Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report. [ ]
This annual report on
Form 10-K contains forward-looking statements as that term is defined in Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). In some cases, you can identify forward-looking statements by terminology such as “may,” “should,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” “continue,” “intends,” and other variations of these words or comparable words.
In addition, any statements that refer to expectations, projections or other characterizations of events, circumstances or trends
and that do not relate to historical matters are forward-looking statements. These forward-looking statements are based largely
on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business
risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially
from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such
forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks that may cause our or our industry’s actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business:
Digital
Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc. and Shield Products, LLC collectively, “Digital
Ally,” “Digital,” and the “Company”) produces digital video imaging, storage products and disinfectant
and related safety products for use in law enforcement, security and commercial applications. The Company’s products include,
among others; in-car digital video/audio recorders contained in a rear-view mirror for use in law enforcement and commercial fleets;
a system that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free
automatic activation of body-worn cameras and in-car video systems; a miniature digital video system designed to be worn on an
individual’s body; and cloud storage solutions. The Company has recently added two new lines of branded products: (1) the
ThermoVu™ line, which is a line of self-contained temperature monitoring stations that provides alerts and controls facility
access when an individual’s temperature exceeds a pre-set threshold and (2) the Shield™ disinfectant and cleanser
line, which is for use against viruses and bacteria and which we began offering to the Company’s law enforcement and commercial
customers beginning late in the second quarter of 2020. Both product lines are manufactured by third parties. In addition,
the Company has active research and development programs to adapt its technologies to other applications. It can integrate electronic,
radio, computer, mechanical, and multi-media technologies to create unique solutions to address needs in a variety of other industries
and markets, including mass transit, school bus, taxicab and the military. The Company sells its products to law enforcement agencies,
private security customers and organizations, and consumer and commercial fleet operators through direct sales domestically and
third-party distributors internationally.
The
Company was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November
30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital
Ally, Inc.
The
following is a summary of the Company’s Significant Accounting Policies:
Basis
of Consolidation:
The
accompanying financial statements include the consolidated accounts of Digital Ally and its wholly-owned subsidiaries, Digital Ally International,
Inc. and Shield Products, LLC. All intercompany balances and transactions have been eliminated during consolidation.
The
Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products. The Company formed
Shield Products, LLC in May 2020 to facilitate the sales of its Shield™ line of disinfectant/cleanser products and ThermoVu™
line of temperature monitoring equipment.
Fair
Value of Financial Instruments:
The
carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated
notes payable approximate fair value because of the short-term nature of these items. The Company accounts for its secured convertible
debentures and proceeds investment agreement on a fair value basis.
Revenue
Recognition:
The
Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all
related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers
in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies
the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract,
(3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize
revenue when a performance obligation is satisfied.
The
Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the
customer. In situation where sales are to a distributor, the Company had concluded its contracts are with the distributor as the Company
holds a contract bearing enforceable rights and obligations only with the distributor. As part of part of its consideration for the contract,
the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each contract, the Company
considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the
transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which
it expects to be entitled. As the Company’s standard payment terms are less than one year, it has elected the practical expedient
under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction
price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is
considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar
circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e. when the Company’s performance
obligations is satisfied), which typically occurs at shipment. Further in determining whether control has been transferred, the Company
considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the
customer. Customers do not have a right to return the product other than for warranty reasons for which they would only receive repair
services or replacement product. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for
product sales when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than
one year.
The
Company sells its products and services to law enforcement and commercial customers in the following manner:
|
●
|
Sales
to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through its
sales force, which is composed of its employees. Revenue is recorded when the product is shipped to the end customer.
|
|
|
|
|
●
|
Sales
to international customers are made through independent distributors who purchase products from the Company at a wholesale price
and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains
the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables
and all related risks and rewards of ownership. Accordingly, upon application of steps one through five above, revenue is recorded
when the product is shipped to the distributor consistent with the terms of the distribution agreement.
|
|
|
|
|
●
|
Repair
parts and services for domestic and international customers are generally handled by its inside customer service employees. Revenue
is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.
|
Sales
taxes collected on products sold are excluded from revenues and are reported as accrued expenses in the accompanying balance sheets until
payments are remitted.
Service
and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue is
recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services. Revenue for
extended warranty, cloud service or other software-based products is over the term of the contract warranty or service period. A time-elapsed
method is used to measure progress because the Company transfers control evenly over the contractual period. Accordingly, the fixed consideration
related to these revenues is generally recognized on a straight-line basis over the contract term, as long as the other revenue recognition
criteria have been met.
Contracts
with some of the Company’s customers contain multiple performance obligations that are distinct and accounted for separately. The
transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”). The
Company determined SSP for all the performance obligations using observable inputs, such as standalone sales and historical pricing.
SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of service being provided.
SSP also reflects the amount the Company would charge for the performance obligation if it were sold separately in a standalone sale.
Multiple performance obligations consist of product, software, cloud subscriptions and extended warranties.
The
Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined points
within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year
contract to future deliverables using management’s best estimate of selling price.
Contract
liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately
as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts,
prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied.
During the year ended December 31, 2020, the Company recognized revenue of $1.6 million related to its contract liabilities at January
1, 2020. Total contract liabilities consist of the following: Contract liabilities consist of deferred revenue and include payments received
in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the Consolidated
Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are
generally recognized as the respective performance obligations are satisfied. Total contract liabilities consist of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Contract liabilities, current
|
|
$
|
1,647,469
|
|
|
$
|
1,707,943
|
|
Contract liabilities,
non-current
|
|
|
1,848,869
|
|
|
|
1,803,143
|
|
|
|
|
|
|
|
|
|
|
Total contract liabilities
|
|
$
|
3,496,338
|
|
|
$
|
3,511,086
|
|
Sales
returns and allowances aggregated $26,069 and $134,825 for the years ended December 31, 2020 and 2019, respectively. Obligations for
estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon
historical return rates adjusted for known changes in key variables affecting these return rates.
Revenues
for the years ended December 31, 2020 and 2019 were derived from the following sources:
|
|
Year
ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
DVM-800
|
|
$
|
2,499,588
|
|
|
$
|
3,756,544
|
|
ThermoVU
|
|
|
1,466,306
|
|
|
|
—
|
|
Shield disinfectants/sanitizers
|
|
|
176,918
|
|
|
|
—
|
|
Repair and service
|
|
|
1,331,071
|
|
|
|
1,505,849
|
|
FirstVu HD
|
|
|
1,383,822
|
|
|
|
1,264,457
|
|
DVM-250 Plus
|
|
|
339,008
|
|
|
|
1,133,557
|
|
Cloud service revenue
|
|
|
937,218
|
|
|
|
754,586
|
|
VuLink
|
|
|
170,415
|
|
|
|
140,392
|
|
EVO
|
|
|
931,889
|
|
|
|
287,012
|
|
Accessories and other
revenues
|
|
|
1,278,633
|
|
|
|
1,598,967
|
|
|
|
$
|
10,514,868
|
|
|
$
|
10,441,364
|
|
Use
of Estimates:
The
preparation of the consolidated 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 reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not
limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair
value of warrants, options, proceeds investment agreement and convertible debt, the recognition of revenue, inventory valuation reserve,
the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates
are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically,
and the effects of revisions are reflected in the period that they are determined to be necessary.
Cash
and cash equivalents:
Cash
and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less.
Cash
and cash equivalents that are restricted as to withdrawal or use under the terms of the secured convertible debentures are presented
as restricted cash separate from cash and cash equivalents on the accompanying balance sheet.
Accounts
Receivable:
Accounts
receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding
amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables
and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written
off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
A
trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days
beyond terms. No interest is charged on overdue trade receivables.
Inventories:
Inventories
consist of electronic parts, circuitry boards, camera parts and ancillary parts (collectively, “components”), work-in-process
and finished goods, and are carried at the lower of cost or market, with cost determined by standard cost methods, which approximate
the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead. Service inventories that exceed the
estimated requirements for the next 12 months based on recent usage levels are reported as other long-term assets. Management has established
inventory reserves based on estimates of excess and/or obsolete current and non-current inventory.
Manufacturing
inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand,
which is determined based on past usage, planned changes to products and known trends in markets and technology. Changes in support plans
or technology could have a significant impact on obsolescence.
To
support our world-wide service operations, we maintain service spare parts inventory, which consists of both consumable and repairable
spare parts. Consumable service spare parts are used within our service business to replace worn or damaged parts in a system during
a service call and are generally classified in current inventory as our stock of this inventory turns relatively quickly. However, if
there has been no recent usage for a consumable service spare part, but the part is still necessary to support systems under service
contracts, the part is considered to be non-current and included within non-current inventories within our consolidated balance sheet.
Consumables are charged to cost of goods sold when issued during the service call.
As
these service parts age over the related product group’s post-production service life, we reduce the net carrying value of our
repairable spare part inventory on the consolidated balance sheet to account for the excess that builds over the service life. The post-production
service life of our systems is generally seven to twelve years and, at the end of twelve years, the carrying value for these parts in
our consolidated balance sheet is reduced to zero. We also perform periodic monitoring of our installed base for premature end of service
life events and expense, through cost of sales, the remaining net carrying value of any related spare parts inventory in the period incurred.
Furniture,
fixtures and equipment:
Furniture,
fixtures and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance
and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful
life of the asset, which ranges from three to ten years. Amortization expense on capitalized leases is included with depreciation expense.
The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited
or charged to income.
Intangible
assets:
Intangible
assets include deferred patent costs and license agreements. Legal expenses incurred in preparation of patent application have been deferred
and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will
be charged to expense at that time. The Company has entered into several sublicense agreements under which it has been assigned the exclusive
rights to certain licensed materials used in its products. These sublicense agreements generally require upfront payments to obtain the
exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and amortizes such costs over their
estimated useful life on a straight-line method.
Leases:
The
Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will
evaluate whether to account for the lease as an operating or finance lease. Operating leases are included in the right of use assets
(ROU) and operating lease liabilities on the consolidated balance sheet as of December 31, 2020. Finance leases would be included in
furniture, fixtures and equipment, net and long-term debt and finance lease obligations on the balance sheet. The Company had operating
leases for copiers and its office and warehouse space at December 31, 2020 but no financing leases.
ROU
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the
operating lease liabilities if the operating lease does not provide an implicit rate. Lease terms may include the option to extend when
Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line
basis over the lease term.
The
Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not
recognized for short term leases.
Secured
convertible debentures:
The
Company has elected to record its debentures at fair value. Accordingly, the debentures are marked-to-market at each reporting date with
the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations. All issuance costs related to the debentures
were expensed as incurred in the Consolidated Statement of Operations.
Proceeds
investment agreement:
The
Company has elected to record its proceeds investment agreement at its fair value. Accordingly, the proceeds investment agreement will
be marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations.
All issuance costs related to the proceeds investment agreement were expensed as incurred in the Consolidated Statement of Operations.
Senior
Convertible Notes:
The
Company has elected to record its senior convertible notes at its fair value. Accordingly, the senior convertible notes will be marked-to-market
at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations. All issuance
costs related to the senior convertible notes were expensed as incurred in the Consolidated Statement of Operations.
Long-Lived
Assets:
Long-lived
assets such as furniture, fixtures and equipment and purchased intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require
a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be
generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable
on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value
is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party appraisals,
as considered necessary.
Warranties:
The
Company’s products carry explicit product warranties that extend up to two years from the date of shipment. The Company records
a provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts these provisions to
reflect actual experience. Accrued warranty costs are included in accrued expenses. Extended warranties are offered on selected products
and when a customer purchases an extended warranty the associated proceeds are treated as contract liabilities and recognized over the
term of the extended warranty.
Shipping
and Handling Costs:
Shipping
and handling costs for outbound sales orders totaled $74,721 and $65,312 for the years ended December 31, 2020 and 2019, respectively.
Such costs are included in general and administrative expenses in the Consolidated Statements of Operations.
