ROC 10-K & 10-Q changes, risk factors and insider trading

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025, other than as set forth below.

Our pending acquisition of Zuccaro Technical Consulting, LLC ("ZTC") may not be completed or may be delayed, and we will incur significant costs whether or not the acquisition is completed.

On June 23, 2026 we entered into a Purchase Agreement to acquire ZTC. Closing is subject to conditions we do not fully control, including receipt of required regulatory approvals and third-party consents, execution of employment agreements with key personnel, and completion of an audit of ZTC's 2024 and 2025 annual financial statements. That audit has not been completed, and it may identify matters that cause us to seek to renegotiate or terminate the transaction, delay closing, or result in the condition not being satisfied. We have incurred, and expect to continue to incur, significant legal, accounting and advisory costs in connection with the transaction, and these costs are expensed as incurred and are not recoverable if the acquisition is not completed. In addition, following any closing we will be required to file audited financial statements of ZTC and related pro forma financial information with the SEC within a prescribed period, and a failure to do so on a timely basis could adversely affect our eligibility to use certain registration statement forms.

The ZTC acquisition may not deliver the benefits we expect, will dilute our existing stockholders, and will reduce our reported operating results.

We have limited experience acquiring and integrating other businesses. Although members of our management team may have participated in acquisitions at other organizations, we have not previously completed one as a company. Integrating ZTC will require significant management attention and resources that would otherwise be directed to operating our business. We may incur integration costs in excess of those we currently anticipate. We may fail to retain ZTC's key personnel, customers or contracts, and the anticipated benefits to our ROC Evidence product line may not materialize. Consideration includes $500,000 of cash, $2,500,000 in restricted shares of our common stock, which will dilute existing stockholders, and revenue share payments of up to $7,000,000 over a seven-year term. In addition, we will issue $500,000 of restricted stock units to ZTC's key personnel. Because a substantial portion of the equity consideration, restricted stock units and the revenue share payments are forfeitable upon termination of employment, we expect to recognize those amounts as compensation expense in periods following the closing rather than as purchase consideration, which will reduce our reported operating results in those future periods, in some cases materially. We also expect to record goodwill and intangible assets, which are subject to impairment testing. A decline in the performance of the acquired business, or in our market capitalization, could result in an impairment charge.

We are a defendant in litigation that could result in substantial costs and divert management attention, and our insurance may not cover the full amount of any loss.

In March 2026 a claim was filed against us and certain other defendants in the High Court of England and Wales, as described in Note 7 to our condensed consolidated financial statements. We have incurred, and expect to continue to incur, legal costs in defending the matter, and insurance coverage may prove insufficient with respect to legal costs and any judgment or settlement. The plaintiff seeks damages of approximately $179.1 million. The Company believes the claim is without merit and intends to defend the matter vigorously. Because the matter is at an early stage, we are not able to estimate the amount or range of any reasonably possible loss, and we have not recorded any accrual for a loss. An adverse outcome, or the cost of defending or resolving the matter, could be material to our results of operations or financial condition in a given period. Litigation of this nature is also inherently unpredictable and may divert the attention of our management from operating our business.

Full-Stack Capability: We are focused on owning the full stack of identity capabilities, offering comprehensive platforms that address a wide range of customer needs. This approach is evident in our development of products like ROC ABIS, ROC Evidence, ROC Watch, ROC Enroll, and ROC Evidence.

Modularity and Configurability: We design our systems to be modular and configurable, allowing us to adapt to specific customer requirements and integrate seamlessly with other technologies. This is crucial in a market where identity solutions must be flexible and adaptable.

Broad View of Identity: Unlike competitors who view identity narrowly as biometrics, we adopt a broader perspective that includes biometrics, license plates, person entities, and real-time video. This comprehensive view enables us to provide more holistic solutions and address a wider range of use cases.

Platform Approach: We are building a platform that offers both comprehensive solutions and individual components, recognizing that customers have diverse needs and require varying levels of integration. This strategy allows us to compete effectively with “all or nothing” approaches.

