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

 

 

 

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 March 31, 2020

 

☐

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 June 5, 2020 was 21,598,544.

 

 

EXPLANATORY NOTE

 

 BIO-key International, Inc. (the “Company”) is filing this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 in reliance on the 45-day extension provided by an order issued by the U.S. Securities and Exchange Commission (the “SEC”) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), dated March 4, 2020 (Release No. 34-88318), as modified and superseded by SEC order issued on March 25, 2020 (Release No. 34-88465) (collectively, the “Order”).

 

On May 15, 2020, the Company filed a Current Report on Form 8-K to indicate its intention to rely on the Order for such extension. Consistent with the Company’s statements made in the Form 8-K, the Company was unable to timely file the Form 10-Q and, therefore, relied on the Order due to circumstances related to the COVID-19 pandemic. Our management has had to devote significant time and attention to assessing the potential impact of the COVID-19 pandemic and related events on our operations and financial position and developing operational and financial plans to address those matters, which has diverted management resources from completing tasks necessary to file this Quarterly Report by the original due date. In particular, the remote work environment caused by the COVID-19 pandemic resulted in disruptions in the Company’s ability to complete its remaining accounting and review processes for the quarter ended March 31, 2020. This included the facts that the Company was not able to access certain inventory located in China and the professional staff of the Company’s independent public accounting firm were unable to perform certain auditing procedures on the Company’s assets that are located in China related to their audit of the Company’s financial statements for the year ended December 31, 2019. This caused a delay in the compilation and review of certain information required in order to permit the Company to file this Quarterly Report on Form 10-Q for its quarter ended March 31, 2020 by the prescribed date without unreasonable effort or expense due to circumstances related to COVID-19.

  

 

 

 

		March 31, 2020				December 31, 2019
		(Unaudited)
ASSETS
Cash and cash equivalents		$	661,937			$	79,013
Accounts receivable, net			120,293				126,000
Due from factor			130,670				110,941
Inventory			397,711				429,119
Prepaid expenses and other			166,572				108,397
Investment – non-marketable security			512,821				512,821
Total current assets			1,990,004				1,366,291
Resalable software license rights			68,774				73,802
Equipment and leasehold improvements, net			75,597				95,509
Capitalized contract costs, net			208,499				231,519
Deposits and other assets			8,712				8,712
Operating lease right-of-use assets			520,470				566,479
Intangible assets, net			147,222				154,386
Total non-current assets			1,029,274				1,130,407
TOTAL ASSETS		$	3,019,278			$	2,496,698
LIABILITIES
Accounts payable		$	616,985			$	844,557
Due to related parties			66,466				188,737
Accrued liabilities			515,108				572,885
Convertible notes payable, net of debt discount and debt issuance costs			2,301,956				2,255,454
Deferred revenue			413,345				359,212
Operating lease liabilities, current portion			162,886				170,560
Total current liabilities			4,076,746				4,391,405
Operating lease liabilities, net of current portion			353,553				390,466
Total non-current liabilities			353,553				390,466
TOTAL LIABILITIES			4,430,299				4,781,871
Commitments and Contingencies
STOCKHOLDERS’ DEFICIT
Common stock — authorized, 170,000,000 shares; issued and outstanding; 18,391,122 and 14,411,432 of $.0001 par value at March 31, 2020 and December 31, 2019, respectively			1,839				1,441
Additional paid-in capital			91,793,124				87,436,402
Accumulated deficit			(93,205,984	)			(89,723,016	)
TOTAL STOCKHOLDERS’ DEFICIT			(1,411,021	)			(2,285,173	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	3,019,278			$	2,496,698

 