Advertising
Costs:
Advertising
expense includes costs related to trade shows and conventions, promotional material and supplies, and media costs. Advertising costs
are expensed in the period in which they are incurred. The Company incurred total advertising expense of approximately $990,975 and $1,019,707
for the years ended December 31, 2020 and 2019, respectively. Such costs are included in selling, advertising and promotional expenses
in the Consolidated Statements of Operations.
Income
Taxes:
Deferred
taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The
Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
No. 740 - Income Taxes that provides a framework for accounting for uncertainty in income taxes and provided a comprehensive model to
recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax
return. It initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained
upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit
that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position
and all relevant facts. Application requires numerous estimates based on available information. The Company considers many factors when
evaluating and estimating its tax positions and tax benefits, and it recognized tax positions and tax benefits may not accurately anticipate
actual outcomes. As it obtains additional information, the Company may need to periodically adjust its recognized tax positions and tax
benefits. These periodic adjustments may have a material impact on its Consolidated Statements of Operations.
The
Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense
in the Consolidated Statements of Operations. There was no interest expense related to the underpayment of estimated taxes during the
years ended December 31, 2020 and 2019. There were no penalties in 2020 and 2019.
The
Company is subject to taxation in the United States and various states. As of December 31, 2020, the Company’s tax returns filed
for 2017, 2018, and 2019 and to be filed for 2020 are subject to examination by the relevant taxing authorities. With few exceptions,
as of December 31, 2020, the Company is no longer subject to Federal, state, or local examinations by tax authorities for years before
2017.
Research
and Development Expenses:
The
Company expenses all research and development costs as incurred. Development costs of computer software to be sold, leased, or otherwise
marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when
a product is available for general release to customers. In most instances, the Company’s products are released soon after technological
feasibility has been established. Costs incurred subsequent to achievement of technological feasibility were not significant, and software
development costs were expensed as incurred during 2020 and 2019.
Common
Stock Purchase Warrants:
The
Company has common stock purchase warrants outstanding that are accounted for as equity based on their relative fair value and are not
subject to re-measurement.
Stock-Based
Compensation:
The
Company grants stock-based compensation to its employees, board of directors and certain third-party contractors. Share-based compensation
arrangements may include the issuance of options to purchase common stock in the future or the issuance of restricted stock, which generally
are subject to vesting requirements. The Company records stock-based compensation expense for all stock-based compensation granted based
on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period
of the award.
The
Company estimates the grant-date fair value of stock-based compensation using the Black-Scholes valuation model. Assumptions used to
estimate compensation expense are determined as follows:
|
●
|
Expected
term is determined using the contractual term and vesting period of the award;
|
|
|
|
|
●
|
Expected
volatility of award grants made in the Company’s plan is measured using the weighted average of historical daily changes in
the market price of the Company’s common stock over the period equal to the expected term of the award;
|
|
|
|
|
●
|
Expected
dividend rate is determined based on expected dividends to be declared;
|
|
|
|
|
●
|
Risk-free
interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a maturity equal to the expected term of
the awards; and
|
|
|
|
|
●
|
Forfeitures
are accounted for as they occur.
|
Segments
of Business:
The
Company has determined that its operations are comprised of one reportable segment: the sale of digital audio and video recording and
speed detection devices. For the year ended December 31, 2020 and 2019, sales by geographic area were as follows:
|
|
Year
ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Sales by geographic area:
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
10,425,494
|
|
|
$
|
10,251,259
|
|
Foreign
|
|
|
89,374
|
|
|
|
190,105
|
|
|
|
$
|
10,514,868
|
|
|
$
|
10,441,364
|
|
Sales
to customers outside of the United States are denominated in U.S. dollars. All Company assets are physically located within the United
States.
Reclassification
of Prior Year Presentation
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the reported results of operations.
New
Accounting Standards
In
2020, FASB issued ASU No. 2020-06 to simplify the accounting for convertible debt instruments as the current accounting guidance was
determined to be unnecessarily complex and difficult to navigate. The ASU primarily does three things: (1) The ASU eliminates the beneficial
conversion feature model and the cash conversion model. The elimination of these models will result in more convertible instruments (convertible
debt instruments or convertible preferred stock instruments) being reported as a single liability instrument. The ASU also makes targeted
improvements to the related disclosures, (2) The ASU eliminates certain settlement conditions that are required to qualify for derivative
scope exception which will allow for less equity contracts to be accounted for as a derivative and (3) The ASU aligns the diluted EPS
calculation for convertible instruments by requiring the use of the if-converted method and requiring share settlement be included in
the calculation when the contract includes an option of cash or share settlement. ASU
No. 2020-06 is effective for fiscal years beginning after December 15, 2021 with early adoption permitted for fiscal years beginning
after December 15, 2020. Based on a preliminary analysis, the Company does not expect the adoption of this new accounting standard will
have a significant impact on the Company’s financial position and results of operations.
In
2020, FASB issued ASU No. 2020-01 which represents a consensus of the Emerging Issues Task Force and it clarifies certain items related
to ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities. The ASU (1) clarifies that when an entity is either applying the equity method or upon discontinuing the equity method it
should consider observable price changes in orderly transactions for the identical or a similar investment with the same issuer for valuing
basis of the investment and (2) clarifies that when determining the accounting for certain forward contracts and purchased options an
entity should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity
method or fair value option. ASU No. 2020-01 is effective
for fiscal years beginning after December 15, 2020 with early adoption permitted. Based on a preliminary analysis, the Company does not
expect the adoption of this new accounting standard will have a significant impact on the Company’s financial position and results
of operations.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant
to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The
amendment also improves consistent application and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
The adoption of this standard did not have a significant impact on the Company’s financial position and results of operations.
In
February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (“Topic 842”). The guidance
requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to
today’s accounting. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use
asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease
payments over the lease term. The right-of-use asset is measured at the lease liability amount, adjusted for lease prepayments, lease
incentives received and the lessee’s initial direct costs. The standard is effective for public business entities for annual reporting
periods beginning after December 15, 2018, and interim periods within that reporting period, which is the first quarter of 2019 for the
Company.
The
Company adopted the new guidance on January 1, 2019 using the optional transitional method and elected to use the package of three practical
expedients which allows the Company not to reassess whether contracts are or contain leases, lease classification and whether initial
direct costs qualify for capitalization. The Company has completed its assessment of the impact of the standard and determined that the
only lease that the Company held was an operating lease for its office and warehouse space. Upon adoption of the standard, the Company
recorded Right of Use (ROU) assets of approximately $501,000 and lease liabilities of approximately $582,000 related to it office and
warehouse space operating leases. The Company also removed deferred rent of approximately $81,000 when adopting the new guidance.
For
financial liabilities measured using the fair value option in ASC 825, ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, issued in January 2016, requires entities to recognize the
changes in fair value of liabilities caused by a change in instrument specific credit risk (own credit risk) in other comprehensive income.
The ASU is effective for calendar-year public business entities beginning in 2018. For all other calendar-year entities, it is effective
for annual periods beginning in 2019 and interim periods beginning in 2020. Entities can early adopt certain provisions of the new standard,
including this provision related to financial liabilities measured under the fair value option. We have considered this guidance and
its impact on this debt accounted for at fair value. Based on discussions with our valuation expert and knowledge of the Company there
was no change in valuation caused by a change in the Company’s credit risk during the period ending December 31, 2020.
ASU
2018-09, Codification improvements, clarifies the accounting for a debt extinguishment when the fair value option is elected. Upon extinguishment
an entity shall include in net income the cumulative amount of the gain or loss previously recorded in other comprehensive income for
the extinguished debt that resulted from changes in instrument-specific credit risk. The ASU is effective for calendar-year public business
entities beginning in 2019. For all other calendar-year entities, it is effective for annual periods beginning in 2020 and interim periods
beginning in 2021. Early adoption is permitted for any fiscal year or interim period for which an entity’s financial statements
have not yet been issued or have not been made available to be issued. We have considered this guidance and its impact on this debt accounted
for at fair value. Based on discussions with our valuation expert and knowledge of the Company there was no change in valuation caused
by a change in the Company’s credit risk during the period ending December 31, 2020. Since there is no change accounted for as
a change in Credit Risk (included in other comprehensive income/loss) there is no impact to the Company’s financial statements
from this new guidance.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit losses
for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the
current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019 and May 2019, the
FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326):
Targeted Transition Relief” which provided additional implementation guidance on the previously issued ASU. In November 2019, the
FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842),” which defers the effective date for public filers that are considered small reporting companies (“SRC”) as defined
by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate the effect
of adopting ASU 2016-13 will have on the Company’s consolidated financial statements.
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, to improve the effectiveness of disclosures.
The amendments remove, modify, and add certain disclosure requirements in Topic 820, “Fair Value Measurement.” The amendments
on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent
interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to
all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019. Early
adoption is permitted, including adoption in an interim period. Furthermore, an entity is permitted to early adopt any removed or modified
disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date. The Company is currently
evaluating the effects the adoption of ASU 2018-13 will have on the disclosures.
In
August 2018, the FASB issued ASU No. 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40), or ASU 2018-15.
ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement that is a service
contract. The amendments under ASU 2018-15 are effective for interim and annual fiscal periods beginning after December 15, 2019, with
early adoption permitted. The Company does not expect the adoption of ASU 2018-15 to have a material impact on its financial statements.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant
to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The
amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
NOTE
2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. Sales to domestic customers
are typically made on credit and the Company generally does not require collateral while sales to international customers require payment
before shipment or backing by an irrevocable letter or credit. The Company performs ongoing credit evaluations of its customers’
financial condition and maintains an allowance for estimated losses. Accounts are written off when deemed uncollectible and accounts
receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts totaled $123,224 as of December
31, 2020 and $123,224 as of December 31, 2019.
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts
that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing
its cash deposits with major financial institutions. At December 31, 2020 and 2019, the uninsured balance amounted to $3,653,192
and $-0-, respectively. The Company uses primarily a network
of unaffiliated distributors for international sales and employee-based direct sales force for domestic sales. No international
distributor individually exceeded 10% of total revenues and no customer receivable balance exceeded 10% of total accounts receivable
for the years ended December 31, 2020 and 2019.
The
Company purchases finished circuit boards and other proprietary component parts from suppliers located in the United States and on a
limited basis from Asia. Although the Company obtains certain of these components from single source suppliers, it generally owns all
tooling and management has located alternative suppliers to reduce the risk in most cases to supplier problems that could result in significant
production delays. The Company has not historically experienced significant supply disruptions from any of its principal vendors and
does not anticipate future supply disruptions. The Company acquires most of its components on a purchase order basis and does not have
long-term contracts with its suppliers.
NOTE
3. ACCOUNTS RECEIVABLE – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
allowance for doubtful accounts receivable was comprised of the following for the years ended December 31, 2020 and 2019:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Beginning balance
|
|
$
|
123,224
|
|
|
$
|
70,000
|
|
Provision for bad debts
|
|
|
—
|
|
|
|
60,000
|
|
Charge-offs to allowance,
net of recoveries
|
|
|
—
|
|
|
|
(6,776
|
)
|
Ending balance
|
|
$
|
123,224
|
|
|
$
|
123,224
|
|
NOTE
4. INVENTORIES
Inventories
consisted of the following at December 31, 2020 and 2019:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Raw material and component parts
|
|
$
|
3,186,426
|
|
|
$
|
4,481,611
|
|
Work-in-process
|
|
|
1,907
|
|
|
|
35,858
|
|
Finished goods
|
|
|
6,974,291
|
|
|
|
4,906,956
|
|
Subtotal
|
|
|
10,162,625
|
|
|
|
9,424,425
|
|
Reserve for excess and
obsolete inventory
|
|
|
(1,960,351
|
)
|
|
|
(4,144,013
|
)
|
Total inventories
|
|
$
|
8,202,274
|
|
|
$
|
5,280,412
|
|
Finished
goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such units
totaled $138,263 and $80,711 as of December 31, 2020 and 2019, respectively.
