SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2021

Accounting Policies [Abstract]

SIGNIFICANT ACCOUNTING POLICIES

2. SIGNIFICANT ACCOUNTING POLICIES

Restatement of Previously Issued Financial Statements

On May 16, 2022, management in concurrence with the Company’s Audit Committee of our Board of Directors (the “Audit Committee”), concluded that that the financial statements previously issued as of and for the quarterly period ended March 31, 2021, should no longer be relied upon due to errors in accounting for certain option awards. Accordingly, we are restating our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, Statements of Cash Flows and the related notes as of and for the quarterly period ended March 31, 2021.

Specifically, the Company determined that a cashless withholding to satisfy personal income tax obligations from certain option awards exercised commencing in the third quarter of 2020 and the first quarter of 2021, caused the underlying options to no longer qualify as equity awards and should have instead been classified as liability awards commencing on the date of exercise.

The change in the classification of the awards to liability classified awards requires the Company to remeasure the fair value of the awards at the end of each reporting period they remain outstanding, with the increase or decrease in fair value correspondingly charged or credited to selling, general and administrative expenses in arriving at net income (loss). Furthermore, the Company, due to an administrative error, failed to sell the shares surrendered in 2021 and did not remit the equivalent amount of funds to the tax authorities. To date, the Company has not returned the shares or otherwise reimbursed the effected individuals for the shares withheld The Company is currently in the process of arranging payment to individuals, which is expected to be completed during the quarter ending June 30, 2022.

These errors resulted in misstatements to our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, and Statements of Cash Flows as of and for the quarterly period ended March 31, 2021 as follows:

	As of March 31, 2021
	As Previously			Restatement			As
	Reported			Adjustment			Restated
BALANCE SHEET
Equity awards liability	$	-			610,978		$	610,978
Liability for shares withheld	$	-			1,244,458		$	1,244,458
Total current liabilities	$	2,029,437			1,855,436		$	3,884,873
Total liabilities	$	2,036,200			1,855,436		$	3,891,636
Common stock (dollars)	$	18,686			(92	)	$	18,594
Additional paid-in capital	$	139,550,103			4,751,432		$	144,301,535
Accumulated deficit	$	(117,436,781	)		(6,606,776	)	$	(124,043,557	)
Total stockholders’ equity	$	22,132,008			(1,855,436	)	$	20,276,572
Common stock (shares)		18,686,391			(92,634	)		18,593,757

For the three months ended March 31, 2021
	As Previously Reported			Restatement Adjustment			As Restated
STATEMENT OF OPERATIONS
Selling, general and administrative expenses	$	2,380,780			3,564,382		$	5,945,162
Total operating expenses		3,717,021			3,564,382			7,281,403
Loss from operations		(1,075,208	)		(3,564,382	)		(4,639,590	)
Net loss		(1,060,066	)		(3,564,382	)		(4,624,448	)
PER SHARE INFORMATION
Loss per common share
Basic and Diluted	$	(0.06	)		(0.19	)	$	(0.25	)
Weighted average common shares used in computing per share amounts -
Basic and Diluted		18,515,550			(35,537	)		18,480,013

For the three months ended March 31, 2021
	As Previously Reported			Restatement Adjustment			As Restated
STATEMENT OF STOCKHOLDERS’ EQUITY
Exercise of stock options, net of cashless exercise of 58,122 shares and 92,634 shares withheld	$	-			1,708,946		$	1,708,946
Net loss		(1,060,066	)		(3,564,382	)		(4,624,448	)
Common stock (shares)		18,686,391			(92,634	)		18,593,757
Common stock (dollars)	$	18,686			(92	)	$	18,594
Additional paid-in capital	$	139,550,103			4,751,432		$	144,301,535
Accumulated deficit	$	(117,436,781	)		(6,606,776	)	$	(124,043,557	)
Total stockholders’ equity	$	22,132,008			(1,855,436	)	$	20,276,572

For the three months ended March 31, 2021
	As Previously Reported			Restatement Adjustment			As Restated
STATEMENT OF CASH FLOWS
Net loss	$	(1,060,066	)		(3,564,382	)		(4,624,448	)
Equity compensation	$	980,633			3,564,382		$	4,545,015
Supplemental disclosure of noncash investing and financing activities:
Reclassification of stock option awards	$	-			1,411,108		$	1,411,108

The correction of these errors had no net effect on net cash used in operating activities.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s financial position at March 31, 2021 and the results of operations, stockholders’ equity and cash flows for the three months ended March 31, 2021 and 2020. All such adjustments are of a normal and recurring nature. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements. Results of operations for the three-month period ended March 31, 2021, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2021.

As noted in the Explanatory Note, the Company has filed this Form 10-Q/A to amend our Quarterly Report on Form 10-Q for the three month period ended March 31, 2021, originally filed with the SEC on May 12, 2021 (the “Original Form 10-Q”), to restate our Financial Statements and related footnote disclosures as of and for the three months ended March 31, 2021.

The balance sheet as of December 31, 2020 has been derived from the audited financial statements at that date, as restated, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.

References in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”).

For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company has adopted this standard and did not have a material impact on its financial statements.

Use of Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, and the fair value of stock options granted under the Company’s Equity compensation plan. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates. As discussed above, certain option awards no longer qualify as equity awards and instead are being classified as liability awards. ASC 718 establishes fair value as the measurement objective in accounting for equity payment arrangements and requires all companies to apply a fair value based measurement method in accounting for all equity payment transactions with employees. The company determined the fair value of these awards utilizing a Black-Scholes option pricing model.

Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

● Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

● Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies. The Company had $610,978 worth of Level 2 liabilities as of March 31, 2021 for the liability classified stock options.

