ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,318
|
|
|
$
|
47,742
|
|
Accounts receivable, net of allowance for doubtful accounts of $138 and $20 at September 30, 2020 and December 31, 2019, respectively
|
|
|
2,071
|
|
|
|
2,487
|
|
Unbilled receivables
|
|
|
2,227
|
|
|
|
3,315
|
|
Prepaid expenses and other current assets
|
|
|
625
|
|
|
|
256
|
|
Total current assets
|
|
|
47,241
|
|
|
|
53,800
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,818
|
|
|
|
3,755
|
|
Long-term tax receivable
|
|
|
1,179
|
|
|
|
-
|
|
Total assets
|
|
$
|
52,238
|
|
|
$
|
57,555
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
258
|
|
|
$
|
187
|
|
Accrued expenses
|
|
|
1,694
|
|
|
|
1,096
|
|
Deferred revenue
|
|
|
3,016
|
|
|
|
2,777
|
|
Total current liabilities
|
|
|
4,968
|
|
|
|
4,060
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
25
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value; 70,000,000 shares authorized; issued and outstanding 21,437,338 as of September 30, 2020 and 21,442,781 as of December 31, 2019
|
|
|
214
|
|
|
|
214
|
|
Additional paid-in capital
|
|
|
96,044
|
|
|
|
96,255
|
|
Accumulated deficit
|
|
|
(49,013
|
)
|
|
|
(43,034
|
)
|
Total stockholders’ equity
|
|
|
47,245
|
|
|
|
53,435
|
|
Total liabilities and stockholders’ equity
|
|
$
|
52,238
|
|
|
$
|
57,555
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands,
except per share data)
(unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
796
|
|
|
$
|
1,138
|
|
|
$
|
3,176
|
|
|
$
|
3,864
|
|
Software maintenance
|
|
|
1,368
|
|
|
|
1,291
|
|
|
|
4,110
|
|
|
|
3,965
|
|
Services
|
|
|
310
|
|
|
|
581
|
|
|
|
597
|
|
|
|
1,925
|
|
Total revenue
|
|
|
2,474
|
|
|
|
3,010
|
|
|
|
7,883
|
|
|
|
9,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
149
|
|
|
|
267
|
|
|
|
483
|
|
|
|
1,106
|
|
Research and development
|
|
|
2,332
|
|
|
|
2,071
|
|
|
|
7,027
|
|
|
|
5,922
|
|
Selling and marketing
|
|
|
1,306
|
|
|
|
930
|
|
|
|
3,771
|
|
|
|
2,665
|
|
General and administrative
|
|
|
1,207
|
|
|
|
915
|
|
|
|
4,170
|
|
|
|
2,510
|
|
Total costs and expenses
|
|
|
4,994
|
|
|
|
4,183
|
|
|
|
15,451
|
|
|
|
12,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent related income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,520
|
)
|
|
|
(1,173
|
)
|
|
|
(7,568
|
)
|
|
|
(2,400
|
)
|
Interest income
|
|
|
7
|
|
|
|
253
|
|
|
|
174
|
|
|
|
806
|
|
Loss before benefit from income taxes
|
|
|
(2,513
|
)
|
|
|
(920
|
)
|
|
|
(7,394
|
)
|
|
|
(1,594
|
)
|
Benefit from income taxes
|
|
|
(736
|
)
|
|
|
(769
|
)
|
|
|
(1,416
|
)
|
|
|
(733
|
)
|
Net loss
|
|
$
|
(1,777
|
)
|
|
$
|
(151
|
)
|
|
$
|
(5,978
|
)
|
|
$
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
Net loss per share – diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares – basic
|
|
|
21,476
|
|
|
|
21,523
|
|
|
|
21,452
|
|
|
|
21,541
|
|
Weighted-average shares – diluted
|
|
|
21,476
|
|
|
|
21,523
|
|
|
|
21,452
|
|
|
|
21,541
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,978
|
)
|
|
$
|
(861
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
401
|
|
|
|
331
|
|
Stock-based compensation
|
|
|
557
|
|
|
|
380
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
(758
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
416
|
|
|
|
(1,440
|
)
|
Unbilled receivables
|
|
|
1,088
|
|
|
|
(976
|
)
|
Prepaid expenses and other current assets
|
|
|
(369
|
)
|
|
|
(142
|
)
|
Long-term tax receivable
|
|
|
(1,179
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
71
|
|
|
|
105
|
|
Accrued expenses
|
|
|
599
|
|
|
|
(64
|
)
|
Deferred revenue
|
|
|
204
|
|
|
|
549
|
|
Net cash used in operating activities
|
|
|
(4,190
|
)
|
|
|
(2,876
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(464
|
)
|
|
|
(78
|
)
|
Net cash used in investing activities
|
|
|
(464
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
23
|
|
|
|
22
|
|
Payments made for taxes of employees who surrendered
shares related to unrestricted stock
|
|
|
(89
|
)
|
|
|
(92
|
)
|
Repurchase of common stock
|
|
|
(704
|
)
|
|
|
(581
|
)
|
Net cash used in financing activities
|
|
|
(770
|
)
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(5,424
|
)
|
|
|
(3,605
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
47,742
|
|
|
|
51,612
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
42,318
|
|
|
$
|
48,007
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure: Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
40
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(in thousands)
(unaudited)
|
|
Three and Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
Balance at December 31, 2018
|
|
|
21,516
|
|
|
$
|
215
|
|
|
$
|
96,376
|
|
|
($
|
34,694
|
)
|
|
$
|
61,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of unrestricted stock
|
|
|
69