NOTE
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture,
fixtures and equipment consisted of the following at December 31, 2020 and 2019:
|
|
Estimated
Useful Life
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Building
|
|
30 years
|
|
$
|
422,441
|
|
|
$
|
—
|
|
Office furniture, fixtures and equipment
|
|
3-10 years
|
|
|
232,472
|
|
|
|
397,795
|
|
Warehouse and production equipment
|
|
3-5 years
|
|
|
96,415
|
|
|
|
210,700
|
|
Demonstration and tradeshow equipment
|
|
2-5 years
|
|
|
107,241
|
|
|
|
252,001
|
|
Leasehold improvements
|
|
2-5 years
|
|
|
289,865
|
|
|
|
163,170
|
|
Rental equipment
|
|
1-3 years
|
|
|
71,548
|
|
|
|
93,923
|
|
Total cost
|
|
|
|
|
1,219,983
|
|
|
|
1,117,591
|
|
Less: accumulated depreciation
and amortization
|
|
|
|
|
(553,183
|
)
|
|
|
(920,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net furniture, fixtures
and equipment
|
|
|
|
$
|
666,800
|
|
|
$
|
197,063
|
|
Depreciation
and amortization of furniture, fixtures and equipment aggregated $62,048 and $254,491 for the years ended December 31,
2020 and 2019, respectively. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts
and any gain or loss is credited or charged to income. The Company retired fixed assets during 2020 totaling $519,468, all of
which were fully depreciated resulting in no gain or loss for the year ended December 31, 2020.
NOTE
6. INTANGIBLE ASSETS
Intangible
assets consisted of the following at December 31, 2020 and 2019:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
Gross
value
|
|
|
Accumulated
amortization
|
|
|
Net
carrying value
|
|
|
Gross
value
|
|
|
Accumulated
amortization
|
|
|
Net
carrying value
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
104,099
|
|
|
$
|
52,872
|
|
|
$
|
51,227
|
|
|
$
|
73,893
|
|
|
$
|
41,785
|
|
|
$
|
32,108
|
|
Patents and Trademarks
|
|
|
264,490
|
|
|
|
135,236
|
|
|
|
129,254
|
|
|
|
542,420
|
|
|
|
326,220
|
|
|
|
216,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,589
|
|
|
|
188,108
|
|
|
|
180,481
|
|
|
|
616,313
|
|
|
|
368,005
|
|
|
|
248,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and trademarks
pending
|
|
|
212,083
|
|
|
|
—
|
|
|
|
212,083
|
|
|
|
164,960
|
|
|
|
—
|
|
|
|
164,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
580,672
|
|
|
$
|
188,108
|
|
|
$
|
392,564
|
|
|
$
|
781,273
|
|
|
$
|
368,005
|
|
|
$
|
413,268
|
|
Patents
and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of the final
patent or trademark is denied, then the amount deferred will be immediately charged to expense.
Amortization
expense for the years ended December 31, 2020 and 2019 was $188,108 and $135,660, respectively. Estimated amortization for intangible
assets with definite lives for the next five years ending December 31 and thereafter is as follows:
Year ending
December 31:
|
|
|
|
2021
|
|
$
|
89,478
|
|
2022
|
|
|
63,909
|
|
2023
|
|
|
1,950
|
|
2024
|
|
|
1,510
|
|
2025 and thereafter
|
|
|
23,634
|
|
|
|
$
|
180,481
|
|
NOTE
7. DEBT OBLIGATIONS
Debt
obligations is comprised of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Economic injury disaster loan (EIDL)
|
|
$
|
150,000
|
|
|
$
|
—
|
|
Payroll protection program loan (PPP)
|
|
|
10,000
|
|
|
|
—
|
|
2019 Secured convertible notes, at fair value
|
|
|
—
|
|
|
|
1,593,809
|
|
2018 Proceeds investment agreement, at fair
value
|
|
|
—
|
|
|
|
6,500,000
|
|
Unsecured promissory
note payable, less unamortized discount of $-0- and $66,061 at December 31, 2020 and 2019, respectively
|
|
|
—
|
|
|
|
233,939
|
|
Debt obligations
|
|
|
160,000
|
|
|
|
8,327,748
|
|
Less: current maturities
of debt obligations
|
|
|
11,727
|
|
|
|
1,827,748
|
|
Debt obligations, long-term
|
|
$
|
148,273
|
|
|
$
|
6,500,000
|
|
Debt
obligations mature as follows as of December 31, 2020:
|
|
December
31, 2020
|
|
2021
|
|
$
|
6,218
|
|
2022
|
|
|
6,206
|
|
2023
|
|
|
3,166
|
|
2024
|
|
|
3,286
|
|
2025 and thereafter
|
|
|
141,124
|
|
|
|
|
|
|
Total
|
|
$
|
160,000
|
|
2020
Small Business Administration Notes.
On
May 4, 2020, the Company issued a promissory note in connection with the receipt of the PPP Loan of $1,418,900 under the SBA’s
PPP Program under the CARES Act. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for nine months after the date of disbursement and total $79,850.57 per month thereafter. The PPP Loan
may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note contains events of default and other provisions
customary for a loan of this type. The PPP provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain
qualifying expenses as described in the CARES Act. The Company intends to use the majority of the PPP Loan amount for qualifying expenses
and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. The Company is in process of applying for
forgiveness of the PPP Loan. On December 10, 2020, the Company was fully forgiven of its $1,418,900 PPP Loan, thus we recorded a gain
on the extinguishment of debt in the amount of $1.4 million in the line item “Gain on Extinguishment of Debt” in our Consolidated
Statements of Operations.
On
May 12, 2020 the Company received $150,000 in loan funding from the SBA under the EIDL program administered by the SBA, which program
was expanded pursuant to the recently enacted CARES Act. The EIDL is evidenced by an unsecured promissory note, dated May 8, 2020, in
the original principal amount of $150,000 with the SBA, the lender.
Under
the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum.
The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal
and interest payments are deferred for twelve months after the date of disbursement and total $731.00 per month thereafter. Such
note may be prepaid in part or in full, at any time, without penalty. The Company granted the secured party a continuing interest
in and to any and all collateral, including but not limited to tangible and intangible personal property.
2020
Secured Convertible Notes.
On
April 17, 2020, the Company entered into a securities purchase agreement with several accredited investors providing for the issuance
of (i) the Company’s 8% secured convertible notes due April 16, 2021 with a principal face amount of $1,666,666, which convertible
notes are, subject to certain conditions, convertible into 1,650,164 shares of the Company’s common stock, at a price per share
of $1.01 (the “2020 Convertible Notes”), and (ii) five-year warrants to purchase an aggregate of 1,237,624 shares of Common
Stock at an exercise price of $1.31, which warrants are immediately exercisable upon issuance and on a cashless basis if the Warrants
have not been registered 180 days after the date of issuance. The accredited investors purchased the foregoing securities for an aggregate
cash purchase price of $1,500,000.
Under
the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited from exercising
their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such holder, together with
its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after
giving effect to such exercise. However, the investors may increase or decrease such percentage to any other percentage not in excess
of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the Company.
The
Company elected to account for the secured convertible notes on the fair value basis. Therefore, the Company determined the fair value
of the secured convertible notes and the common stock purchase warrants which yielded estimated fair values of the secured convertible
notes including their embedded derivatives and the detachable common stock purchase warrants. The following represents the resulting
fair value as determined on April 17, 2020, the date of origination:
Secured convertible notes
|
|
$
|
778,859
|
|
Common stock purchase
warrants
|
|
|
721,141
|
|
|
|
|
|
|
Gross cash proceeds
|
|
$
|
1,500,000
|
|
During
the year ended December 31, 2020, the holders of the 2020 Convertible Notes exercised their right to convert principal balances aggregating
$1,665,666 into equity. In addition, on June 12, 2020, the Company exercised its right to prepay in cash the remaining outstanding principal
balance aggregating $1,000. There remains no outstanding 2020 Convertible notes as of December 31, 2020 as a result of these conversions
and prepayments.
Under
the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of the secured
convertible notes at each reporting date with the resulting charge or credit being reflected in the consolidated statement of operations.
Following is an analysis of the activity in the secured convertible notes during the year ended December 31, 2020:
|
|
Amount
|
|
Balance at December 31, 2019
|
|
$
|
—
|
|
Issuance of
2020 convertible notes at fair value
|
|
|
778,859
|
|
Principal repaid during
the period by issuance of common stock
|
|
|
(1,665,666
|
)
|
Principal repaid during
the period by payment of cash
|
|
|
(1,000
|
)
|
Change
in fair value of secured convertible note during the period
|
|
|
887,807
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
Following
is a range of certain estimates and assumptions utilized as of the April 17, 2020 issuance date to determine the fair value of secured
convertible notes:
|
|
April 17,
2020
|
|
|
|
Assumptions
|
|
Volatility – range
|
|
|
90
|
%
|
Risk-free rate
|
|
|
0.36
|
%
|
Contractual term
|
|
|
1.0
years
|
|
Stock price
|
|
$
|
0.92
|
|
Debt yield
|
|
|
132.2
|
%
|
Under
the fair value basis, legal, accounting, and miscellaneous costs directly related to the issuance of the secured convertible notes are
charged to expense as incurred. A total of $34,906 and $-0- of such issuance costs were charged to operations during the years ended
December 31, 2020 and 2019, respectively.
2019
Secured Convertible Notes.
On
August 5, 2019, the Company, entered into a securities purchase agreement with several accredited investors providing for the issuance
of (i) the Company’s 8% secured convertible notes due August 4, 2020 with a principal face amount of $2,777,777.78, which convertible
notes are, subject to certain conditions, convertible into 1,984,126 shares of the Company’s common stock, at a price per share
of $1.40; (ii) five-year warrants to purchase an aggregate of 571,428 shares of Common Stock at an exercise price of $1.8125, which warrants
are immediately exercisable upon issuance and on a cashless basis if the Warrants have not been registered 180 days after the date of
issuance; and (iii) the issuance of shares of common stock equal to 5% of the aggregate purchase price of the convertible notes, with
an aggregate value of $125,000 (the “Commitment Shares”). The accredited investors purchased the foregoing securities for
an aggregate cash purchase price of $2,500,000.
Pursuant
to the purchase agreement, an aggregate of $1,153,320 in principal amount of convertible notes (the “Registered Notes”),
the conversion shares underlying the Registered Notes and all of the Commitment Shares were issued to the accredited investors in a registered
direct offering pursuant to a prospectus supplement to the Company’s currently effective shelf registration statement on Form S-3.
Accordingly, $1,153,320 in original principal amount of our convertible notes were issued as Registered Notes pursuant to the shelf registration
statement and therefore freely tradable.
In
a related transaction and in accordance with the purchase agreement, the Company issued to the accredited investors in a concurrent private
placement pursuant to an exemption from the registration requirements of the Securities Act provided in Section 4(a)(2) of the Securities
Act and/or Regulation D promulgated thereunder, (1) the remaining aggregate of $1,624,457.78 in principal amount of convertible notes,
(2) the shares of common stock issuable from time to time upon conversion of such convertible notes, and (3) the common shares underlying
the common stock purchase warrants. On September 5, 2019, the Company filed a Registration Statement on Form S-1 covering the securities
issued in the concurrent private placement including an aggregate of $1,624,457.78 in principal amount of previously non-registered convertible
notes, the shares of common stock issuable from time to time upon conversion of such non-registered convertible notes and the common
stock underlying the common stock purchase warrants. Such Registration Statement on Form S-1 was declared effective by the Securities
and Exchange Commission on September 12, 2019.
In
connection with the purchase agreement, the Company and its subsidiary entered into a security agreement, dated as of August 5, 2019,
with the investors, pursuant to which the Company and its subsidiary granted a security interest in, among other items, the Company and
its subsidiary’s accounts, chattel paper, documents, equipment, general intangibles, instruments and inventory, and all proceeds,
as set forth in the security agreement. In addition, pursuant to an intellectual property security agreement, dated as of August 5, 2019,
the Company granted a continuing security interest in all of the Company’s right, title and interest in, to and under certain of
the Company’s trademarks, copyrights and patents. In addition, the Company’s subsidiary jointly and severally agreed to guarantee
and act as surety for the Company’s obligation to repay the convertible notes pursuant to a subsidiary guarantee.
