BIO KEY INTERNATIONAL INC - Quarter Report: 2021 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, 2021

 

☐

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 May 14, 2021 was 7,820,455.

 

 

 

 

		March 31, 2021				December 31, 2020
		(Unaudited)
ASSETS
Cash and cash equivalents		$	13,528,521			$	16,993,096
Accounts receivable, net			1,432,248				548,049
Due from factor			49,808				60,453
Note receivable			-				295,000
Inventory			600,447				330,947
Prepaid expenses and other			1,606,161				201,507
Investment – debt security			512,821				512,821
Total current assets			17,730,006				18,941,873
Resalable software license rights			56,361				58,882
Equipment and leasehold improvements, net			69,985				81,793
Capitalized contract costs, net			170,219				165,315
Deposits and other assets			8,712				8,712
Note receivable			295,000				-
Operating lease right-of-use assets			430,206				487,325
Intangible assets, net			1,460,130				1,514,146
Goodwill			1,262,526				1,262,526
Total non-current assets			3,753,139				3,578,699
TOTAL ASSETS		$	21,483,145			$	22,520,572
LIABILITIES
Accounts payable		$	309,323			$	244,158
Accrued liabilities			535,952				508,487
Note payable – PistolStar acquisition, net of debt discount			-				232,000
Deferred revenue - current			524,836				657,349
Operating lease liabilities, current portion			230,072				234,309
Total current liabilities			1,600,183				1,876,303
Deferred revenue – long term			49,393				44,987
Operating lease liabilities, net of current portion			211,442				264,163
Total non-current liabilities			260,835				309,150
TOTAL LIABILITIES			1,861,018				2,185,453
Commitments and Contingencies
STOCKHOLDERS’ EQUITY
Common stock — authorized, 170,000,000 shares; issued and outstanding; 7,817,913 and 7,814,572 of $.0001 par value at March 31, 2021 and December 31, 2020, respectively			782				782
Additional paid-in capital			119,982,465				119,844,026
Accumulated deficit			(100,361,120	)			(99,509,689	)
TOTAL STOCKHOLDERS’ EQUITY			19,622,127				20,335,119
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	21,483,145			$	22,520,572

 

		Three months ended March 31,
		2021				2020
Revenues
Services		$	380,022			$	207,523
License fees			478,958				235,345
Hardware			1,029,658				79,617
Total revenues			1,888,638				522,485
Costs and other expenses
Cost of services			175,944				70,445
Cost of license fees			38,969				10,456
Cost of hardware			551,722				43,362
Total cost of goods sold			766,635				124,263
Gross Profit			1,122,003				398,222
Operating Expenses
Selling, general and administrative			1,516,398				1,381,399
Research, development and engineering			441,651				336,889
Total Operating Expenses			1,958,049				1,718,288
Operating loss			(836,046	)			(1,320,066	)
Other income (expenses)
Interest income			2,615				1
Interest expense			(18,000	)			(1,551,141	)
Loss on extinguishment of debt			-				(499,076	)
Total Other Income (Expenses)			(15,385	)			(2,050,216	)
Net loss			(851,431	)			(3,370,282	)
Deemed dividends related to down-round features			-				(112,686	)
Net loss available to common stockholders		$	(851,431	)		$	(3,482,968	)
Basic & Diluted Loss per Common Share		$	(0.11	)		$	(1.84	)
Weighted Average Shares Outstanding:
Basic & Diluted			7,773,688				1,895,690

 

		Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance as of January 1, 2021			7,814,572			$	782			$	119,844,026			$	(99,509,689	)		$	20,335,119
Issuance of common stock for directors’ fees			2,091				-				7,510				-				7,510
Legal and commitment fees			-				-				(2,709	)			-				(2,709	)
Issuance of restricted common stock to employees			1,250				-				-				-				-
Share-based compensation			-				-				133,638				-				133,638
Net loss			-				-				-				(851,431	)			(851,431	)
Balance as of March 31, 2021			7,817,913			$	782			$	119,982,465			$	(100,361,120	)		$	19,622,127

		Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance as of January 1, 2020			1,812,483			$	182			$	87,437,661			$	(89,723,016	)		$	(2,285,173	)
Issuance of common stock pursuant to securities purchase agreements			87,500				8				1,032,492				-				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			121,500				12				1,457,988				-				1,458,000
Conversion of convertible note payable			288,461				29				1,499,971				-				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			2,309,944			$	231			$	91,794,732			$	(93,205,984	)		$	(1,411,021	)

 

		Three Months Ended March 31,
		2021				2020
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss		$	(851,431	)		$	(3,370,282	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation			25,115				19,912
Amortization of intangible assets			54,016				7,164
Amortization of debt discount			18,000				218,061
Amortization of capitalized contract costs			22,989				36,679
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			57,119				46,009
Stock based directors’ fees			7,510				-
Share based compensation for employees and consultants			133,638				512,719
Change in assets and liabilities:
Accounts receivable			(884,199	)			5,707
Due from factor			10,645				(19,729	)
Capitalized contract costs			(27,893	)			(13,659	)
Inventory			(269,500	)			31,408
Resalable software license rights			2,521				5,028
Prepaid expenses and other			(1,404,654	)			(58,175	)
Accounts payable			65,165				(227,572	)
Accrued liabilities			27,465				(57,777	)
Deferred revenue			(128,107	)			54,133
Operating lease liabilities			(56,958	)			(44,587	)
Net cash used in operating activities			(3,198,559	)			(1,022,805	)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures			(13,307	)			-
Net cash used in investing activities			(13,307	)			-
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible notes			-				283,000
Costs to issue notes and common stock			(2,709	)			(13,000	)
Proceeds from warrant exercise			-				1,458,000
Repayments of note payable - PistolStar			(250,000	)			-
Net repayments of loans payable to related parties			-				(122,271	)
Net cash (used in) provided by financing activities			(252,709	)			1,605,729
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(3,464,575	)			582,924
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			16,993,096				79,013
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	13,528,521			$	661,937

		Three Months Ended March 31,
		2021				2020
Cash paid for:
Interest		$	18,000			$	—
Noncash Investing and financing activities
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 enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. 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 cards, 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, 2020 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, 2020, filed with the SEC on March 29, 2021. 

 

Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. All share figures and results are reflected on a post-split basis.

 

Foreign Currency

 

The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date.  For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.

 

Recently Issued Accounting Pronouncements

 

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 will evaluate the impact ASU 2016-13 will have on its consolidated financial statements in a future period closer to the date of adoption.

 

Effective January 1, 2021, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”) to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S. GAAP.  Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of ASU 2019-12 did not have a significant impact on the Company’s 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.

 

 

 

2.	GOING CONCERN

 

The Company has historically financed its operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The Company currently requires approximately $735,000 per month to conduct operations, a monthly amount that it has been unable to consistently achieve through revenue generation.  During the first quarter of 2021, the Company generated approximately $1,889,000 of revenue, which is below its average monthly cash requirements. Additionally, the ongoing threat of COVID-19 and its variation, may have an impact on future revenue and operations. During 2020, the Company raised approximately $24,000,000 from financing activities and at March 31, 2021 had approximately $13,500,000 in cash. As of the date of this report, the Company believes it has enough cash for twelve to fifteen months of operations.

 

 

 

 

3.	REVENUE FROM CONTRACTS WITH CUSTOMERS

 

In accordance with ASC 606, Revenue from Contracts with Customers (“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:

 

 

 

*EMESA – Europe, Middle East, South America

 

 

Software licenses

Software license revenue consist of fees for perpetual and subscription licenses for one or more of the Company’s biometric fingerprint solutions or identity access management 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 term of the contract ends. Revenue is recognized over time on a ratable basis over the contract term. Support and maintenance contracts are up to one to five years in length and are generally invoiced in advance at the beginning of the term. Support and maintenance revenue for subscription licenses 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 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 of March 31, 2021. 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, 2021, deferred revenue represents the Company’s remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized from one to five years. 

 

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.

 

 

Deferred Revenue 

Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12-60 months. Contracts greater than 12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At March 31, 2021 and December 31, 2020, amounts in deferred revenue were approximately $574,000 and $702,000, respectively. Revenue recognized during the three months ended March 31, 2021 and 2020 from amounts included in deferred revenue at the beginning of the period was approximately $305,000 and $72,000, respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods.  