Pending Acquisition of Zuccaro Technical Consulting LLC

On June 23, 2026, we entered into a Purchase Agreement to acquire 100% of the equity interests of Zuccaro Technical Consulting LLC (“ZTC”), a provider of digital forensics services that complements our ROC Evidence product line. Consideration consists of $500,000 in cash payable at closing, subject to customary adjustments, $2,500,000 in restricted shares of our common stock vesting over three years, and revenue share payments equal to 15% of ROC Evidence Advanced Revenue over a seven-year term, capped in the aggregate at $7,000,000. Separately, we have committed to grant up to $500,000 of retention restricted stock units to continuing ZTC employees vesting over five years. Closing remains subject to customary conditions, including completion of an audit of ZTC’s 2024 and 2025 annual financial statements. The acquisition had not closed as of June 30, 2026 and remains pending as of the date of this Quarterly Report. We expect that a substantial portion of the share-based and revenue share consideration will be recognized as post-combination compensation expense over the applicable service periods rather than as purchase consideration, which we expect will increase operating expenses in future periods. For additional information, refer to Note 7 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.

Execution of Indemnification Agreements by Directors and Executive Officers of the Company

On August 11, 2026, each of the Company's directors and executive officers entered into an indemnification agreement with the Company (each, an "Indemnification Agreement"). Each Indemnification Agreement provides that the Company will indemnify the director or officer party thereto against expenses, judgments, fines, penalties, and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending, or completed proceeding by reason of the fact that such person is or was a director or officer of the Company, to the fullest extent permitted under Colorado law.

Each Indemnification Agreement also provides for the advancement of expenses to the director or officer in connection with a covered proceeding, subject to the terms of the agreement. The Company's indemnification obligations under each Indemnification Agreement are not exclusive of any other indemnification rights to which the applicable director or officer may be entitled under the Company's organizational documents, applicable law, or any other agreement, and the Company is the indemnitor of first resort with respect to such obligations. Each Indemnification Agreement is governed by and construed in accordance with the internal laws of the State of Colorado.

R&D Contract revenue increased $867,703, or 41%, to $2,990,707. This increase is primarily attributable to a single research and development contract with a U.S. Government customer. We recognized approximately $2.7 million of revenue under that arrangement during the quarter. Of that amount, approximately $2.3 million related to a license of functional intellectual property and approximately $0.4 million related to research and development services. The license component was recognized in full during the second quarter. The services component is expected to be recognized over the remaining period of performance under the option, which extends into 2027.

Product revenue decreased $743,643, or 26%, to $2,102,275. The decrease was driven principally by a $1,676,462 decline in ROC Watch revenue, reflecting the completion of a significant ROC Watch deployment in the prior-year period, partially offset by an increase of $725,676 in ROC SDK revenue and increases of $143,761 and $45,882 in ROC ABIS and ROC Enroll revenue, respectively.

Revenue decreased by $500,820, or 6%, for the six months ended June 30, 2026 compared to the same period in 2025. The decrease was primarily driven by lower product revenue, partially offset by higher R&D contract revenue. Product revenue decreased by $857,611, or 16%, primarily due to lower ROC Watch revenue following the completion of a significant deployment. The decrease was partially offset by growth in ROC SDK from new customer and expansion opportunities, as well as increased revenue from ROC ABIS and ROC Evidence. R&D contract revenue increased by $356,791, or 12%, primarily reflecting revenue recognized from government-funded development contracts, including the significant contract awarded during the second quarter of 2026 discussed above.

Our revenue has historically been concentrated among a limited number of customers, and one customer accounted for 35% of total revenue for the six months ended June 30, 2026 and 47% of accounts receivable at June 30, 2026. The timing of contract awards, option exercises and license deliveries can cause our quarterly revenue to fluctuate significantly. Period-to-period comparisons of our results of operations should not be relied upon as indicative of future performance.

Our gross profit increased by $572,214 or 14%, for the three months ended June 30, 2026, compared to the same period in 2025, while gross margin improved to 90% from 80%. This improvement was driven principally by the recognition of the license component of the U.S. Government research and development arrangement described above, whereas the license portion of the arrangement was recognized with no significant incremental cost of sales. This arrangement accounted for substantially all of the margin improvement in the quarter. Our cost of sales also declined $448,154, or 46%, reflecting a lower proportion of hardware revenue following the decrease in ROC Watch revenue.

Our gross profit increased by $64,077, or 1%, for the six months ended June 30, 2026, compared to the same period in 2025, while gross margin improved to 86% from 80%. The drivers were the same as for the quarter, with the effect of the license component partially offset by the decline in higher-cost hardware revenue over the six-month period then ended.

We do not expect the gross margin improvement in the second quarter of 2026 to recur in the third and fourth quarters of 2026. Period-to-period comparisons of gross margin should not be relied upon as indicative of future performance.