Under
the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited from exercising
their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such holder, together with
its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after
giving effect to such exercise. However, the investors may increase or decrease such percentage to any other percentage not in excess
of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the Company.
The
Company elected to account for the secured convertible notes on the fair value basis. Therefore, the Company determined the fair value
of the (1) secured convertible notes, (2) the Commitment Shares and (3) the common stock purchase warrants which yielded estimated fair
values of the secured convertible notes including their embedded derivatives, the Commitment Shares and the detachable common stock purchase
warrants. The following represents the resulting fair value as determined on August 5, 2019, the date of origination:
Secured convertible notes
|
|
$
|
1,845,512
|
|
Common stock issued as Commitment Shares
|
|
|
118,749
|
|
Common stock purchase
warrants
|
|
|
535,739
|
|
|
|
|
|
|
Gross cash proceeds
|
|
$
|
2,500,000
|
|
Under
the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of the secured
convertible notes at each reporting date with the resulting charge or credit being reflected in the consolidated statement of operations.
Following is an analysis of the activity in the secured convertible notes during the years ended December 31, 2020 and 2019:
|
|
Amount
|
|
Balance at December 31, 2018
|
|
|
—
|
|
Issuance of
convertible notes on August 5, 2019, at fair value
|
|
|
1,845,512
|
|
Principal repaid during
the period by issuance of common stock
|
|
|
(648,067
|
)
|
Principal repaid during
the period by payment of cash
|
|
|
(123,457
|
)
|
Change
in fair value of secured convertible note during the period
|
|
|
519,821
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
1,593,809
|
|
Principal repaid during
the period by issuance of common stock
|
|
|
(1,259,074
|
)
|
Principal repaid during
the period by payment of cash
|
|
|
(747,180
|
)
|
Change
in fair value of secured convertible note during the period
|
|
|
412,445
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
Following
is a range of certain estimates and assumptions utilized as of December 31, 2020 to determine the fair value of secured convertible notes:
|
|
December
31,
2019
|
|
|
|
Assumptions
|
|
Volatility – range
|
|
|
115
|
%
|
Risk-free rate
|
|
|
1.60
|
%
|
Contractual term
|
|
|
0.6
years
|
|
Calibrated stock price
|
|
$
|
1.06
|
|
Debt yield
|
|
|
123.6
|
%
|
Under
the fair value basis, legal, accounting, and miscellaneous costs directly related to the issuance of the secured convertible notes are
charged to expense as incurred. A total of $-0- and $89,148 of such issuance costs were charged to operations during the years ended
December 31, 2020 and 2019, respectively.
2018
Proceeds Investment Agreement.
On
July 31, 2018, the Company entered into a Proceeds Investment Agreement (the “PIA Agreement”) with Brickell Key Investments
LP (“BKI”), pursuant to which BKI funded an aggregate of $500,000 (the “First Tranche”) to be used (i) to fund
the Company’s litigation proceedings relating to the infringement of certain patent assets listed in the PIA Agreement and (ii)
to repay the Company’s existing debt obligations and for certain working capital purposes set forth in the PIA Agreement. Pursuant
to the PIA Agreement, BKI was granted an option to provide the Company with an additional $9.5 million, at BKI’s sole discretion
(the “Second Tranche”). On August 21, 2018, BKI exercised its option on the Second Tranche for $9.5 million which completed
the $10 million funding.
Pursuant
to the PIA Agreement and in consideration for the $10 million in funding, the Company agreed to assign to BKI (i) 100% of all gross,
pre-tax monetary recoveries paid by any defendant(s) to the Company or its affiliates agreed to in a settlement or awarded in judgment
in connection with the patent assets, plus any interest paid in connection therewith by such defendant(s) (the “Patent Assets Proceeds”),
up to the minimum return (as defined in the Agreement) and (ii) if BKI has not received its minimum return by the earlier of a liquidity
event (as defined in the Agreement) and July 31, 2020, then the Company agreed to assign to BKI 100% of the Patent Asset Proceeds until
BKI has received an amount equal to the minimum return on $4.0 million.
Pursuant
to the PIA Agreement, the Company granted BKI (i) a senior security interest in the Patent Assets, the claims (as defined in the Agreement)
and the Patent Assets Proceeds until such time as the minimum return is paid, in which case, the security interest on the patent assets,
the claims and the Patent Assets Proceeds will be released, and (ii) a senior security interest in all other assets of the Company until
such time as the minimum return is paid on $4.0 million, in which case, the security interest on such other assets will be released.
The
security interest is enforceable by BKI if the Company is in default under the PIA Agreement which would occur if (i) the Company fails,
after five (5) days’ written notice, to pay any due amount payable to BKI under the PIA Agreement, (ii) the Company fails to comply
with any provision of the PIA Agreement or any other agreement or document contemplated under the PIA Agreement, (iii) the Company becomes
insolvent or insolvency proceedings are commenced (and not subsequently discharged) with respect to the Company, (iv) the Company’s
creditors commence actions against the Company (which are not subsequently discharged) that affect material assets of the Company, (v)
the Company, without BKI’s consent, incurs indebtedness other than immaterial ordinary course indebtedness up to $500,000, (vi)
the Company fails, within five (5) business days following the closing of the second tranche, to fully satisfy its obligations to certain
holders of the Company’s senior secured convertible promissory notes listed in the PIA Agreement and fails to obtain unconditional
releases from such holders as to the Company’s obligations to such holders and the security interests in the Company held by such
holders or (vii) there is an uncured non-compliance of the Company’s obligations or misrepresentations by the Company under the
PIA Agreement.
Under
the PIA Agreement, the Company issued BKI a warrant to purchase up to 465,712 shares of the Company’s common stock, par value $0.001
per share (the “PIA Warrant”), at an exercise price of $2.60 per share provided that the holder of the PIA Warrant will be
prohibited from exercising the PIA Warrant if, as a result of such exercise, such holder, together with its affiliates, would own more
than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise.
However, such holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase
in such percentage shall not be effective until 61 days after such notice to the Company. The PIA Warrant is exercisable for five years
from the date of issuance and is exercisable on a cashless exercise basis if there is no effective registration statement. No contractual
registration rights were given.
The
Company elected to account for the PIA on the fair value basis. Therefore, the Company determined the fair value of the PIA and PIA Warrants
which yielded estimated fair values of the PIA including their embedded derivatives and the detachable PIA Warrants as follows:
Proceeds investment agreement
|
|
$
|
9,067,513
|
|
Common stock purchase
warrants
|
|
|
932,487
|
|
|
|
|
|
|
Gross cash proceeds
|
|
$
|
10,000,000
|
|
The
Company utilized a probability weighted present value of expected patent asset proceeds for the litigation involving both Axon and WatchGuard
(see Note 12 – Commitments and Contingencies) which involved estimates of the amount and timing of the expected patent asset proceeds
from the alleged patent infringement. The fair value of the PIA is updated for actual and estimated activity affecting the probability
weighted present value of expected patent asset proceeds at each reporting date with the change charged/credited to operations. Following
is a range of certain estimates and assumptions utilized as of December 31, 2019 to probability weighted present value of expected patent
asset proceeds for the litigation involving both Axon and WatchGuard:
|
|
December
31,
2019
|
|
Discount rate
|
|
|
3.0%
- 16.6
|
%
|
Expected term to patent asset proceeds payment
|
|
|
0.58
years - 4 years
|
|
Probability of success
|
|
|
5.9%
- 38.5
|
%
|
Estimated minimum return payable to BKI
|
|
$
|
21
million
|
|
Negotiation discount
|
|
|
43.3
|
%
|
During
2019, the Company settled its patent infringement litigation with WatchGuard whereby it received a lump-sum payment of $6.0 million as
further described in Note 12. In accordance with the terms of the PIA, the Company remitted the $6.0 as a principal payment toward its
minimum return payment obligations under the PIA. The Company recorded the receipt of the $6,000,000 settlement as Patent litigation
settlement income in the accompanying consolidated statement of operations.
On
July 20, 2020, the Company and BKI executed a Termination Agreement and Mutual Release (the “Termination Agreement”). Under
the terms of the Termination Agreement the parties agreed to terminate the PIA and to release each other from any further liability under
the PIA obligation.
Under
the terms of the Termination Agreement, upon payment of $1,250,000 by the Company to BKI both parties agreed to terminate the PIA and
to release each other from any further liability thereunder. Such $1,250,000 payment was made on July 22, 2020. In addition to the $1,250,000
payment, the Company further agreed to pay BKI the following: (a) a contingent payment in the amount of $2,750,000 following the closing
of an asset purchase, membership interest purchase, or similar transaction between the Company and a specified third-party (the “Purchase
Transaction”) and (b) any and all future proceeds received from Watchguard and its successors and assigns by the Company for WatchGuard’s
use of U.S. Patent Nos. 8,781,292 and 9,253,452. For clarity, the Company and BKI further agreed that the payment of the contingent payment
would only be due and payable upon the closing of the specified Purchase Transaction and the relevant contingent payment portion of the
Termination Agreement, and any obligations stemming therefrom, would automatically terminate if the specified Purchase Transaction is
abandoned prior to its closing, including its failure to close within three years from the date of the Termination Agreement.
The
parties abandoned the Purchase Transaction during the year ended December 31, 2020 and therefore, the contingent payment obligation automatically
terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does not anticipate any
future recoveries from Watchguard and its successors and assigns relative to WatchGuard’s use of U.S. Patent Nos. 8,781,292 and
9,253,452. As a result, the PIA obligation was extinguished upon the payment of the $1,250,000 required under the Termination Agreement.
The
following represents activity in the PIA during the years ended December 31, 2020 and 2019:
Beginning balance as of January 1, 2019
|
|
$
|
9,142,000
|
|
Repayment of obligation
|
|
|
(6,000,000
|
)
|
Change in the fair value
during the period
|
|
|
3,358,000
|
|
Ending balance as of December 31, 2019
|
|
$
|
6,500,000
|
|
|
|
|
|
|
Beginning Balance as of January 1, 2020
|
|
$
|
6,500,000
|
|
Repayment of obligation
|
|
|
(1,250,000
|
)
|
Change in fair value
during the period
|
|
|
(5,250,000
|
)
|
Ending balance as of December 31, 2020
|
|
$
|
-
|
|
Unsecured
Promissory Note Payable.
On
December 23, 2019, the Company, borrowed $300,000 under an unsecured note payable to a private, third-party lender. The promissory
note bears interest at the rate of 8% per annum with principal and accrued interest payable on or before its maturity date of
March 31, 2020. The Company granted the lender warrants exercisable to purchase a total of 107,000 shares of its common stock
at an exercise price of $1.40 per share until December 23, 2024. When determining the fair value of these warrants, the assumptions
utilized in the Black-Scholes model include the expected volatility of stock price of 86%, discount rate of 1.75%, and expected
dividends of 0%. The Company allocated $71,869 of the proceeds of the promissory note to additional paid-in-capital, which
represented the grant date relative fair value of the warrants issued to the lender. The discount will be amortized to interest
expense ratably over the term of the promissory note which approximates the effective interest method. The amortization of discount
resulted in $66,061 and $5,808 of the discount amortized to interest expense during the years ended December 31, 2020 and 2019,
respectively.
On
January 17, 2020, the Company borrowed $100,000 under an unsecured note payable to a private, third-party lender. The
promissory note bore interest at the rate of 8% per annum with principal and accrued interest payable on or before its
maturity date of April 17, 2020. The Company granted the lender warrants exercisable to purchase a total of 35,750 shares of
its common stock at an exercise price of $1.40 per share until January 17, 2025. When determining the fair value of these
warrants, the assumptions utilized in the Black-Scholes model include the expected volatility of stock price of 86%, discount
rate of 2%, and expected dividends of 0%. The Company allocated $20,806 of the proceeds of the promissory note to additional
paid-in-capital, which represented the grant date relative fair value of the warrants issued to the lender. The note was
repaid in full on March 12, 2020 and the discount was amortized to interest expense through the date of payment. The
amortization of discount resulted in $20,806 of the discount amortized to interest expense during the year ended December 31,
2020.