		Three months ended March 31,
		2020				2019
Revenues
Services		$	207,523			$	241,610
License fees			235,345				83,208
Hardware			79,617				226,805
			522,485				551,623
Costs and other expenses
Cost of services			70,445				90,829
Cost of license fees			10,456				377,216
Cost of hardware			43,362				136,005
			124,263				604,050
Gross Profit (Loss)			398,222				(52,427	)
Operating Expenses
Selling, general and administrative			1,381,399				1,377,033
Research, development and engineering			336,889				374,118
Total Operating Expenses			1,718,288				1,751,151
Operating loss			(1,320,066	)			(1,803,578	)
Other income (expenses)
Interest income			1				70
Interest expense			(1,551,141	)			-
Loss on extinguishment of debt			(499,076	)			-
Total Other Income (Expenses)			(2,050,216	)			70
Net loss			(3,370,282	)			(1,803,508	)
Deemed dividends related to down-round features			(112,686	)			-
Net loss available to common stockholders		$	(3,482,968	)		$	(1,803,508	)
Basic & Diluted Loss per Common Share		$	(0.23	)		$	(0.13	)
Weighted Average Shares Outstanding:
Basic & Diluted			15,165,522				13,979,318

 

		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 conversion			972,000				97				1,457,903				-				1,458,000
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	)

		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

 

		Three Months Ended March 31,
		2020				2019
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss		$	(3,370,282	)		$	(1,803,508	)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Depreciation			19,912				19,292
Amortization of intangible assets			7,164				3,314
Amortization of software license rights			-				281,074
Amortization of capitalized contract costs			36,679				33,510
Amortization of debt discount			218,061				-
Amortization of debt issuance costs			878,398				-
Loss on extinguishment of debt			499,076				-
Amortization of beneficial conversion feature			413,687
Interest expense capitalized to note payable			40,995				-
Operating leases right-of-use assets			46,009				34,864
Stock based directors’ fees			-				16,505
Share based compensation for employees and consultants			512,719				509,528
Change in assets and liabilities:
Accounts receivable			5,707				833,613
Due from factor			(19,729	)			(19,142	)
Capitalized contract costs			(13,659	)			(13,709	)
Inventory			31,408				17,921
Resalable software license rights			5,028				26,130
Prepaid expenses and other			(58,175	)			(36,928	)
Accounts payable			(227,572	)			124,534
Accrued liabilities			(57,777	)			29,764
Deferred revenue			54,133				136,631
Operating lease liabilities			(44,587	)			(32,897	)
Net cash (used in) provided by operating activities			(1,022,805	)			160,496
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of intangible assets			-				(1,737	)
Capital expenditures			-				(23,391	)
Net cash used in investing activities			-				(25,128	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible notes			283,000				-
Costs to issue convertible notes			(13,000	)			-
Proceeds from warrant exercise			1,458,000				-
Net repayments of related party loans			(122,271	)			-
Net cash provided by financing activities			1,605,729				-
NET INCREASE IN CASH AND CASH EQUIVALENTS			582,924				135,368
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			79,013				323,943
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	661,937			$	459,311

 

		Three Months Ended March 31,
		2020				2019
Cash paid for:
Interest		$	—			$	—
Noncash Investing and financing activities
Right-of-use asset addition under ASC 842		$	—			$	602,937
Operating lease liabilities under ASC 842		$	—			$	590,342
Deemed dividends related to down-round features		$	112,686			$	-
Common Stock issued for loan commitment fees		$	132,500			$	-
Conversion of convertible note payable to common stock		$	1,500,000			$	-
Beneficial conversion feature		$	641,215			$	-

 

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 personal inspection identification, passwords, tokens, smart cards, ID 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 subsidiary (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. 

 

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.

 

Reclassifications

Certain balance sheet accounts have been reclassified to conform to the 2020 presentation.

 

 

2.	GOING CONCERN

 

The Company has incurred significant losses to date, and at March 31, 2020 had an accumulated deficit of approximately $93 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 March 31, 2020, the Company’s total cash and cash equivalents were approximately $662,000, 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. The Company estimates that it currently requires approximately $525,000 per month to conduct operations, a monthly amount that it has been unable to achieve consistently through revenue generation.

