NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
1.
NATURE OF BUSINESS
Business
Intellicheck,
Inc. (the “Company” or “Intellicheck”) is a prominent technology company that is engaged in developing,
integrating and marketing identity authentication and threat identification solutions to address challenges that include bank
and retail fraud prevention, law enforcement threat identification, and mobile and handheld access control and security for the
government, military and commercial markets. Intellicheck’s products include Retail ID®, a solution for preventing fraud
in the retail and banking industry; Age ID®, a smartphone or tablet-based solution for preventing sale of age-restricted products
to minors; Law ID®, a smartphone-based solution used by law enforcement officers to identify and mitigate threats; and Defense
ID®, a mobile and fixed infrastructure solution for threat identification, identity authentication and access control to military
bases and other government facilities.
Intellicheck
continues to develop and release innovative products based upon its rich patent portfolio consisting of twenty issued patents
and five pending.
Liquidity
For
the nine months ended September 30, 2019, the Company incurred a net loss of $2,654,898 and used cash in operations of $2,089,687.
As of September 30, 2019, the Company had cash of $2,757,327, working capital of $2,614,801 and an accumulated deficit of $117,041,299.
Based on the Company’s business plan and cash resources, Intellicheck expects its existing and future resources and revenues
generated from operations and current level of expenses from operations to satisfy its working capital requirements for at least
the next 12 months.
However,
if performance expectations fall short or expenses exceed expectations, the Company may need to secure additional financing or
reduce expenses to continue operations. Failure to do so would have a material adverse impact on its financial condition. There
can be no assurance that any contemplated additional financing will be available on terms acceptable, if at all. If required,
the Company believes it would be able to reduce expenses to a sufficient level to continue as a going concern.
Merging
of Subsidiaries
On
December 31, 2018, the Company merged its wholly owned subsidiaries, Mobilisa, Inc. and Positive Access Corporation into one company
under Intellicheck, Inc. As of and prior to December 31, 2018, the financial statements are consolidated and include the accounts
of Intellicheck and these subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation
S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in
the United States of America for complete financial statements. In the opinion of management, the unaudited interim financial
statements furnished herein include all adjustments necessary for a fair presentation of the Company’s financial position
at September 30, 2019 and the results of operations and stockholders’ equity for the three and nine months ended September
30, 2019 and cash flows for the nine months ended September 30, 2019. All such adjustments are of a normal and recurring nature.
Interim financial statements are prepared on a basis consistent with the Company’s annual consolidated financial statements.
Results of operations for the nine-month period ended September 30, 2019, are not necessarily indicative of the operating results
that may be expected for the year ending December 31, 2019.
The
consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that
date but does not include all of the information and notes required by accounting principles generally accepted in the United
States of America (“GAAP”) for complete financial statements.
References
in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued
by the Financial Accounting Standards Board (“FASB”).
For
further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2018.
Recent
Accounting Pronouncements
In
August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rule amending certain disclosure requirements
that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the amendments
expand the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments,
an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note
or separate statement. The rule was effective on November 5, 2018 and was effective for the
quarter that begins after the effective date. The Company applied these changes on the Statement of Stockholders’
Equity and did not have a significant impact on this presentation.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to perform a hypothetical purchase price
allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2019, and early adoption is permitted. The Company is in the
process of evaluating the impact of this standard on its financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments to measure credit losses on financial instruments, including trade receivables. The guidance
eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial
instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses.
Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments
of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied
on a prospective basis. The Company is in the process of evaluating the impact of this standard on its financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) which provides guidance on accounting
for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet
and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued additional guidance, which offers
a transition option to entities adopting the new lease standards. Under the transition option, entities can elect to apply the
new guidance using a modified retrospective approach at the beginning of the year in which the new lease standard is adopted,
rather than to the earliest comparative period presented in their financial statements. The guidance is effective for reporting
periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective
basis and provides for certain practical expedients. The Company has adopted ASU 2016-02 effective January 1, 2019 and has elected
the optional transitional method to apply this standard as of this effective date and therefore, it will not apply this standard
to the comparative periods presented in its consolidated financial statements. The Company elected the practical expedient to
include non-lease components as rent and utilities in the definition of rent payments. The impact of adoption was the recognition
of a right-to-use asset and operating lease liability on the Company’s financial statements of approximately $266,000 and
$274,000, respectively and did not have a significant impact on its statement of operations.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s
financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial
statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances,
and the fair value of stock options granted under the Company’s stock-based compensation plans. Due to the inherent uncertainties
involved in making estimates, actual results reported in future periods may be different from those estimates.
Allowance
for Doubtful Accounts
The
Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical
experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions
and other factors that may affect customers’ ability to pay.
Inventory
Inventory
is stated at the lower of cost or market and cost is determined using the first-in, first-out method. Inventory is primarily comprised
of finished goods. As of September 30, 2019 and December 31, 2018, the majority of inventory is related to Commercial Identity
products for intended near-term sales.
Goodwill
Goodwill
represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. Pursuant to ASC
Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter (December 31, 2019), or between
annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine
whether it was necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate
the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than
not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment
review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity
specific events and sustained decrease in share price. There were no impairment charges recognized during the nine months ended
September 30, 2019 and 2018.
Intangible
Assets
Intangible
assets include trade names, patents and non-contractual customer relationships. The Company uses the straight-line method to amortize
these assets over their estimated useful lives. The Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC Topic 360.
To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of the assets. There were no impairment charges recognized
during the nine months ended September 30, 2019 and 2018.
Income
Taxes
The
Company accounts for income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards.
Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as
of September 30, 2019 and December 31, 2018, due to the uncertainty of the realizability of those assets.
Fair
Value of Financial Instruments
The
Company adheres to the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This pronouncement
requires that the Company calculate the fair value of financial instruments and include this additional information in the notes
to financial statements when the fair value is different than the book value of those financial instruments. The Company’s
financial instruments include cash, accounts receivable, note receivable, accounts payable and accrued expenses. As of September
30, 2019 and December 31, 2018, the carrying value of the Company’s financial instruments approximated fair value, due to
their short-term nature.
Revenue
Recognition and Deferred Revenue
General
The
majority of license fees and services revenue are generated from fixed-price contracts, which provide for licenses to software
products and services to customize such software to meet the customers’ use. In certain instances, customization services
are determined to be essential to the functionality of the delivered software. Under ASC 606, revenue is recognized when a customer
obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange
for those goods or services. The Company measures revenue based on the consideration specified in a customer arrangement, and
revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise
in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct
performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation.
Customers typically receive the benefit of the Company’s services as they are performed. Substantially all customer contracts
provide that the Company is compensated for services performed to date.
Invoicing
is based on schedules established in customer contracts. Payment terms are generally established from 30 to 60 days from the invoice
date. Product returns are recorded as a reduction to revenue.
Revenue
is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected
on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer,
in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Furthermore,
the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to
a customer.
Nature
of goods and services
The
following is a description of the products and services from which the Company generates revenue, as well as the nature, timing
of satisfaction of performance obligations, and significant payment terms for each:
Software
as a Service (SaaS)
Software
as a service (SaaS) for hosted subscription services and licensed software allows customers to access a set of data for a predetermined
period of time. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription
period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance
as the entity performs. Accordingly, the revenue should be recognized over time based on the usage of the hosted subscription
services and licensed software, which can vary from month to month. The revenue is typically based either on a formula such as
number of locations using the service in a given month multiplied by a fee per location or the number of actual scans in a given
month multiplied by a set price per scan based on the contract with the customer
Other
Subscription and Support Services
The
Company also recognizes revenues from other subscription and support services, which includes jurisdictional updates to certain
commercial customers and support services particularly to its Defense ID® customers. These subscriptions require continuing
service or post contractual customer support and performance. As the customer obtains access at a point in time but continues
to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume
the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized
over time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of locations
in a given month multiplied by a fee per location.