Unsecured
Promissory Notes Payable – Related party
During
February and April 2020, the Company borrowed a total of $319,000 from the Company’s Chairman, CEO & President under an unsecured
promissory note bearing interest at 6% through its May 28, 2020 maturity date. The proceeds from the note were used for general corporate
purposes. The principal balance and related accrued interest were paid in full during the year ended December 31, 2020. Total interest
accrued and paid on this note was $5,236.
NOTE
8. FAIR VALUE MEASUREMENT
In
accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the
market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a
business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
The following is a brief description of those three levels:
●
|
Level
1 — Quoted prices in active markets for identical assets and liabilities
|
|
|
●
|
Level
2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)
|
|
|
●
|
Level
3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)
|
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring
basis as of December 31, 2020 and 2019.
|
|
December
31, 2020
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible
debentures
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Proceeds
investment agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December
31, 2019
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible
debentures
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,593,809
|
|
|
$
|
1,593,809
|
|
Proceeds
investment agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
6,500,000
|
|
|
|
6,500,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,093,809
|
|
|
$
|
8,093,809
|
|
The
following table represents the change in Level 3 tier value measurements:
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
Secured
|
|
|
Proceeds
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Investment
|
|
|
|
|
|
|
Notes
|
|
|
Notes
|
|
|
Agreement
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,142,000
|
|
|
$
|
9,142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments made on debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,000,000
|
)
|
|
|
(6,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New secured convertible debentures
|
|
|
1,845,512
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,845,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of secured convertible debentures
|
|
|
(648,067
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(648,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of 2019 secured convertible notes
|
|
|
(123,457
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(123,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of secured convertible debentures and proceeds
investment agreement
|
|
|
519,821
|
|
|
|
—
|
|
|
|
3,358,000
|
|
|
|
3,877,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
1,593,809
|
|
|
$
|
—
|
|
|
$
|
6,500,000
|
|
|
$
|
8,093,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of secured convertible debt
|
|
|
—
|
|
|
|
778,859
|
|
|
|
—
|
|
|
|
778,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of secured convertible debentures
|
|
|
(1,259,074
|
)
|
|
|
(1,665,666
|
)
|
|
|
—
|
|
|
|
(2,924,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of proceeds investment agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,250,000
|
)
|
|
|
(1,250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of secured convertible notes
|
|
|
(747,180
|
)
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
(748,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of secured convertible debentures and proceeds investment agreement
|
|
|
412,445
|
|
|
|
887,807
|
|
|
|
(5,250,000
|
)
|
|
|
(3,949,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE
9. ACCRUED EXPENSES
Accrued
expenses consisted of the following at December 31, 2020 and 2019:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Accrued warranty expense
|
|
$
|
31,845
|
|
|
$
|
17,838
|
|
Accrued litigation costs
|
|
|
250,000
|
|
|
|
295,000
|
|
Accrued sales commissions
|
|
|
38,294
|
|
|
|
28,480
|
|
Accrued payroll and related fringes
|
|
|
199,850
|
|
|
|
233,254
|
|
Accrued insurance
|
|
|
—
|
|
|
|
78,579
|
|
Accrued sales returns and allowances
|
|
|
26,069
|
|
|
|
18,258
|
|
Accrued sales taxes
|
|
|
53,627
|
|
|
|
50,136
|
|
Other
|
|
|
196,409
|
|
|
|
124,336
|
|
|
|
$
|
796,094
|
|
|
$
|
845,881
|
|
Accrued
warranty expense was comprised of the following for the years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
17,838
|
|
|
$
|
195,135
|
|
Provision for warranty expense
|
|
|
123,474
|
|
|
|
47,355
|
|
Charges applied to warranty reserve
|
|
|
(109,468
|
)
|
|
|
(224,651
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
31,845
|
|
|
$
|
17,838
|
|
NOTE
10. INCOME TAXES
The
components of income tax provision (benefit) for the years ended December 31, 2020 and 2019 are as follows:
|
|
|
2020
|
|
|
|
2019
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current taxes
|
|
|
—
|
|
|
|
—
|
|
Deferred tax provision (benefit)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2020 and 2019 to the
Company’s effective tax rate is as follows:
|
|
2020
|
|
|
2019
|
|
U.S. Statutory tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State taxes, net of Federal benefit
|
|
|
5.1
|
%
|
|
|
5.1
|
%
|
Stock based compensation
|
|
|
(1.9
|
)%
|
|
|
(2.6
|
)%
|
Change in valuation reserve on deferred tax
assets
|
|
|
(32.6
|
)%
|
|
|
(22.4
|
)%
|
Forgiveness of Payroll Protection Plan loan
|
|
|
11.3
|
%
|
|
|
—
|
%
|
Other, net
|
|
|
(2.9
|
)%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
—
|
%
|
|
|
—
|
%
|
Significant
components of the Company’s deferred tax assets (liabilities) as of December 31, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
765,000
|
|
|
$
|
605,000
|
|
Start-up costs
|
|
|
115,000
|
|
|
|
115,000
|
|
Inventory reserves
|
|
|
510,000
|
|
|
|
1,080,000
|
|
Uniform capitalization
of inventory costs
|
|
|
85,000
|
|
|
|
85,000
|
|
Allowance for doubtful
accounts receivable
|
|
|
35,000
|
|
|
|
90,000
|
|
Equipment depreciation
|
|
|
255,000
|
|
|
|
240,000
|
|
Deferred revenue
|
|
|
915,000
|
|
|
|
915,000
|
|
Debt and PIA obligations
carried at fair value
|
|
|
—
|
|
|
|
1,045,000
|
|
Accrued expenses
|
|
|
120,000
|
|
|
|
110,000
|
|
Net operating loss carryforward
|
|
|
19,855,000
|
|
|
|
17,515,000
|
|
Research and development
tax credit carryforward
|
|
|
1,795,000
|
|
|
|
1,795,000
|
|
State jobs credit carryforward
|
|
|
230,000
|
|
|
|
230,000
|
|
Charitable
contributions carryforward
|
|
|
60,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
24,740,000
|
|
|
|
23,880,000
|
|
Valuation
reserve
|
|
|
(24,595,000
|
)
|
|
|
(23,740,000
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
145,000
|
|
|
|
140,000
|
|
Domestic
international sales company
|
|
|
(145,000
|
)
|
|
|
(140,000
|
)
|
Total deferred tax liabilities
|
|
|
(145,000
|
)
|
|
|
(140,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
(liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
valuation allowance on deferred tax assets totaled $24,595,000 and $23,740,000 as of December 31, 2020 and 2019, respectively. The Company
records the benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred
tax assets.” In accordance with ASC 740, “Income Taxes,” the Company records a valuation allowance to reduce the carrying
value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
The
Company has incurred operating losses in 2020 and 2019 and it continues to be in a three-year cumulative loss position at December 31,
2020 and 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits
to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined
to increase our valuation allowance by $855,000 to continue to fully reserve its deferred tax assets at December 31, 2020. The Company
expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates
its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more
likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal
would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’
equity.
At
December 31, 2020, the Company had available approximately $76,070,000 of Federal net operating loss carryforwards available to offset
future taxable income generated. Such tax net operating loss carryforwards expire between 2026 and 2040. In addition, the Company had
research and development tax credit carryforwards totaling $1,795,000 available as of December 31, 2020, which expire between 2023 and
2037.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards
in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates prepared by the
Company indicate that due to ownership changes which have occurred, approximately $765,000 of its net operating loss and $175,000 of
its research and development tax credit carryforwards are currently subject to an annual limitation of approximately $1,151,000, and
may be further limited by additional ownership changes which may occur in the future. As stated above, the net operating loss and research
and development credit carryforwards expire between 2023 and 2037, allowing the Company to potentially utilize all of the limited net
operating loss carry-forwards during the carryforward period.
As
discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process. The
Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position
meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate
settlement. Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross
interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in
the consolidated financial statements.
The
effective tax rate for the years ended December 31, 2020 and 2019 varied from the expected statutory rate due to the Company continuing
to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full
valuation allowance on net deferred tax assets as of December 31, 2020 primarily because of the current year operating losses.
The
Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2016
and all prior tax years.
NOTE
11. OPERATING LEASE
On
May 13, 2020, the Company entered into an operating lease for new warehouse and office space which will serve as its new principal executive
office and primary business location. The original lease agreement was amended on August 28, 2020 to correct the footage under lease
and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months
and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 2026. The Company is responsible
for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location. The Company took
possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and warehouse operating
lease as of December 31, 2020 was seventy-one months. The Company’s previous office and warehouse space lease expired in April
2020 and the Company paid holdover rent for the time period until it moved to and commenced occupying the new space on June 15, 2020.
The
Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes. The terms
of the lease include 48 monthly payments of $1,598 with a maturity date of October 2023. The Company has the option to Purchase the equipment
at maturity for its estimated fair market value at that point in time. The remaining lease term for the Company’s copier operating
lease as of December 31, 2020 was 34 months.
Lease
expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease terms.
Total lease expense under the two operating leases was approximately $349,079 for the year ended December 31, 2020.
The
discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined
the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date,
the operating lease liabilities reflect a weighted average discount rate of 8%.
The
following sets forth the operating lease right of use assets and liabilities as of December 31, 2020:
Assets:
|
|
|
|
Operating lease right of use assets
|
|
$
|
753,175
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Operating lease obligations-current portion
|
|
$
|
113,484
|
|
Operating lease obligations-less current portion
|
|
$
|
723,272
|
|
Total operating lease obligations
|
|
$
|
836,756
|
|
The
components of lease expense were as follows for the year ended December 31, 2020:
Selling, general and administrative
expenses
|
|
$
|
349,079
|
|
Following
are the minimum lease payments for each year and in total.
Year ending
December 31:
|
|
|
|
2021
|
|
$
|
175,249
|
|
2022
|
|
|
184,145
|
|
2023
|
|
|
184,241
|
|
2024
|
|
|
171,642
|
|
Thereafter
|
|
|
333,705
|
|
Total undiscounted minimum future lease payments
|
|
|
1,048,982
|
|
Imputed interest
|
|
|
(212,226
|
)
|
Total operating lease liability
|
|
$
|
836,756
|
|
NOTE
12. COMMITMENTS AND CONTINGENCIES
COVID-19
pandemic
The
COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global
geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.
Like
most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020.
By that time, much of our first fiscal quarter was completed. During the year ended December 31, 2020, we observed recent decreases in
demand from certain customers, including primarily our law-enforcement and commercial customers.
Given
the fact that our products are sold through a variety of distribution channels, we expect our sales will experience more volatility as
a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. We are aware
that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from COVID-19 on future
operating results. Although we observed significant declines in demand for our products from certain customers during the year ended
December 31, 2020, we believe that it remains too early for us to know the exact impact COVID-19 will have on the long-term demand for
our products. We also cannot be certain how demand may shift over time as the impacts of the COVID-19 pandemic may go through several
phases of varying severity and duration.
In
light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have taken,
and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic. We continue to monitor the impacts
of COVID-19 on our operations closely and this situation could change based on a significant number of factors that are not entirely
within our control and are discussed in this and other sections of this annual report on Form 10-K. We do not expect there to be material
changes to our assets on our balance sheet or our ability to timely account for those assets. Further, in connection with the preparation
of this annual report on Form 10-K and the financial statements contained herein, we reviewed the potential impacts of the COVID-19 pandemic
on goodwill and intangible assets and have determined there to be no material impact at this time. We have also reviewed the potential
impacts on future risks to the business as it relates to collections, returns and other business-related items.