● Level 3—Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when the fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. The Company had no Level 3 assets or liabilities as of March 31, 2021 and 2020.

Allowance for Doubtful Accounts

The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect customers’ ability to pay.

Goodwill

Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. Pursuant to ASC Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter (December 31, 2021), or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. There were no impairment charges recognized during either of the three months ended March 31, 2021 and 2020.

Intangible Assets

Intangible assets include patents, copyrights, intellectual property rights and licensed software. The Company uses the straight-line method to amortize these assets over their estimated useful lives. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC Topic 360. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest

charges, will be less than the carrying amount of the assets. There were no impairment charges recognized during either of the three months ended March 31, 2021 and 2020.

Income Taxes

The Company accounts for income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as of March 31, 2021 and December 31, 2020, due to the uncertainty of the realizability of those assets.

Fair Value of Financial Instruments

The Company adheres to the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This pronouncement requires that the Company calculate the fair value of financial instruments and include this additional information in the notes to financial statements when the fair value is different than the book value of those financial instruments. The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued expenses. As of March 31, 2021 and December 31, 2020, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature.

Revenue Recognition and Deferred Revenue

General

Most license fees and services revenue are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with the Company’s software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access the Company’s software. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company measures revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of the Company’s services as they are performed. Substantially all customer contracts provide that the Company is compensated for services performed to date.

Invoicing is based on schedules established in customer contracts. Payment terms are generally established from 30 to 60 days from the invoice date. Product returns are recorded as a reduction to revenue.

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Furthermore, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

Nature of goods and services

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

Software as a Service (SaaS)

Software as a service (SaaS) for hosted subscription services and licensed software allows customers to access a set of data for a predetermined period of time. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time based on the usage of the hosted subscription services and licensed software, which can vary from month to month. The revenue is typically based either on a formula such as number of locations using the service in a given month multiplied by a fee per location or the number of actual scans in a given month multiplied by a set price per scan based on the contract with the customer.

Other Subscription and Support Services

The Company also recognizes revenues from other subscription and support services, which includes jurisdictional updates to certain commercial customers and support services particularly to its Defense ID® customers. These subscriptions require continuing service or post contractual customer support and performance. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of locations in a given month multiplied by a fee per location.

Equipment Revenue

Revenue from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the equipment is received.

Non-Recurring Services Revenue

The non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as it is provided and the Company’s performance obligation has been satisfied.

Extended Warranty

Extended warranty revenues are generated when a warranty is provided to the customer separately of other performance obligations when the equipment is sold. As the customer obtains access at a point in time and continues to have access for the remainder of the warranty term, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs. The related revenue is recognized ratably over the specified term of the warranty period. The extended warranty is separate to the Company’s standard warranty of usually one year that it receives from its vendor.

Disaggregation of revenue

In the following tables, revenue is disaggregated by product and service and the timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue.

	For the Three Months Ended March 31,
	2021		2020
Products and services
Software as a Service (SaaS)	$	2,775,706	$	2,238,419
Other subscription and support services		15,797		79,231
Equipment		36,266		783,793
Non-recurring services		21,000		-
Extended warranties on equipment		3,156		6,330
Other		10,616		7,499
	$	2,862,541	$	3,115,272
Timing of revenue recognition
Products transferred at a point in time	$	46,881	$	791,292
Services transferred over time		2,815,660		2,323,980
	$	2,862,541	$	3,115,272

Contract balances

The current portion of deferred revenue at March 31, 2021 and December 31, 2020 was $455,896 and $402,782, respectively, and primarily consists of revenue that is recognized over time for software license contracts and hosted subscription services. The changes in these balances are related to the satisfaction or partial satisfaction of these contracts. Of this balance, at December 31, 2020, $242,738 was recognized as revenue for the three months ended March 31, 2021, respectively. The long-term portion of deferred revenue was $6,763 and $8,662 as of March 31, 2021 and December 31, 2020, respectively.

The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:

	Remainder
	2021		2022		2023		Total
Software as a Service (SaaS)	$	401,658	$	39,876	$	-	$	441,534
Other subscription and support services		7,180		4,493		1,581		13,254
Extended warranties on equipment		4,951		2,179		741		7,871
	$	413,789	$	46,548	$	2,322	$	462,659

All consideration from contracts with customers is included in the amounts presented above.

Business Concentrations and Credit Risk

During the three-month period ended March 31, 2021, the Company made sales to three customers that accounted for approximately 59% of total revenues. The revenue was associated with commercial identity sales customers. These customers represented 55% of total accounts receivable at March 31, 2021. During the three-month period ended March 31, 2020, the Company made sales to three customers that accounted for approximately 51% of total revenues. The revenue was associated with commercial identity sales customers.

Net (Loss) Income Per Share

Basic net (loss) income per share is computed by dividing the net (loss) income for the period by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing the net (loss) income for the period by the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive effect of outstanding options, warrants and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net (loss) income per share excludes all anti-dilutive shares. In the periods of a net loss, all common stock equivalents are considered anti-dilutive.

	Three Months Ended
	March 31,
	2021			2020
Numerator:
Net (Loss) Income	$	(4,624,448	)	$	26,602
Denominator:
Weighted average common shares – Basic		18,480,013			16,153,549
Dilutive effect of equity incentive plans		-			1,000,312
Weighted average common shares – Diluted		18,480,013			17,153,861
Net Loss per share –
Basic	$	(0.25	)	$	0.00
Diluted	$	(0.25	)	$	0.00

The following table summarizes the common stock equivalents excluded from (loss) income per diluted share because their effect would be anti-dilutive:

	Three Months Ended
	March 31,
	2021		2020
Stock options		527,424		-
Warrants		12,680		-
Restricted stock		405,576		-
Performance stock units		265,942		-
		1,211,622		-