity Requirement and  has been advised that Nasdaq will continue to monitor the Company’s ongoing compliance with the Stockholders’ Equity Requirement and, if at the time of the Company’s next periodic report the Company does not evidence compliance, that it may be subject to delisting.