To
date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver
products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities in
a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist our customers
and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect these restrictions
on personal travel to be material to our business operations or financial results. We have taken steps to restrain and monitor our operating
expenses and therefore we do not expect any such impacts to materially change the relationship between costs and revenues.
Like
most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and
guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our
business effectively. To date, we have been able to operate our business effectively using these measures and to maintain all internal
controls as documented and posted. We also have not experienced challenges in maintaining business continuity and do not expect to incur
material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it
remains possible that challenges may arise in the future.
The
actions we have taken so far during the COVID-19 pandemic include, but are not limited to:
|
●
|
Requiring
all employees who can work from home to work from home;
|
|
|
|
|
●
|
Increasing
our IT networking capability to best assure employees can work effectively outside the office; and
|
|
|
|
|
●
|
For
employees who must perform essential functions in one of our offices:
|
|
|
|
|
●
|
Having
employees maintain a distance of at least six feet from other employees whenever possible;
|
|
|
|
|
●
|
Having
employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
|
|
|
|
|
●
|
Having
employees stay segregated from other employees in the office with whom they require no interaction; and
|
|
|
|
|
●
|
Requiring
employees to wear masks while they are in the office whenever possible.
|
We
currently believe revenue for the year ending December 31, 2021 may decline year over year due to the conditions noted. In April 2020,
we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses during the pandemic. Actions taken to date
include work hour and salary reductions for senior management. These cost reductions are in addition to the significant restructuring
actions we initiated in the first quarter of 2020. Based on our current cash position, our projected cash flow from operations and our
cost reduction and cost containment efforts to date, we believe that we will have sufficient capital and or have access to sufficient
capital through public and private equity and debt offerings to sustain operations for a period of one year following the date of this
filing. If business interruptions resulting from the COVID-19 pandemic were to be prolonged or expanded in scope, our business, financial
condition, results of operations and cash flows would be negatively impacted. We will continue to actively monitor this situation and
will implement actions necessary to maintain business continuity.
Litigation.
From
time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose
the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing
the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend
any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed
reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of
possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration
factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood
of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters
progress over time.
While
the ultimate resolution is unknown, based on the information currently available, we do not expect that these lawsuits will individually,
or in the aggregate, have a material adverse effect to our results of operations, financial condition or cash flows. However, the outcome
of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result
from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance
coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Axon
The
Company owns U.S. Patent No. 9,253,452 (the “ ‘452 Patent’ ”), which generally covers the automatic activation
and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating the light
bar on the vehicle.
The
Company filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against Axon, alleging
willful patent infringement against Axon’s body camera product line and Signal auto-activation product. The Company is seeking
both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.
In
December 2016 and January 2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452 Patent.
The United States Patent and Trademark Office (“USPTO”) rejected both of Axon’s petitions. Axon is now statutorily
precluded from filing any more IPR petitions against the ‘452 Patent.
The
District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR. However, on November 17, 2017,
the Federal District Court of Kansas rejected Axon’s request to maintain the stay. With this significant ruling, the parties will
now proceed towards trial. Since litigation has resumed, the Court has issued a claim construction order (also called a Markman Order)
where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope of the claims. Following the Markman
Order, the Court set all remaining deadlines in the case. Fact discovery closed on October 8, 2018, and a Final Pretrial Conference
took place on January 16, 2019. The parties filed motions for summary judgment on January 31, 2019.
On
June 17, 2019, the Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s patent and
dismissed the case. Importantly, the Court’s ruling did not find that Digital’s ‘452 Patent was invalid. It also did
not address any other issue, such as whether Digital’s requested damages were appropriate, and it did not impact the Company’s
ability to file additional lawsuits to hold other competitors accountable for patent infringement. This ruling solely related to an interpretation
of the claims as they relate to Axon and was unrelated to the supplemental briefing Digital recently filed on its damages claim and the
WatchGuard settlement. Those issues are separate and the judge’s ruling on summary judgment had nothing to do with Digital’s
damages request. The Company has filed an appeal to this ruling and has asked the appellate court to reverse this decision.
The
Company filed an opening appeal brief on August 26, 2019 with the U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”),
appealing the U.S. District Court’s granting of Axon’s motion for summary judgment. Axon responded by filing a responsive
brief on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019. The Court of Appeals scheduled oral
arguments on our appeal of the U.S. District Court’s summary judgment ruling on April 6, 2020. This appeal was intended to address
the Company’s position that the U.S. District Court incorrectly dismissed our claims against Axon. If the Court of Appeals overturns
the ruling of the U.S. District Court, the case will be remanded to the U.S District Court before a new judge. On March 12, 2020, the
panel of judges for the Court of Appeals issued an order cancelling the oral arguments previously set for April 6, 2020, having determined
that the appeal will be decided solely based on the parties’ briefs. On April 22, 2020, a three-judge panel of the United States
Court of Appeals denied our appeal and affirmed the District Court’s previous decision to grant Axon summary judgment. On May 22,
2020, we filed a petition for panel rehearing requesting that we be granted a rehearing of our appeal of the U.S. District Court’s
summary judgment ruling. Furthermore, we requested that we be given an opportunity to make our case through oral argument in front of
the three-judge panel of the Court of Appeals, which was also denied. The Company has abandoned its right to any further appeals.
WatchGuard
On
May 27, 2016, the Company filed suit against WatchGuard, (Case No. 2:16-cv-02349-JTM-JPO) alleging patent infringement based on WatchGuard’s
VISTA Wi-Fi and 4RE In-Car product lines.
On
May 13, 2019, the parties resolved the dispute and executed a settlement agreement in the form of a Release and License Agreement. The
litigation has been dismissed as a result of this settlement.
The
Release and License Agreement encompasses the following key terms:
|
●
|
WatchGuard
paid Digital Ally a one-time, lump settlement payment of $6,000,000.
|
|
|
|
|
●
|
Digital
Ally granted WatchGuard a perpetual covenant not to sue if WatchGuard’s products incorporate agreed-upon modified recording
functionality. Digital Ally also granted WatchGuard a license to the ‘292 Patent and the ‘452 Patent (and related patents,
now existing and yet-to-issue) through December 31, 2023. The parties agreed to negotiate in good faith to attempt to resolve any
alleged infringement that occurs after the license period expires.
|
|
|
|
|
●
|
The
parties further agreed to release each other from all claims or liabilities pre-existing the settlement.
|
|
|
|
|
●
|
As
part of the settlement, the parties agreed that WatchGuard made no admission that it infringed any of Digital Ally’s patents.
|
Upon
receipt of the $6,000,000 the parties filed a joint motion to dismiss the lawsuit with the court, which was granted.
General
401
(k) Plan. The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended, requires
it to provide 100% matching contributions for employees, who elect to contribute up to 3% of their compensation to the plan and 50% matching
contributions for employee’s elective deferrals on the next 2% of their contributions. The Company made matching contributions
totaling $110,491 and $108,688 for the years ended December 31, 2020 and 2019, respectively. Each participant is 100% vested at all times
in employee and employer matching contributions.
Consulting
and Distributor Agreements. The Company entered into an agreement that required it to make monthly payments that will be applied
to future commissions and/or consulting fees to be earned by the provider. The agreement is with a limited liability company (“LLC”)
that is minority owned by a relative of the Company’s chief financial officer. Under the agreement, dated January 15, 2016 and
as amended on February 13, 2017, the LLC provides consulting services for developing a new distribution channel outside of law enforcement
for its body-worn camera and related cloud storage products to customers in the United States. The Company advanced amounts to the LLC
against commissions ranging from $5,000 to $6,000 per month plus necessary and reasonable expenses for the period through June 30, 2017,
which can be automatically extended based on the LLC achieving minimum sales quotas. The agreement was renewed in January 2017 for a
period of three years, subject to yearly minimum sales thresholds that would allow the Company to terminate the contract if such minimums
are not met. As of December 31, 2020, the Company had advanced a total of $274,731 pursuant to this agreement which has been fully reserved
for a net advance of $-0-. The minimum sales threshold was not met, and the Company discontinued all advances, although the contract
has not been formally terminated. However, the exclusivity provisions of the agreement have been terminated.
On
June 1, 2018 the Company entered into an agreement with an individual that required it to make monthly payments that will be applied
to future commissions and/or consulting fees to be earned by the provider. Under the agreement, the individual provides consulting services
for developing new distribution channels both inside and outside of law enforcement for its in-car and body-worn camera systems and related
cloud storage products to customers within and outside the United States. The Company was required to advance amounts to the individual
as an advance against commissions of $7,000 per month plus necessary and reasonable expenses for the period through August 31, 2018,
which was extended to December 31, 2018 by mutual agreement of the parties at $6,000 per month. The parties have mutually agreed to further
extend the arrangement on a monthly basis at $5,000 per month. The Company had advanced a total of $53,332 pursuant to this agreement,
until September of 2020 when the agreement was mutually terminated, thus as of December 31, 2020 the Company had advanced $-0- pursuant
to this agreement.
NOTE
13. STOCK-BASED COMPENSATION
The
Company recorded pretax compensation expense related to the grant of stock options and restricted stock issued of $1,462,270 and $2,112,090
for the years ended December 31, 2020 and 2019, respectively.
As
of December 31, 2020, the Company had adopted nine separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted
Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the
2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the
“2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option
and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”),
(viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”) and (ix) the 2020 Stock Option and Restricted Stock
Plan (the “2020 Plan”).. The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan and 2020
Plan are referred to as the “Plans.”
These
Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total of
5,675,000 shares of common stock. The 2005 Plan terminated during 2015 with 19,678 shares not awarded or underlying options, which shares
are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding as of December 31,
2020 total 7,563. The 2006 Plan terminated during 2016 with 25,849 shares not awarded or underlying options, which shares are now unavailable
for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding as of December 31, 2020 total 39,750.
The 2007 Plan terminated during 2017 with 89,651 shares not awarded or underlying options, which shares are now unavailable for issuance.
Stock options granted under the 2007 Plan that remain unexercised and outstanding as of December 31, 2020 total 5,000. The 2008 Plan
terminated during 2018 with 9,249 shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options
granted under the 2008 Plan that remain unexercised and outstanding as of December 31, 2020 total 31,250.
Our
Board of Directors adopted the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”) on September 30, 2020 and the
Company’s stockholders approved the 2020 Plan at the Annual Meeting held on September 9, 2020. The 2020 Plan authorizes us to issue
1,500,000 shares of Common Stock upon exercise of options and grant of restricted stock awards. A total of 438,341 options and restricted
stock have been granted under the 2020 Plan to date. The 2020 Plan also authorizes us to grant (i) to the key employees’ incentive
stock options to purchase shares of Common Stock and non-qualified stock options to purchase shares of Common Stock and restricted stock
awards and (ii) to non-employee directors and consultants non-qualified stock options and restricted stock.
The
Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have been
granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally vesting
based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide for accelerated
vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of common stock that are issuable
under its Plans with the SEC. A total of 1,064,346 shares remained available for awards under the various Plans as of December 31, 2020.
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.
Activity
in the various Plans during the years ended December 31, 2020 and 2019 is reflected in the following table:
Options
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at January 1, 2019
|
|
|
434,012
|
|
|
$
|
4.62
|
|
Granted
|
|
|
180,000
|
|
|
|
3.01
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(24,887
|
)
|
|
|
(13.78
|
)
|
Outstanding at December 31, 2019
|
|
|
589,125
|
|
|
$
|
3.74
|
|
Exercisable at December 31, 2019
|
|
|
499,125
|
|
|
$
|
3.87
|
|
Options
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at January 1, 2020
|
|
|
589,125
|
|
|
$
|
3.74
|
|
Granted
|
|
|
255,000
|
|
|
|
2.09
|
|
Exercised
|
|
|
(1,875
|
)
|
|
|
4.16
|
|
Forfeited
|
|
|
(3,937
|
)
|
|
|
(12.14
|
)
|
Outstanding at December 31, 2020
|
|
|
838,313
|
|
|
$
|
3.20
|
|
Exercisable at December 31, 2020
|
|
|
725,813
|
|
|
$
|
3.37
|
|
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The total estimated grant
date fair value stock options issued during the year ended December 31, 2020 and 2019 was $415,742 and $436,217, respectively.