Selling, general and administrative expenses increased by $2,407,364, or 63%, for the six months ended June 30, 2026, compared to the same period in 2025. The drivers were consistent with those described above for the quarter. The increase was primarily driven by higher personnel-related costs associated with expanding our business development and administrative functions to support the growth of our product offerings and markets served. The increase also reflected additional costs associated with operating as a public company. These investments support our long-term growth strategy.

Research and development expenses increased by $1,253,963, or 43%, for the six months ended June 30, 2026, compared to the same period in 2025. The increase was primarily driven by higher personnel-related costs associated with expanding our research and engineering organization and continued investment in the development and enhancement of our products and platform. These investments are intended to expand product capabilities, support new customer opportunities, and address evolving customer requirements across our target markets.

We recorded no provision for or benefit from income taxes for either the three or the six months ended June 30, 2026, in each case reflecting an effective tax rate of 0%. For the comparable prior-year periods, we recorded income tax expense of $229,494 for the three months ended June 30, 2025 on pre-tax income of $810,698, reflecting an effective tax rate of approximately 28.3%, and an income tax benefit of $61,319 for the six months ended June 30, 2025 on a pre-tax loss of $216,679, also reflecting an effective tax rate of approximately 28.3%. The $229,494 decrease in income tax expense for the three-month period, and the $61,319 decrease in income tax benefit for the six-month period were each primarily attributable to the establishment of a full valuation allowance against our U.S. federal and state deferred tax assets during 2025. The prior-year interim amounts were determined before that valuation allowance was established and therefore reflect tax expense and benefit at a blended federal and state rate, whereas no tax expense or benefit has been recognized in the current-year periods.

The shift from an income tax benefit for the six months ended June 30, 2025 to income tax expense for the three months ended June 30, 2025 does not reflect any change in our tax positions or in the rate applied. Because substantially the same blended federal and state rate of approximately 28.3% was applied in each period, the direction of the tax amount follows the direction of pre-tax results.

No income tax benefit was recognized on our pre-tax losses for the three and six months ended June 30, 2026 because any benefit that would otherwise have been recognized was offset by a corresponding increase in the valuation allowance. Accordingly, our effective tax rate of 0% for each of the three and six months ended June 30, 2026 differed from the U.S. federal statutory rate of 21% primarily due to the effect of the full valuation allowance recorded against our deferred tax assets, as well as due to state income taxes and non-deductible expenses, the effect of each of which was also offset by the change in the valuation allowance.

In addition, because relatively small changes in projected pre-tax results would produce significant changes in our estimated annual effective tax rate, we determined that a reliable estimate of the annual effective tax rate could not be made and computed our interim income tax provision based on actual year-to-date results.

We used $6,045,692 of cash in operating activities during the six months ended June 30, 2026, compared to $126,190 during the same period in 2025. Cash used in operating activities in the 2026 period included approximately $3.0 million of net outflows from changes in operating assets and liabilities, primarily due to a $1.5 million increase in accounts receivable, and a $0.7 million decrease in accounts payable and accrued expenses. We expect to continue to use cash in operating activities as we invest in product development and expand our sales and marketing organization. Our rate of cash usage in any given period depends substantially on the timing of contract awards, billings and collections, and may vary significantly from period to period Our revenue is concentrated among a limited number of U.S. Government and government-adjacent customers, and the timing of customer billings, collections, and contract awards is influenced by federal budgeting and appropriation cycles. One customer represented 47% of our accounts receivable as of June 30, 2026. As a result, our quarterly cash flow from operations may vary significantly from period to period, and a delay in collection from a significant customer could have a disproportionate effect on our liquidity in any given quarter. We monitor working capital, days sales outstanding, and our concentrated receivable balances on a regular basis.

Our revolving line of credit provides for borrowings of up to $2.5 million. We repaid all amounts outstanding under the facility during the three months ended June 30, 2026 and had no borrowings outstanding as of June 30, 2026. The facility is payable on demand and may be cancelled by either party at any time upon written notice. Accordingly, we do not consider availability under the facility to be a committed source of liquidity.

Net cash used in operating activities was $6,045,692 and $126,190 for the six months ended June 30, 2026 and 2025, respectively. The increase of $5,919,502 was driven by two principal factors.

First, our cash operating costs grew substantially faster than gross profit. Selling, general and administrative expenses increased $2,407,364 and research and development expenses increased $1,253,963, while gross profit increased only $64,077. The costs driving that growth, principally personnel costs and costs associated with operating as a public company, were substantially settled in cash during the period.