 

 

 

 

4.	PISTOLSTAR, INC. ACQUISITION

 

On June 30, 2020, the Company acquired PistolStar, Inc., a private company based in the United States, which 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 the Company acquired PistolStar, it 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 payment of $2.0 million and the issuance of a $500,000 promissory note.

 

The promissory note, which was issued to the previous owner of PistolStar, carried interest at 4% per annum and was payable in four installments over the 12-month period following the closing. The balance of the note at December 31, 2020 was $232,000, net of the unamortized debt discount. On January 21, 2021, the Company paid the $250,000 balance due on the note.

 

The fair value of the assets acquired and liabilities assumed was less than the purchase price, resulting in the recognition of goodwill. The goodwill reflected the value of the synergies the Company expected to realize and the assembled workforce.

 

 

 

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.

 

Accounts receivable at March 31, 2021 and December 31, 2020 consisted of the following: 

 

 

 

 

 

6.	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:

 

 

 

 

 

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”) which has been extended to October 31, 2021. 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.	NOTE RECEIVABLE

 

During the third quarter 2020, the Company loaned $295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts. The note does not bear any interest if paid within the nine (9) monthly installments beginning December 31, 2020.  The note bears a default rate of 5%. Currently, TTI is in the process of raising capital to repay the loan, and facilitate fulfilling the African contracts. No payments were received from TTI during the three months ended March 31, 2021. The note is currently in default and as such, has been classified as noncurrent as of March 31, 2021.

 

 

 

 

9.	PREPAID EXPENSES AND OTHER

 

Included in prepayments at March 31, 2021 was $1.4 million relating to deposits for a range of hardware devices. These devices were ordered in conjunction with the Company securing the recent license contracts in Africa, and are expected to be delivered over the next few quarters as the hardware is deployed.

 

 

 

 

 

10.

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:

 

 

 

 

 

11.	RESALABLE SOFTWARE LICENSE RIGHTS

 

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 greater of actual unit cost of licenses sold or the straight line method over 10 years with the greater of the two approaches being the actual unit cost per license sold. A total of $2,521 and $5,028 was charged to cost of sales during the three-month periods ended March 31, 2021 and March 31, 2020, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $123,639 has been charged to cost of sales, with a carrying balance of $56,361 and $58,882 as of March 31, 2021 and December 31, 2020, respectively.

 

 

 

12.	INVESTMENT IN DEBT SECURITY

 

The Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in June 2020. The Bond Certificate translated to $512,821 U.S. Dollars, based on the exchange rate at the 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 investment is recorded at amortized cost which approximates fair value and is currently planned to be held to maturity.

 

 

 

 

13.	COMMITMENT

 

Sales Incentive Agreement with TTI

 

On March 25, 2020, the Company entered into a sales incentive agreement with 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 62,500 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 12,500 shares of Common Stock at an exercise price of $12.00 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 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement.

 

There has been no revenue generated or sales incentive fees paid during the three months ended March 31, 2021 and 2020.

 

 

 

 

14.	CONVERTIBLE NOTES PAYABLE

 

There was no balance outstanding for convertible notes payable as of March 31, 2021 and December 31, 2020. Details for Notes that were either converted or redeemed during the 2020 fiscal year were as follows:

 

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 $12.00 per share.

 

In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 250,000 shares of common stock at a fixed exercise price of $12.00 per share, paid a $50,000 commitment fee, and issued 33,334 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 and included an additional $729,000 in interest due to the debt restructuring. 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 $5.20 per share. 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 amendment, the closing stock price for the day was $6.08, which resulted in a beneficial conversion of $0.88 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 $5.20 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 had 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 the remaining principal balance was $0. The Amended Note amount of $3,789,000 was converted into 728,654 shares of common stock in 2020.

 

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 $12.00 per share. At the closing, the Company agreed to issue 81,250 shares of common stock in lieu of payment of a $75,000 commitment fee which was reduced to 6,250 shares as the January 2020 Note was repaid prior to the maturity date.