The
Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated grant date fair
value of the options during the years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
Assumptions
|
|
|
Assumptions
|
|
Volatility – range
|
|
|
104
|
%
|
|
|
107.6
|
%
|
Risk-free rate
|
|
|
0.28
|
%
|
|
|
2.23
|
%
|
Contractual term
|
|
|
5.5
years
|
|
|
|
5.5
years
|
|
Exercise price
|
|
$
|
2.09
|
|
|
$
|
3.01
|
|
The
Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with an intrinsic
value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant to cashless exercises
during the years ended December 31, 2020 and 2019.
At
December 31, 2020 and 2019, the aggregate intrinsic value of options outstanding was approximately $86,150 and $-0-, respectively, and
the aggregate intrinsic value of options exercisable was approximately $58,025 and $-0-, respectively.
As
of December 31, 2020, the unrecognized portion of stock compensation expense on all existing stock options was $183,415 and will be recognized
over the next five months.
The
following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable
options under the Company’s option plans as of December 31, 2020:
|
|
|
Outstanding
options
|
|
Exercisable
options
|
|
Exercise
price
range
|
|
|
Number
of
options
|
|
|
Weighted
average
remaining
contractual life
|
|
Number
of
options
|
|
|
Weighted
average
remaining
contractual life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
to $3.49
|
|
|
|
725,313
|
|
|
8.2 years
|
|
|
612,813
|
|
|
|
7.9
years
|
|
$
|
3.50
to $4.99
|
|
|
|
64,000
|
|
|
3.3 years
|
|
|
64,000
|
|
|
|
3.3
years
|
|
$
|
5.00
to $6.49
|
|
|
|
—
|
|
|
— years
|
|
|
—
|
|
|
|
—years
|
|
$
|
6.50
to $7.99
|
|
|
|
7,250
|
|
|
0.8 years
|
|
|
7,250
|
|
|
|
0.8
years
|
|
$
|
8.00
to $9.99
|
|
|
|
2,500
|
|
|
0.4 years
|
|
|
2,500
|
|
|
|
0.4
years
|
|
$
|
10.00
to $13.20
|
|
|
|
39,250
|
|
|
0.0 years
|
|
|
39,250
|
|
|
|
0.0
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838,313
|
|
|
7.3 years
|
|
|
725,813
|
|
|
|
7.0
years
|
|
Restricted
stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are valued
on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to four years corresponding
to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may be forfeited upon the termination
of service to or employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the
transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights
and the right to receive cash dividends.
A
summary of all restricted stock activity under the equity compensation plans for the years ended December 31, 2020 and 2019 is as follows:
|
|
Number
of
Restricted
shares
|
|
|
Weighted
average
grant date
fair value
|
|
Nonvested balance, January 1, 2019
|
|
|
772,150
|
|
|
$
|
3.40
|
|
Granted
|
|
|
522,110
|
|
|
|
2.91
|
|
Vested
|
|
|
(774,015
|
)
|
|
|
(3.35
|
)
|
Forfeited
|
|
|
(5,370
|
)
|
|
|
(3.46
|
)
|
Nonvested balance, December 31, 2019
|
|
|
514,875
|
|
|
$
|
2.97
|
|
|
|
Number
of
Restricted
shares
|
|
|
Weighted
average
grant date
fair value
|
|
Nonvested balance, January 1, 2020
|
|
|
514,875
|
|
|
$
|
2.97
|
|
Granted
|
|
|
846,591
|
|
|
|
1.02
|
|
Vested
|
|
|
(604,591
|
)
|
|
|
(1.85
|
)
|
Forfeited
|
|
|
(36,750
|
)
|
|
|
(1.84
|
)
|
Nonvested balance, December 31, 2020
|
|
|
720,125
|
|
|
$
|
1.69
|
|
The
Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of
December 31, 2020, there were $130,072 of total unrecognized compensation costs related to all remaining non-vested restricted stock
grants, which will be amortized over the next 12 months in accordance with their respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Years
ended
|
|
Number
of
shares
|
|
|
|
|
|
2021
|
|
|
479,250
|
|
2022
|
|
|
240,875
|
|
NOTE
14. COMMON STOCK PURCHASE WARRANTS
The
Company has issued common stock purchase warrants in conjunction with various debt and equity issuances. The warrants are either immediately
exercisable, or have a delayed initial exercise date, no more than six months from their respective issue date and allow the holders
to purchase up to 3,388,364 shares of common stock at $2.60 to $13.43 per share as of December 31, 2020. The warrants expire from January
22, 2021 through July 31, 2023 and allow for cashless exercise.
The
following table summarizes information about shares issuable under warrants outstanding during the years ended December 31, 2020 and
2019:
|
|
Warrants
|
|
|
Weighted
average
exercise price
|
|
Vested Balance, January 1, 2019
|
|
|
4,693,145
|
|
|
$
|
5.40
|
|
Granted
|
|
|
678,428
|
|
|
|
1.75
|
|
Exercised
|
|
|
(529,000
|
)
|
|
|
(2.96
|
)
|
Cancelled
|
|
|
(18,000
|
)
|
|
|
(3.50
|
)
|
Vested Balance, December 31, 2019
|
|
|
4,824,573
|
|
|
$
|
5.15
|
|
|
|
Warrants
|
|
|
Weighted
average
exercise price
|
|
Vested Balance, January 1, 2020
|
|
|
4,824,573
|
|
|
$
|
5.15
|
|
Granted
|
|
|
1,273,374
|
|
|
|
1.31
|
|
Exercised
|
|
|
(2,704,583
|
)
|
|
|
(1.95
|
)
|
Cancelled
|
|
|
(5,000
|
)
|
|
|
(16.50
|
)
|
Vested Balance, December 31, 2020
|
|
|
3,388,364
|
|
|
$
|
6.24
|
|
The
total intrinsic value of all outstanding warrants aggregated $-0- as of December 31, 2020 and the weighted average remaining term is
15.8 months.
The
following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable
warrants to purchase common shares as of December 31, 2020:
|
|
|
Outstanding
and exercisable warrants
|
Exercise
price
|
|
|
Number
of warrants
|
|
|
Weighted
average
remaining
contractual life
|
$
|
2.60
|
|
|
|
465,712
|
|
|
2.6 years
|
$
|
3.00
|
|
|
|
316,800
|
|
|
2.3 years
|
$
|
3.36
|
|
|
|
733,333
|
|
|
1.9 years
|
$
|
3.65
|
|
|
|
167,000
|
|
|
1.5 years
|
$
|
3.75
|
|
|
|
25,753
|
|
|
1.6 years
|
$
|
5.00
|
|
|
|
800,000
|
|
|
1.0 years
|
$
|
13.43
|
|
|
|
879,766
|
|
|
0.1 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,388,364
|
|
|
1.3 years
|
NOTE
15 - STOCKHOLDERS’ EQUITY
Amendment
to Articles of Incorporation
The
Company held its annual meeting of the shareholders on September 9, 2020. At such meeting a proposed amendment to the Company’s
Articles of Incorporation to increase the number of authorized shares of capital stock that the Company may issue from 50,000,000 to
100,000,000, of which all 100,000,000 shares shall be classified as Common Stock, was approved.
Underwritten
Public Offering
On
March 3, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters
and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public
offering (the “Offering”) an aggregate of 2,521,740 shares of the Company’s common stock at a public price of $1.15
per share. The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional 378,261 shares of common
stock to cover over-allotments, if any. The Offering was registered and the common stock was issued pursuant to the Company’s effective
shelf registration statement on Form S-3 (File No. 333-225227), which was initially filed with the SEC on May 25, 2018 and was declared
effective on June 6, 2018.
The
underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,
indemnification obligations of the Company and the Underwriters. The Underwriters received discounts and commissions of seven percent
(7%) of the gross cash proceeds received by the Company from the sale of the common stock in the Offering. In addition, the Company agreed
to pay the Underwriters (a) a non-accountable expense reimbursement of 1% of the gross proceeds received and (b) “road show”
expenses, diligence fees and the fees and expenses of the Underwriters’ legal counsel not to exceed $50,000. The net proceeds to
the Company from the Offering totaled $2,502,136, after deducting underwriting discounts and commissions and estimated expenses payable
by the Company.
On
June 2, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters
and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public
offering an aggregate of 3,090,909 shares of the Company’s common stock, at a public price of $1.65 per share (the “June
2nd Offering”). The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional
463,636 shares of common stock to cover over-allotments, if any (the “June 2nd Option Shares”). The June 2nd
Offering was registered and the common stock was issued pursuant to the Company’s shelf registration statement on Form S-3
(File No. 333-225227), which was initially filed with the SEC on May 25, 2018 and was declared effective on June 6, 2018.
On
June 8, 2020, the Underwriters fully exercised their over-allotment option to acquire the June 2nd Option Shares at $1.65
per share, and the offering of the June 2nd Option Shares closed on June 10, 2020. The exercise of such over-allotment option
resulted in additional gross proceeds, before deducting underwriting discounts and commissions and other estimated offering expenses,
of $765,000, which the Company intends to use for general corporate purposes, including
for compliance with certain Nasdaq continued listing requirements and continued investments in the Company’s commercialization
efforts.
The
underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,
indemnification obligations of the Company and the Underwriters. The Underwriters received discounts and commissions of seven percent
(7%) of the gross cash proceeds received by the Company from the sale of the common shares in the June 2nd Offering. In addition,
the Company agreed to pay the Underwriters “road show” expenses, diligence fees and the fees and expenses of the Underwriters’
legal counsel not to exceed $30,000. The net proceeds to the Company from the June 2nd Offering totaled $5,350,413, including
the exercise of the underwriter’s overallotment option and after deducting underwriting discounts and commissions and estimated
expenses payable by the Company.
On
June 8, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters
and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public
offering an aggregate of 2,325,581 shares of common stock at a public price of $2.15 per share (the “June 8th Offering”).
The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional 213,953 shares of common stock
to cover over-allotments, if any (the “June 8th Option Shares”).The June 8th Offering was registered
and the common stock was issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-225227), which
was initially filed with the SEC on May 25, 2018 and was declared effective on June 6, 2018.
On
June 10, 2020, the Underwriters fully exercised their over-allotment option to acquire the June 8th Option Shares at $2.15
per share, and the offering of the June 8th Option Shares closed on June 10, 2020. The exercise of such over-allotment option
resulted in additional gross proceeds, before deducting underwriting discounts and commissions and other estimated Offering expenses,
of $460,000, which the Company intends to use for general corporate purposes, including
for compliance with certain Nasdaq continued listing requirements and continued investments in the Company’s commercialization
efforts.
The
underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,
indemnification obligations of the Company and the Underwriters. The Underwriters received discounts and commissions of seven percent
(7%) of the gross cash proceeds received by the Company from the sale of the common shares in the June 8th Offering. In addition,
the Company agreed to pay the Underwriters “road show” expenses, diligence fees and the fees and expenses of the Underwriters’
legal counsel not to exceed $30,000. The net proceeds to the Company from the June 8th Offering totaled $4,976,692, including
the exercise of the underwriter’s overallotment option and after deducting underwriting discounts and commissions and estimated
expenses payable by the Company.
2020
Issuances of Restricted Common Stock.
On
January 3, 2020, the board of directors approved the grant of 530,050 shares of restricted common stock to officers and employees of
the Company. Such shares will generally vest one-half on January 2, 2021 and one half on January 2, 2022, provided that each grantee
remains an officer or employee on such dates.
In
April 17, 2020 the Compensation Committee of the Board of Directors of the Company determined that the cash portion of the annual base
salaries of the Company’s President and Chief Executive Officer, and the Company’s Chief Financial Officer, Treasurer and
Secretary, would be reduced to annual rates of $150,000 each for the balance of 2020 commencing May 1, 2020.