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares surrendered by employees to pay taxes
related to unrestricted stock
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
(49
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
Repurchase of common stock
|
|
|
(20
|
)
|
|
|
0
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
(78
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
|
21,551
|
|
|
$
|
216
|
|
|
$
|
96,262
|
|
|
($
|
34,466
|
)
|
|
$
|
62,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
7
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
177
|
|
|
|
-
|
|
|
|
177
|
|
Repurchase of common stock
|
|
|
(48
|
)
|
|
|
(1
|
)
|
|
|
(161
|
)
|
|
|
-
|
|
|
|
(162
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(938
|
)
|
|
|
(938
|
)
|
Balance at June 30, 2019
|
|
|
21,514
|
|
|
$
|
215
|
|
|
$
|
96,300
|
|
|
($
|
35,404
|
)
|
|
$
|
61,111
|
|
Performance share award
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of unrestricted stock
|
|
|
72
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares surrendered by employees to pay taxes related to unrestricted stock
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
(43
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
190
|
|
|
|
-
|
|
|
|
190
|
|
Repurchase of common stock
|
|
|
(114
|
)
|
|
|
(1
|
)
|
|
|
(341
|
)
|
|
|
-
|
|
|
|
(342
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
(151
|
)
|
Balance at September 30, 2019
|
|
|
21,479
|
|
|
$
|
215
|
|
|
$
|
96,105
|
|
|
($
|
35,555
|
)
|
|
$
|
60,765
|
|
|
|
Three and Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
Balance at December 31, 2019
|
|
|
21,443
|
|
|
$
|
214
|
|
|
$
|
96,255
|
|
|
|
(43,034
|
)
|
|
$
|
53,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of unrestricted stock
|
|
|
94
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares surrendered by employees to pay taxes related to unrestricted stock
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(50
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
|
|
83
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,060
|
)
|
|
|
(1,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
|
21,552
|
|
|
$
|
215
|
|
|
$
|
96,287
|
|
|
($
|
44,094
|
)
|
|
$
|
52,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
7
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
23
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
230
|
|
|
|
-
|
|
|
|
230
|
|
Repurchase of common stock
|
|
|
(139
|
)
|
|
|
(1
|
)
|
|
|
(468
|
)
|
|
|
-
|
|
|
|
(469
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,142
|
)
|
|
|
(3,142
|
)
|
Balance at June 30, 2020
|
|
|
21,390
|
|
|
$
|
214
|
|
|
$
|
96,072
|
|
|
($
|
47,236
|
)
|
|
$
|
49,050
|
|
Issuance of unrestricted stock
|
|
|
142
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares surrendered by employees to pay taxes related to unrestricted stock
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
244
|
|
|
|
-
|
|
|
|
244
|
|
Repurchase of common stock
|
|
|
(83
|
)
|
|
|
(1
|
)
|
|
|
(232
|
)
|
|
|
-
|
|
|
|
(233
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,777
|
)
|
|
|
(1,777
|
)
|
Balance at September 30, 2020
|
|
|
21,437
|
|
|
$
|
214
|
|
|
$
|
96,044
|
|
|
($
|
49,013
|
)
|
|
$
|
47,245
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Description of the Company and Basis of Presentation
Description of the Company
We are a leading provider of
software and services to the biometrics industry. Our software products are used in government and commercial biometrics systems,
which are capable of determining or verifying an individual’s identity. We offer engineering services related to software
configuration, integration, and installation, as well as complete systems development. We sell our biometrics software products
and services globally through systems integrators, OEMs, and directly to end user customers. We also derive a portion of our revenue
from the sale of imaging software.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all
information and notes necessary for a complete presentation of our financial position, results of operations and cash flows, in
conformity with generally accepted accounting principles. We filed audited financial statements which included all information
and notes necessary for such presentation for the two years ended December 31, 2019 in conjunction with our 2019 Annual Report
on Form 10-K. This Form 10-Q should be read in conjunction with that Form 10-K.
The accompanying unaudited consolidated
balance sheets, statements of operations, statements of cash flows, and statements of stockholders’ equity reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of financial
position at September 30, 2020, and of operations and cash flows for the interim periods ended September 30, 2020 and
2019.