Equipment
Revenue
Revenue
from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer
has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has
been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the
equipment is received.
Non-Recurring
Services Revenue
The
non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes
revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as
it is provided and the Company’s performance obligation has been satisfied.
Extended
Warranty
Extended
warranty revenues are generated when a warranty is provided to the customer separately of other performance obligations when the
equipment is sold. As the customer obtains access at a point in time and continues to have access for the remainder of the warranty
term, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance
as the Company performs. The related revenue is recognized ratably over the specified term of the warranty period. The extended
warranty is separate to the Company’s standard warranty of usually one year that it receives from its vendor.
Disaggregation
of revenue
In
the following tables, revenue is disaggregated by product and service and the timing of revenue recognition. The table also includes
a reconciliation of the disaggregated revenue.
|
|
For the Three Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Products and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software as a Service (SaaS)
|
|
$
|
1,563,680
|
|
|
$
|
650,676
|
|
Other subscription and support services
|
|
|
141,798
|
|
|
|
241,970
|
|
Equipment
|
|
|
149,844
|
|
|
|
110,291
|
|
Non-recurring services
|
|
|
61,900
|
|
|
|
5,500
|
|
Extended warranties on equipment
|
|
|
11,674
|
|
|
|
29,683
|
|
Other
|
|
|
1,305
|
|
|
|
1,461
|
|
|
|
$
|
1,930,201
|
|
|
$
|
1,039,581
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
151,149
|
|
|
$
|
111,752
|
|
Services transferred over time
|
|
|
1,779,052
|
|
|
|
927,829
|
|
|
|
$
|
1,930,201
|
|
|
$
|
1,039,581
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Products and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software as a Service (SaaS)
|
|
$
|
3,545,587
|
|
|
$
|
1,870,060
|
|
Other subscription and support services
|
|
|
566,274
|
|
|
|
820,751
|
|
Equipment
|
|
|
337,364
|
|
|
|
287,697
|
|
Non-recurring services
|
|
|
259,945
|
|
|
|
22,748
|
|
Extended warranties on equipment
|
|
|
49,993
|
|
|
|
97,494
|
|
Other
|
|
|
8,023
|
|
|
|
4,311
|
|
|
|
$
|
4,767,186
|
|
|
$
|
3,103,061
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
345,387
|
|
|
$
|
292,008
|
|
Services transferred over time
|
|
|
4,421,799
|
|
|
|
2,811,053
|
|
|
|
$
|
4,767,186
|
|
|
$
|
3,103,061
|
|
Contract
balances
The
current portion of deferred revenue at September 30, 2019 and December 31, 2018 was $681,977 and $704,536, respectively, and primarily
consists of revenue that is recognized over time for software license contracts and hosted subscription services. The changes
in these balances are related to the satisfaction or partial satisfaction of these contracts. Of this balance, at December 31,
2018, $115,929 and $678,399 were recognized as revenue for the three and nine months ended September 30, 2019, respectively. The
long-term portion of deferred revenue is $17,177 and $29,486 as of September 30, 2019 and December 31, 2018, respectively.
The
Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied
in previous periods.
Transaction
price allocated to the remaining performance obligations
The
following table includes estimated revenue expected to be recognized in the future related to performance obligations that are
unsatisfied (or partially unsatisfied) at the end of the reporting period:
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software as a Service (SaaS)
|
|
$
|
235,998
|
|
|
$
|
173,296
|
|
|
$
|
-
|
|
|
$
|
409,294
|
|
Other subscription and support services
|
|
|
99,134
|
|
|
|
148,907
|
|
|
|
4,621
|
|
|
|
252,662
|
|
Extended warranties on equipment
|
|
|
9,153
|
|
|
|
20,646
|
|
|
|
7,399
|
|
|
|
37,198
|
|
|
|
$
|
344,285
|
|
|
$
|
342,849
|
|
|
$
|
12,020
|
|
|
$
|
699,154
|
|
All
consideration from contracts with customers is included in the amounts presented above.