 

If the Company is unable to generate sufficient revenue to meet its goals, it will need to obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute its plan to substantially grow operations, increase revenue, and serve a significant customer base; and (ii) provide working capital. No assurance can be given that any form of additional financing will be available on terms acceptable to the Company, that adequate financing will be obtained by the Company, in order to meet its needs, or that such financing would not be dilutive to existing shareholders.

 

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The matters described in the preceding paragraphs raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, and become profitable in its future operations. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

 

 

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 period:

 

 

 

*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 prepayment 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 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 March 31, 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 March 31, 2020 and December 31, 2019, deferred revenue represents the Company's remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized within one year.

 

Revenue recognized during the three months ended March 31, 2020 from amounts included in deferred revenue at the beginning of the period was approximately $72,000. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was $413,345 and $359,212 at March 31, 2020 and December 31, 2019, respectively.

 

 

4.	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 March 31, 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 sale 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 March 31, 2020 and December 31, 2019 consisted of the following: 

 

 

 

 

5.	SHARE BASED COMPENSATION

 

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

 

 

 

 

6.

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:  

 

 

 

 

7.

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:

  

 

 

 

8.	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 cashflows 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 the year, 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 $281,074 and $176 was charged to cost of sales during the three month period ended March 31, 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 $5,028 and $25,954 was charged to cost of sales during the three month periods ended March 31, 2020 and March 31, 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 March 31, 2020 and December 31, 2019, respectively.

  

 

 

9.	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 translates to $512,821 U.S. Dollars as of March 31, 2020 and December 31, 2019. The bond has a one-year maturity maturing in June 2020, and 5% interest rate. The Company can invest up to a 20,000,000 Hong Kong dollars under the terms of the certificate.  The bond is recorded on the balance sheet as an investment – non-marketable security. The investment is recorded at amortized cost which approximates fair value, and is currently planned to be held to maturity.

 

 

 

10.	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 March 31, 2020 was $66,466 and $0, respectively, and as of December 31, 2019 was $74,737 and $114,000, respectively. The balances owed are 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 have been no revenue generated or sales incentive fees paid during the three months ended March 31, 2020.

 

 

 

11.	CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable as of March 31, 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 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 is secured by a lien on substantially all of the Company’s assets and properties and is 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 extingushment 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. At March 31, 2020, the Investor converted $1,500,000 into 2,307,690 shares of common stock.

 

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 remain the same. As of the date of this report, the Investor has converted $3,500,000 into 5,384,610 shares of common stock and the remaining principal balance is $289,000.

 

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.

 

Secured convertible note payable relating to the Amended and Original Notes, net of unamortized debt discount and debt issuance costs consisted of:

 

 

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 is convertible into common stock at a conversion price of $1.50 per share. The January 2020 Note is 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.

 

Convertible note payable relating to the January 2020 Note, net of unamortized debt issuance costs consisted of:

 

 

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 is convertible into common stock at a conversion price of $1.15 per share. If the Company offers a conversion discount or other more favorable conversion terms, then the investor shall be allowed to convert this February 2020 Note at the same price.  On March 12, 2020, the Original Note was amended to convert at the option of the Investor into shares of common stock at a fixed conversion price of $0.65 per share, which triggered the more favorable conversion terms and resulted in an additional deemed dividend expense of $70,998. The February 2020 Note  is 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 550,000 shares of common stock in lieu of payment of a $57,500 commitment fee which would be reduced to 50,000 shares if the February 2020 Note is repaid prior to the maturity date.  To date, the Company has only issued 50,000 shares at the request of the lender. The Company paid $6,000 of legal fees for the February 2020 Note.

 

Secured convertible note payable relating to the February 2020 Note, net of unamortized debt issuance costs consisted of:

 

  

 

 

12.

