| Significant Accounting Policies | 2. SIGNIFICANT ACCOUNTING
POLICIES Basis of Presentation The accompanying unaudited
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted accounting principles in the United States of America
for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include
all adjustments necessary for a fair presentation of the Company’s financial position at September 30, 2020 and the results
of operations, stockholders’ equity and cash flows for the nine months ended September 30, 2020 and 2019. All such adjustments
are of a normal and recurring nature. Interim financial statements are prepared on a basis consistent with the Company’s
annual financial statements. Results of operations for the nine-month period ended September 30, 2020, are not necessarily indicative
of the operating results that may be expected for the year ending December 31, 2020. The balance sheet as of
December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information
and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete
financial statements. References in this Quarterly
Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued by the Financial
Accounting Standards Board (“FASB”). For further information,
refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2019. 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” Use of Estimates The preparation of the
Company’s financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements
and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include
impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, and the fair value
of stock options granted under the Company’s stock-based compensation plans. Due to the inherent uncertainties involved in
making estimates, actual results reported in future periods may be different from those estimates. Allowance for Doubtful Accounts The Company records its
allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the
age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other
factors that may affect customers’ ability to pay. 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, 2020), 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 nine months ended September 30, 2020
and 2019. 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 nine months ended September 30, 2020 and 2019. Income Taxes The Company accounts for
income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and
liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as of September 30, 2020
and December 31, 2019, 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, accrued expenses and notes payable. As of September 30, 2020 and December
31, 2019, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature. Revenue Recognition and Deferred Revenue General The majority of license
fees and services revenue are generated from fixed-price 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 September 30,
2020 2019
Products and services
Software as a Service (SaaS) $ 2,451,381 $ 1,563,680
Other subscription and support services 36,346 141,798
Equipment 176,061 149,844
Non-recurring services 29,000 61,900
Extended warranties on equipment 5,058 11,674
Other 1,129 1,305
$ 2,698,975 $ 1,930,201
Timing of revenue recognition
Products transferred at a point in time $ 177,190 $ 151,149
Services transferred over time 2,521,785 1,779,052
$ 2,698,975 $ 1,930,201
For the Nine Months Ended September 30,
2020 2019
Products and services
Software as a Service (SaaS) $ 6,361,150 $ 3,545,587
Other subscription and support services 186,280 566,274
Equipment 1,011,608 337,364
Non-recurring services 70,450 259,945
Extended warranties on equipment 17,232 49,993
Other 9,722 8,023
$ 7,656,442 $ 4,767,186
Timing of revenue recognition
Products transferred at a point in time $ 1,021,330 $ 345,387
Services transferred over time 6,635,112 4,421,799
$ 7,656,442 $ 4,767,186 Contract balances The current portion of
deferred revenue at September 30, 2020 and December 31, 2019 was $446,411 and $572,391, 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, 2019, $84,398 and
$542,900 was recognized as revenue for the three and nine months ended September 30, 2020, respectively. The long-term portion
of deferred revenue was $10,522 and $13,322 as of September 30, 2020 and December 31, 2019, 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
2020 2021 2022 Total
Software as a Service (SaaS) $ 240,710 $ 178,997 $ - $ 419,707
Other subscription and support services 6,773 11,094 5,254 23,121
Extended warranties on equipment 3,436 8,099 2,570 14,105
$ 250,919 $ 198,190 $ 7,824 $ 456,933 All consideration from contracts with customers
is included in the amounts presented above. Business Concentrations and Credit Risk During the three and nine
month periods ended September 30, 2020, the Company made sales to two customers that accounted for approximately 46% and 37% of
total revenues, respectively. The revenue was associated with commercial identity sales customers. These customers represented
54% of total accounts receivable at September 30, 2020. During the three and nine month periods ended September 30, 2019, the Company
made sales to three customers that accounted for approximately 36% and 34% of total revenues, respectively. The revenue was associated
with commercial identity sales customers. Net Income (Loss) Per Share Basic net income (loss)
per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted
average number of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive
effect of outstanding options, warrants and restricted stock is reflected in diluted earnings per share by application of the treasury
stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive shares.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Numerator:
Net Income (Loss) $ 32,412 $ (568,230 ) $ (701,259 ) $ (2,654,898 )
Denominator:
Weighted average common shares – Basic 18,336,107 15,864,004 16,960,770 15,749,312
Dilutive effect of equity incentive plans 428,887 - - -
Weighted average common shares – Diluted 18,764,994 15,864,004 16,960,770 15,749,312
Net Income (Loss) per share –
Basic $ 0.00 $ (0.04 ) $ (0.04 ) $ (0.17 )
Diluted $ 0.00 $ (0.04 ) $ (0.04 ) $ (0.17 ) The following table summarizes
the common stock equivalents excluded from income (loss) per diluted share because their effect would be anti-dilutive due to the
net loss:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Stock options - 1,436,623 653,882 1,436,623
Warrants - 204,930 12,680 204,930
Restricted stock - 4,008 4,499 4,008
Performance stock units - - 265,942 -
- 1,645,561 937,003 1,645,561 |