Business
Concentrations and Credit Risk
During
the three and nine month periods ended September 30, 2019, the Company made sales to three customers that accounted for approximately
36% and 34% of total revenues, respectively. The revenue was associated with commercial identity sales customers. These customers
represented 26% of total accounts receivable at September 30, 2019. During the three and nine month periods ended September 30,
2018, the Company made sales to two customers that accounted for approximately 32% and 33% of total revenues, respectively. The
revenue was associated with commercial identity sales customers.
Net
Loss Per Share
Basic
net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number
of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive effect
of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method.
The calculation of diluted net loss per share excludes all anti-dilutive shares.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(568,230
|
)
|
|
$
|
(1,131,219
|
)
|
|
$
|
(2,654,898
|
)
|
|
$
|
(3,299,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – Basic/Diluted
|
|
|
15,864,004
|
|
|
|
15,631,818
|
|
|
|
15,749,312
|
|
|
|
15,510,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per share – Basic/Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.21
|
)
|
The
following table summarizes the common stock equivalents excluded from loss per diluted share because their effect would be anti-dilutive
due to the net loss:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
1,436,623
|
|
|
|
1,074,332
|
|
|
|
1,436,623
|
|
|
|
1,074,332
|
|
Warrants
|
|
|
204,930
|
|
|
|
471,801
|
|
|
|
204,930
|
|
|
|
471,801
|
|
Restricted stock
|
|
|
4,008
|
|
|
|
6,569
|
|
|
|
4,008
|
|
|
|
6,569
|
|
|
|
|
1,645,561
|
|
|
|
1,552,702
|
|
|
|
1,645,561
|
|
|
|
1,552,702
|
|
3.
INTANGIBLE ASSETS
The
changes in the carrying amount of intangible assets for the nine months ended September 30, 2019 were as follows:
Net balance at December 31, 2018
|
|
$
|
306,575
|
|
Deduction: Amortization expense
|
|
|
(111,587
|
)
|
Net balance at September 30, 2019
|
|
$
|
194,988
|
|
The
following summarizes amortization of intangible assets included in the accompanying statements of operations:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
26,207
|
|
|
$
|
32,374
|
|
|
$
|
90,955
|
|
|
$
|
97,122
|
|
General and administrative
|
|
|
6,877
|
|
|
|
6,876
|
|
|
|
20,632
|
|
|
|
20,631
|
|
|
|
$
|
33,084
|
|
|
$
|
39,250
|
|
|
$
|
111,587
|
|
|
$
|
117,753
|
|
4.
NOTE RECEIVABLE
On
August 31, 2015, the Company sold the wireless enterprise assets to the Jamestown S’Klallam Tribe (the “Buyer”)
for total consideration of $350,000 which consists of an upfront cash payment of $30,000, the issuance of a promissory note totaling
$200,000 and contingent consideration up to a maximum of $120,000 based on future earnings. Under the terms of the promissory
note, monthly payments of $3,683 including principal and interest at 4%, are to be made over a 60-month term expiring in August
2020. At September 30, 2019, the total note receivable was $39,705, which is included in Other Current Assets on the Balance Sheets.
At December 31, 2018, the total note receivable was $71,137, of which $42,120 and $29,017 is included in Other Current Assets
and Notes Receivable, net of current portion, respectively on the Balance Sheets.
5.
DEBT
Revolving
Line of Credit
On
February 6, 2019 the Company entered into a revolving credit facility with Citibank that allows for borrowings up to the lesser
of (i) $2,000,000 or (ii) the collateralized balance in the Company’s existing fixed income investment account with Citibank
subject to certain limitations. The facility bears interest at a rate consistent of Citibank’s Base Rate (6.5% at September
30, 2019) minus 2%. Interest is payable monthly and as of September 30, 2019, there were no amounts outstanding under this facility
and unused availability under this facility was $2,000,000.
6.
ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Professional fees
|
|
$
|
148,481
|
|
|
$
|
69,406
|
|
Payroll and related
|
|
|
490,037
|
|
|
|
406,925
|
|
Incentive bonuses
|
|
|
428,617
|
|
|
|
-
|
|
Severance payments to former officer
|
|
|
-
|
|
|
|
158,406
|
|
Other
|
|
|
71,573
|
|
|
|
92,181
|
|
|
|
$
|
1,138,708
|
|
|
$
|
726,918
|
|
7.
INCOME TAXES
The
Company’s available net operating loss (“NOL”) at December 31, 2018 was approximately $15 million. The federal
and state NOLs incurred in all years through 2017 are available to offset future taxable income and expire from 2019 through 2038
if not utilized. The 2018 gross NOL incurred for the year ended December 31, 2018 was approximately $4 million which can
be utilized at 80% with no expiration. There can be no assurance that the Company will realize any benefit of the NOLs. The Company
has a full valuation allowance on its deferred tax assets since management continues to believe that it is more likely than not
that these assets will not be realized.
8.
SHARE BASED COMPENSATION
The
Company accounts for the issuance of equity awards to employees in accordance with ASC Topic 718 and 505, which requires that
the cost resulting from all share-based payment transactions be recognized in the financial statements. These pronouncements establish
fair value as the measurement objective in accounting for share based payment arrangements and requires all companies to apply
a fair value based measurement method in accounting for all share based payment transactions with employees. All stock-based compensation
is included in operating expenses for the periods as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Compensation cost recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative
|
|
$
|
64,290
|
|
|
$
|
40,402
|
|
|
$
|
497,102
|
|
|
$
|
152,555
|
|
Research & development
|
|
|
6,753
|
|
|
|
3,057
|
|
|
|
16,722
|
|
|
|
15,605
|
|
|
|
$
|
71,043
|
|
|
$
|
43,459
|
|
|
$
|
513,824
|
|
|
$
|
168,160
|
|
Stock
Options
The
Company uses the Black-Scholes option pricing model to value the options. The table below presents the weighted average expected
life of the options in years. The expected life computation is based on the time to option expiration. Volatility is determined
using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the
U.S. Treasury yield curve in effect at the time of grant.
Stock
option activity under the 2006 and 2015 Stock Option Plans (collectively, the “Plans”) during the periods indicated
below were as follows:
|
|
Number
of Shares Subject to Issuance
|
|
|
Weighted-average
Exercise Price
|
|
|
Weighted-average
Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,072,332
|
|
|
$
|
1.44
|
|
|
1.85 years
|
|
$
|
881,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
444,163
|
|
|
|
2.68
|
|
|
|
|
|
|
|
Exercised
|
|
|
(79,872
|
)
|
|
|
2.14
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
1,436,623
|
|
|
$
|
1.78
|
|
|
2.20 years
|
|
$
|
4,608,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
1,084,542
|
|
|
$
|
1.49
|
|
|
1.60 years
|
|
$
|
3,791,113
|
|
The
aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s
closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had they all exercised their options on September 30, 2019. This amount changes
based upon the fair market value of the Company’s stock.
Restricted
Stock Units
The
Company issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of
common stock of the Company. During the nine months ended September 30, 2019, the Company issued RSUs to certain directors as
compensation. RSU agreements can vest immediately or with the passage of time. The vesting of all RSUs is contingent on continued
board and employment services.
The
compensation expense incurred by the Company for RSUs is based on the closing market price of the Company’s common stock
on the date of grant and is amortized ratably on a straight-line basis over the requisite service period and charged to general
and administrative expense with a corresponding increase to additional paid-in capital.
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
9,807
|
|
|
|
5.00
|
|
|
|
|
|
Vested and settled in shares
|
|
|
(5,799
|
)
|
|
|
5.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
4,008
|
|
|
$
|
4.99
|
|
|
$
|
-
|
|
As
of September 30, 2019, there was $536,152 of total unrecognized compensation cost, net of estimated forfeitures, related to all
unvested stock options and restricted stock units, which is expected to be recognized over a weighted average period of approximately
3.1 years.