The
Committee also decided that the reduction of the base annual salaries of Company’s President and Chief Executive Officer, and the
Company’s Chief Financial Officer, Treasurer and Secretary, for 2020, which totaled $69,231 and $55,384, respectively, as of May
1, 2020 was paid through the issuance of shares of restricted stock under the 2018 Stock Option and Restricted Stock Plan with the Company
paying the applicable federal and state taxes on such amounts. Accordingly, the Company issued the Company’s President and Chief
Executive Officer, and the Company’s Chief Financial Officer, Treasurer and Secretary 75,250 shares and 60,200 shares, respectively,
effective April 17, 2020 based on a closing price of $0.92 per share on such date. In addition, on September 9, 2020 a total of 178,091
shares of restricted stock were issued to five employees in consideration for their agreement to voluntary reduce their cash compensation
by a total of $165,625 with the Company paying the applicable federal and state taxes on such amounts.
On
July 1, 2020, the Company entered into a commission agreement with an individual who provides services for our Shield and ThermoVU product
lines. Pursuant to such agreement, we issued a total of 10,000 shares of common stock valued at $30,700 based on the closing market price
which has been expensed during the year ended December 31, 2020.
Shelf
Registration Statement on Form S-3
On
July 2, 2020, the SEC declared the Company’s shelf registration statement on Form S-3 (the “Shelf Registration Statement”)
effective. The Shelf Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination
of our common stock, debt securities, debt securities convertible into common stock or other securities in any combination thereof, rights
to purchase shares of common stock or other securities in any combination thereof, warrants to purchase shares of common stock or other
securities in any combination thereof or units consisting of common stock or other securities in any combination thereof having an aggregate
initial offering price not exceeding $125,000,000. The Company has utilized the shelf for its two recent offerings as described in “Note
18. SUBSEQUENT EVENTS”.
NOTE
16. RELATED PARTY TRANSACTIONS
American
Rebel Holding, Inc. Secured Promissory Notes
On
October 1, 2020, the Company advanced $250,000 to American Rebel Holdings, Inc. (AREB) under a secured promissory note. The CEO, President
and Chairman of AREB is the brother of the Company’s CEO, President and Chairman. Such note bears interest at 8% and is secured
by all the tangible and intangible assets of the Company that are not currently secured by other indebtedness. The Company also received
warrants to purchase 1,250,000 shares of AREB common stock at an exercise price of $0.10 per share with a five-year term. This
note had an original maturity date of January 2, 2021; however, additional provisions within the note provided for an extension of the
maturity date for fourteen months due to AREB’s failure to raise $300,000 in new debt or equity financing prior to the original
maturity date. Upon this extension, the AREB was obligated to make equal monthly payments of principal and interest over the extended
period of the note. The required monthly payments have not been made by AREB, therefore this note is currently in default status.
On
October 21, 2020, the Company advanced $250,000 to American Rebel Holdings, Inc. (AREB) under a second secured promissory note.
Such note bears interest at 8% and is secured by inventory manufactured and revenue/accounts receivable derived from a specific
purchase order. The Company also received warrants to purchase 1,250,000 shares of AREB common stock at an exercise price of $0.10
per share with a five-year term. This note has a maturity date of April 21, 2021, subject to full repayment upon AREB closing
on debt or equity financings of at least $600,000, and the receipt of revenue from the sale of inventory sold under the specific
purchase order serving as collateral. The required monthly payments have not been made by AREB, therefore
this note is currently in default status. On March 1, 2021, the Company advanced an additional $117,600 to AREB on terms
similar to the previously issued notes.
The parties have been
negotiating the terms of a Forbearance Agreement regarding the following: (a) the secured promissory note dated October 1, 2020;
(b) the secured promissory note dated October 21, 2020; and (c) an advance made by the Company on March 1, 2021. The parties are
attempting to arrange for a series of payments that will liquidate the outstanding balances of the two delinquent notes and the
advance by no later than June 30, 2021. Based on the terms being negotiated, if AREB timely and fully complies with all of its
obligations under the Forbearance Agreement, the Company would agree that AREB’s obligations to the Company in connection
with the defaults would be satisfied. However, there is no assurance that the parties will agree to the terms contained in the
Forbearance Agreement, and whether AREB will be able to comply with such terms.
Unsecured
Promissory Notes Payable – Related party
During
February and April 2020, the Company borrowed a total of $319,000 from the Company’s Chairman, CEO & President under an unsecured
promissory note bearing interest at 6% through its May 28, 2020 maturity date. The proceeds from the note were used for general corporate
purposes. The principal balance and related accrued interest were paid in full in cash during the year ended December 31, 2020. Total
interest accrued and paid on this note was $5,236.
NOTE
17. NET LOSS PER SHARE
The
calculation of the weighted average number of shares outstanding and loss per share outstanding for the years ended December 31, 2020
and 2019 are as follows:
|
|
Year
ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator
for basic and diluted income per share – Net loss
|
|
$
|
(2,625,881
|
)
|
|
$
|
(10,005,713
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share – weighted average shares
outstanding
|
|
|
21,603,635
|
|
|
|
11,478,618
|
|
Dilutive effect of shares
issuable upon conversion of convertible debt and the exercise of stock options and warrants outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share
– adjusted weighted average shares outstanding
|
|
|
21,603,635
|
|
|
|
11,478,618
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.87
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.87
|
)
|
Basic
loss per share is based upon the weighted average number of common shares outstanding during the period. For the years ended December
31, 2020 and 2019, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants
were antidilutive, and, therefore, not included in the computation of diluted income (loss) per share.
Note
18. SUBSEQUENT EVENTS
Underwritten
public offering - On January 14, 2021, the Company consummated an underwritten public offering (the “Offering”)
of (i) 2,800,000 shares of common stock (”Shares”), (ii) pre-funded warrants to purchase up to 7,200,000 of Common
Stock (the “Pre-Funded Warrants”), issuable to investors whose purchase of shares
of Common Stock would otherwise result in such investor, together with its affiliates and certain related parties, beneficially
owning more than 4.99% (or, at the election of the holder, 9.99%) of the Company’s outstanding Common Stock immediately
following the consummation of the Registered Offering (“Pre-Funded Warrants”); and (iii) common stock purchase warrants
(“Warrants”) to purchase up to an aggregate of 10,000,000 shares of Common Stock (the “Warrant Shares”),
which are exercisable for a period of five years after issuance at an initial exercise price $3.25 per share, subject to certain
adjustments, as provided in the Warrants. The Offering was conducted pursuant to an underwriting agreement, dated January
12, between the Company and Kingswood Capital Markets, division of Benchmark Investments, Inc. (the “Underwriters”),
acted as the exclusive placement agent in connection with the Offering pursuant to a placement
agency agreement. The common stock in the Offering was sold at a public offering price of $3.095 per share.
The
common stock in the Offering was issued pursuant to the Company’s effective shelf registration statement on Form S-3 (File No.
333-239419). The underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions
to closing, indemnification obligations of the Company and the Underwriters. The Underwriters received
discounts and commissions of six percent (6%) of the gross cash proceeds received by the Company from the sale of the common shares in
the Offering and certain expenses.
Under
the underwriting agreement, the Company and its officers and directors executed lock-up agreements whereby, (a) the Company has agreed
not to engage in the following for a period of 90 days from the date of the pricing of the Offering, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be
filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities
of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of capital stock of the Company.
Further,
pursuant to the terms of the Purchase Agreement the Company has granted to the Investors, for a period of 12 months after the closing
of the Offering, the right to participate in subsequent offerings by the Company of Common Stock and Common Stock equivalents in an amount
up to 50% of the amount of each such subsequent offering, on the same terms, conditions and price provided for in such subsequent offering.
The
Company received approximately $29,013,000 in net proceeds from the Offering after deducting the discounts, commissions,
and other estimated offering expenses payable by the Company. As of March 31, 2021, all pre-funded warrants have been fully
exercised. The Company plans to use the net proceeds from the Offering for working capital, product development, order fulfillment
and for general corporate purposes.
Underwritten
public offering - On February 1, 2021, the Company consummated an underwritten public offering (the “Offering”) of
(i) 3,250,000 shares of common stock (”Shares”), (ii) pre-funded warrants to purchase up to 11,050,000 of Common Stock (the
“Pre-Funded Warrants”), issuable to investors whose purchase of shares of Common Stock
would otherwise result in such investor, together with its affiliates and certain related parties, beneficially owning more than 4.99%
(or, at the election of the holder, 9.99%) of the Company’s outstanding Common Stock immediately following the consummation of
the Registered Offering (“Pre-Funded Warrants”); and (iii) common stock purchase warrants (“Warrants”) to purchase
up to an aggregate of 14,300,000 shares of Common Stock (the “Warrant Shares”), which are exercisable for a period of five
years after issuance at an initial exercise price $3.25 per share, subject to certain adjustments, as provided in the Warrants.
The Offering was conducted pursuant to an underwriting agreement, dated January 28, between the Company and Kingswood Capital Markets,
division of Benchmark Investments, Inc. (the “Underwriters”), acted as the exclusive
placement agent in connection with the Offering pursuant to a placement agency agreement. The common stock in the Offering was
sold at a public offering price of $2.799 per share.
The
common stock in the Offering was issued pursuant to the Company’s effective shelf registration statement on Form S-3 (File No.
333-239419). The underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions
to closing, indemnification obligations of the Company and the Underwriters. The Underwriters received
discounts and commissions of six percent (6%) of the gross cash proceeds received by the Company from the sale of the common shares in
the Offering and certain expenses.
Under
the underwriting agreement, the Company and its officers and directors executed lock-up agreements whereby, (a) the Company has agreed
not to engage in the following for a period of 90 days from the date of the pricing of the Offering, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be
filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities
of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of capital stock of the Company.
Further,
pursuant to the terms of the Purchase Agreement the Company has granted to the Investors, for a period of 12 months after the closing
of the Offering, the right to participate in subsequent offerings by the Company of Common Stock and Common Stock equivalents in an amount
up to 50% of the amount of each such subsequent offering, on the same terms, conditions and price provided for in such subsequent offering.
The
Company received approximately $37,587,600 in net proceeds from the Offering after deducting the discounts, commissions,
and other estimated offering expenses payable by the Company. As of March 31, 2021, all pre-funded warrants have been fully
exercised. The Company plans to use the net proceeds from the Offering for working capital, product development, order fulfillment
and for general corporate purposes.
American
Rebel Holding, Inc. Secured Promissory Notes - On October 1, 2020, the Company advanced $250,000 to American Rebel
Holdings, Inc. (AREB) under a secured promissory note and on October 21, 2020, the Company advanced an additional $250,000 to
American Rebel Holdings, Inc. (AREB) under a second secured promissory note. Both notes are currently in default. On March
1, 2021, the Company advanced an additional $117,600 to AREB on terms similar to the previously issued notes. See “NOTE
16. RELATED PARTY TRANSACTIONS” for further information.
The parties have been
negotiating the terms of a Forbearance Agreement regarding the following: (a) the secured promissory note dated October 1,
2020; (b) the secured promissory note dated October 21, 2020; and (c) an advance made by the Company on March 1, 2021. The parties
are attempting to arrange for a series of payments that will liquidate the outstanding balances of the two delinquent notes
and the advance by no later than June 30, 2021. Based on the terms being negotiated, if AREB timely and fully complies
with all of its obligations under the Forbearance Agreement, the Company would agree that AREB’s obligations
to the Company in connection with the defaults would be satisfied. However, there is no assurance that the parties will
agree to the terms contained in the Forbearance Agreement, and whether AREB will be able to comply with such terms.
Purchase
of Building - On February 24, 2021 the Company entered into a contract to purchase a 71,361 square foot building located in Lenexa
Kansas which is intended to serve as the Company’s office and warehouse needs. The building contains approximately 30,000 square
foot of office space and the remainder warehouse space. The total purchase price is approximately $5.3 million and is expected to close
on or around May 1, 2021.
*************************************