 

On June 12, 2020, the January 2020 Note was paid in full by payment of $211,984. The 75,000 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 $9.20 per share.  On March 12, 2020, the Original Note was amended to reduce the conversion price to $5.20 per share, which reduced the conversion price of the February Note to $5.20 and resulted in a deemed dividend 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 issued 6,250 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.

 

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

 

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 was 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 May 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor priced at $9.28 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 237,500 shares of common stock at a fixed exercise price of $9.28 and was immediately exercisable. The valuation of the warrant of $876,937 was recorded to debt discount and was 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 were included in the interest expense on the statement of operations.

 

Following the completion of the underwritten offering in July 2020, the principal balance of $2,415,000 was paid in full during the third quarter of 2020.  As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $1,218,163 in July 2020.

 

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 was 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 June 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the June 2020 Note, the Company paid a $100,000 due diligence fee by issuing 17,071 shares to the Investor priced at $5.86 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 178,125 shares of common stock at a fixed exercise price of $9.28 per share and was immediately exercisable. 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 in July 2020, the principal balance of $1,811,250 was paid in full during the third quarter of 2020. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.

 

 

 

 

15.

LEASES

 

The Company’s leases office space in New Jersey, Hong Kong, Minnesota, and New Hampshire with lease termination dates in 2023, 2022, 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, were:

 

 

 

Supplemental cash flow information related to leases were as follows:

 

 

Maturities of operating lease liabilities were as follows as of March 31, 2021:

 

 

 

 

 

16.	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 preferred stock.

 

 

The basic and diluted EPS calculations was as follows for the three month periods ended March 31, 2021 and 2020:

 

 

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, 2021 and 2020:

 

 

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:

 

 

 

 

17.	STOCKHOLDERS’ EQUITY

 

1. 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.

 

2. Common Stock

 

Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective at the opening of trading on November 20, 2020.

 

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.

 

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

 

Issuances of Common Stock

 

On March 30, 2020, the Company issued 121,500 shares of common stock upon exercise of warrants at $12.00 per share, resulting in proceeds of $1,458,000 to the Company.

 

See Note 14 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 during fiscal 2020.

 

Issuances of Nonvested Stock

 

Nonvested stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Nonvested stock is expensed ratably over the term of the restriction period.

 

The Company issued 1,250 shares of restricted common stock during the three-month period ended March 31, 2021 to certain employees of the Company. These shares vest in equal annual installments over a three-year period from the date of grant, and had a fair value on the date of issuance of $4,550.

 

Nonvested stock compensation for the three-month period ended March 31, 2021 was $17,375.

 

Issuances to Directors, Executive Officers & Consultants

 

During the three-month period ended March 31, 2021, the Company issued 2,091 shares of common stock to its directors in lieu of payment of board and committee fees valued at $7,510. There were no shares of common stock issued to directors in the three-month period ended March 31, 2020.

 

Employees’ exercise options

 

During the three-month periods ended March 31, 2021 and 2020, no employee stock options were exercised.

 

 

3. Warrants

 

There were no warrants issued during the three-month periods ended March 31, 2021 and 2020.

 

4.  Securities Purchase Agreement dated September 23, 2015

 

On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock in connection with the issuance of a promissory note. The warrants were immediately exercisable at an initial exercise price of $28.80 per share and had a term of five years.  The 2015 Warrants expired in September 2020.

 

The 2015 Warrants had a “full ratchet” anti-dilution adjustment provision.  The anti-dilution adjustment provision was triggered in the first quarter of 2020 from the February 2020 Note and amendments to the Original Note. 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 48,078, the exercise was reduced to $5.20 per share, and the Company recorded a non-cash deemed dividend in amount of $41,688. 

 

18.	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 value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.

 

 

 

 

19.	MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLES

 

For the three months ended March 31, 2021 and 2020, two customers accounted for 52% of revenues and three customers accounted for 71% of revenues, respectively. Two customers accounted for 68% of current accounts receivable as of March 31, 2021. At December 31, 2020, one customer accounted for 31% of current accounts receivable.

 

 

 

 

20.	SUBSEQUENT EVENTS

 

On May 13, 2021, the Company issued 1,292 shares of common stock to its directors in payment of meeting fees. Additionally, the Company issued 1,250 shares of restricted stock with three-year vesting period to new employees. 

 

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