The
Company had 792,133 shares available for future grants under the Plans at September 30, 2019.
Warrants
All
previously granted warrants were issued with an exercise price that was equal to or above the fair market value of the Company’s
common stock on the date of grant. As of September 30, 2019, the Company had 204,930 warrants outstanding with an exercise price
of $2.20 which are exercisable through 2021. As of December 31, 2018, the Company had 448,481 warrants outstanding of which 48,625,
16,356 and 383,500 warrants have an exercise price of $4.48, $8.00 and $2.20, respectively, which are exercisable through 2021.
During the nine months ended September 30, 2019, there were 178,570 warrants exercised at
an exercise price of $2.20 per share.
9.
LEGAL PROCEEDINGS
The
Company is not aware of any infringement by the Company’s products or technology on the proprietary rights of others.
The
Company is not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have
a material effect on its business.
10.
COMMITMENTS AND CONTINGENCIES
The
Company leases offices in Melville, New York which require monthly payments of $10,334 and expires March 31, 2021 under an operating
lease. The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to
the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.
This operating lease is included in Operating Lease Right-of-Use (ROU) Asset, Operating Lease Liability, current portion and Operating
Lease Liability, long-term portion on the Balance Sheets. The Company recognizes rent and utilities expense for this lease on
a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating
lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities
are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s
lease does not provide an implicit rate, it uses its incremental borrowing rate of 5% based on the commencement date in determining
the present value of these lease payments. The Company gives consideration to instruments with similar characteristics when calculating
this incremental borrowing rate. Lease terms may include options to extend or terminate the lease when it is reasonably certain
that the Company will exercise that option. Rent expense which includes utilities was $31,404 and $94,212 for the three and nine
months ended September 30, 2019, respectively and cash payments for rent and utilities was $31,934 and $95,182 for the three and
nine months ended September 30, 2018, respectively.
On
October 4, 2017, Dr. William Roof, the Company’s President and Chief Executive Officer retired from the Company at the request
of the board of directors (the “Board”). The parties have entered into a separation and consulting agreement dated
as of November 2, 2017 (the “Agreement”). Pursuant to the Agreement, the Company may contact Dr. Roof to provide consulting
services and he will provide consulting services at the Company’s request to ensure a smooth and effective transition of
management and business affairs. In consideration of these services and to fulfill the Company’s obligations under Dr. Roof’s
employment agreement with the Company, Dr. Roof will receive aggregate cash payments of $500,000 over a 20-month period together
with reimbursement of certain vision and dental benefit premiums. The Company does not anticipate this to be a significant effort
and therefore has accounted for these payments as severance on the date of separation. In addition, the Board extended the expiration
date of Dr. Roof’s options to purchase Company’s common stock to nine months from the Separation Date. The Board immediately
appointed Bill White, the Company’s current Chief Financial Officer, as its Interim President and Chief Executive Officer.
At September 30, 2019, the total severance liability was fully paid.
In
May 2019, the Board entered into a 2019 separate executive incentive bonus plan (“the 2019 Bonus Plan”) with four
members of the Company’s executive management team. Each agreement, under the 2019 Bonus Plan, is based on certain goals
achieved by the Company plus individual achievements by each executive. The bonus would be paid in the form of cash and RSUs upon
approval by the Board in March 2020. At September 30, 2019, the total bonus liability was $282,717 which is included in Accrued
Expenses on the Balance Sheets.
In
September 2019, the Company’s executive management team created a 2019 Employee Incentive Plan for all the Company’s
non-executives and non-sales personnel. The incentive payment is based on the Company attaining certain revenue goals for the
calendar year 2019 and is based as a percentage of the employee’s salary. The bonus would be paid in the form of cash. The
Company accrued the amount earned through September 30, 2019 that is expected to be paid totaling $145,900 and is included
in Accrued Expenses on the Balance Sheets.