LEASES

 

The Company’s leases office space in New Jersey, Hong Kong and Minnesota with lease termination dates of 2023, 2020, 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 three months ended March 31, 2019:

 

 

Maturities of operating lease liabilities were as follows:

 

 

  

 

13.	EARNINGS PER SHARE (“EPS”)

 

The Company’s basic EPS is calculated using net income (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 preferred stock.

 

The basic and diluted EPS calculations was as follows for the three month periods ended March 31, 2020 and 2019:

 

 

 

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 months ended March 31, 2020 and 2019:

 

 

 

  

The following table sets forth options and warrants which were excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

 

 

 

 

 

14.	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 March 31, 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 March 31, 2020 or December 31, 2019.

        

Securities Purchase Agreement dated November 13, 2014

 

Pursuant to 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 664,584 shares of common stock and warrants to purchase an additional 996,877 shares of common stock for aggregate gross proceeds of $1,595,000.

  

The warrants expired in November 2019.

 

Securities Purchase Agreement dated September 23, 2015

 

On September 23, 2015, the Company issued a warrant (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 customary anti-dilution protections including a "full ratchet" anti-dilution adjustment provision which are 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.

 

On August 24, 2018 the Company issued common stock and warrants to certain investors at a purchase price of $1.50 per unit 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.

 

On February 14, 2020, the February 2020 Note was issued a conversion price of $1.15 that triggered the anti-dilution provisions included in these warrants. Also, the amendments to the Original Note reduced the conversion price of such 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.

 

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. 

 

Issuances of Stock Options

 

On March 21, 2019, the Company issued options to purchase 235,334 shares of common stock to certain officers, employees, and contractors. The options have a three year vesting period, seven year term, and exercise price of $1.18.  The Company did not issue any options in the three months ended March 31, 2020. 

 

 

 

15.	FAIR VALUES OF FINANCIAL INSTRUMENTS

 

Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities 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 March 31, 2020 and December 31, 2019 as the interest rates approximated market.

 

 

 

16.	MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLES

 

For the three months ended March 31, 2020 and 2019, three customers accounted for 71% of revenues and two customers accounted for 56% of revenues, respectively. Two customers accounted for 37% of current accounts receivable as of March 31, 2020. At December 31, 2019, three customers accounted for 18%, 16% and 14% of current accounts receivable, respectively.

 

 

 

17.	SUBSEQUENT EVENTS

 

Refer to Note 11 for subsequent events related to the conversions of the Amended Note.

 

On April 2, 2020, the Company issued 6,850 shares of common stock to its directors in payment of meeting fees. Additionally, the Company issued a stock option to a new employee for 5,000 shares with three-year vesting period. 

 

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 $340,000 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.  While these are the initial guidelines, we are monitoring the announcements for the issuance of the final guidelines.

 

On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “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 Note, the Company paid a $133,333 due diligence fee by issuing 114,943 shares to the Investor priced at $1.16. The Company also issued a warrant to purchase 1,900,000 shares of common stock at a fixed exercise price of $1.16 and paid a placement fee of 7% of the gross proceeds to a placement agent.

 

On May 12, 2020, the Company issued 7,077 shares of common stock to its directors in payment of meeting fees.  Additionally, the Company issued a warrant to an investor for 125,000 shares for a business referral. 

 

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

 

Subsequent to period-end, due to the effects of the worldwide coronavirus pandemic, the Company is closely monitoring its operations, liquidity, and capital resources. The COVID-19 outbreak has caused us to migrate to a remote business model for our sales, marketing, administrative and executive teams.  Research and development and production are adjusting to the new landscape to maintain production as best as possible considering the conditions and regulations. We continue to monitor the situation closely and it is possible that we will implement further measures. Since we qualify as an essential business in New Jersey because we serve the healthcare industry, we have been able to access inventory to fulfill orders and ship products as required. We are actively working to minimize the current and future impact of this unprecedented situation. As of the date of issuance of these financial statements, the full impact to the Company’s financial position is not known.

 

The Company has reviewed subsequent events through the date of this filing.