The results of operations for
the interim period ended September 30, 2020 are not necessarily indicative of the results to be expected for the year.
Principles of Consolidation
The consolidated financial statements
include the accounts of Aware and its subsidiary. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation
of our financial statements in conformity with accounting principles generally accepted in the United States of America requires
us 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.
The most significant estimates included in the financial statements pertain to revenue recognition, reserves for doubtful accounts,
useful lives of fixed assets, valuation allowance for deferred income tax assets, and accrued liabilities. Actual results could
differ from those estimates.
Recent
Accounting Pronouncements
In December 2019,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU was issued to reduce the complexity of the reporting
information for financial statement users. We adopted the standard on January 1, 2020. The adoption of the standard did not
result in any adjustment to our financial statements.
In June 2016,
the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial
Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such
losses are recorded. This guidance was to be effective for reporting periods beginning after December 15, 2019,
with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective
dates for us, as a smaller reporting company, until fiscal year 2023. We are continuing to assess the impact of the standard on
our consolidated financial statements.
Note 2 – Revenue Recognition
We recognize revenue in accordance
with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, we apply the following
five step model:
|
1.
|
Identify the contract with the 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 (or as) each performance obligation
is satisfied.
|
We categorize revenue as software
licenses, software maintenance, or services. Revenue from software licenses is recognized at a point in time upon delivery, provided
all other revenue recognition criteria are met. We recognize software maintenance revenue over time on a straight-line basis over
the contract period. Services revenue is recognized over time as the services are delivered using an input method (i.e., labor
hours incurred as a percentage of total labor hours budgeted), provided all other revenue recognition criteria are met.
In addition to selling software
licenses, software maintenance and software services on a standalone basis, a significant portion of our contracts include multiple
performance obligations, which require an allocation of the transaction price to each distinct performance obligation based on
a relative standalone selling price (“SSP) basis. The SSP is the price at which we would sell a promised good or service
separately to a customer. The best estimate of SSP is the observable price of a good or service when we sell that good or service
separately. A contractually stated price or a list price for a good or service may be the SSP of that good or service. We use a
range of amounts to estimate SSP when we sell each of the goods and services separately and need to determine whether there is
a discount that needs to be allocated based on the relative SSP of the various goods and services. In instances where SSP is not
directly observable, such as when we do not sell the product or service separately, we typically determine the SSP using an adjusted
market assessment approach using information that may include market conditions and other observable inputs. We typically have
more than one SSP for individual goods and services due to the stratification of those goods and services by customers and circumstances.
In these instances, we may use information such as the nature of the customer and distribution channel in determining the SSP.
When software licenses and significant
customization engineering services are sold together, they are accounted for as a combined performance obligation, as the software
licenses are generally highly dependent on, and interrelated with, the associated customization services and therefore are not
distinct performance obligations. Revenue for the combined performance obligation is recognized over time as the services are delivered
using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted).
The amount of consideration
is not adjusted for a significant financing component if the time between payment and the transfer of the related good or service
is expected to be one year or less under the practical expedient in ASC 606-10-32-18. Our revenue arrangements are typically accounted
for under such expedient, as payment is typically due within 30 to 60 days. As of September 30, 2020 and 2019, none of our
contracts contained a significant financing component.
Disaggregation of Revenues
We organize
ourselves into a single segment that reports to the chief operating decision maker. We conduct our operations in the United States
and sell our products and services to domestic and international customers. Revenues were generated from the following geographic
regions for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
1,484
|
|
|
$
|
1,502
|
|
|
$
|
4,652
|
|
|
$
|
4,952
|
|
United Kingdom
|
|
|
266
|
|
|
|
554
|
|
|
|
1,046
|
|
|
|
1,900
|
|
Brazil
|
|
|
239
|
|
|
|
174
|
|
|
|
730
|
|
|
|
504
|
|
Rest of World
|
|
|
485
|
|
|
|
780
|
|
|
|
1,455
|
|
|
|
2,398
|
|
|
|
$
|
2,474
|
|
|
$
|
3,010
|
|
|
$
|
7,883
|
|
|
$
|
9,754
|
|
Revenue by product group for
the three and nine months ended September 30, 2020 and 2019 was (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Biometrics
|
|
$
|
1,956
|
|
|
$
|
2,556
|
|
|
$
|
6,927
|
|
|
$
|
8,905
|
|
Imaging
|
|
|
518
|
|
|
|
454
|
|
|
|
956
|
|
|
|
849
|
|
|
|
$
|
2,474
|
|
|
$
|
3,010
|
|
|
$
|
7,883
|
|
|
$
|
9,754
|
|
Revenue by timing of transfer
of goods or services for the three and nine months ended September 30, 2020 and 2019 was (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Goods or services transferred at a point in time
|
|
$
|
896
|
|
|
$
|
1,061
|
|
|
$
|
3,258
|
|
|
$
|
3,189
|
|
Goods or services transferred over time
|
|
|
1,578
|
|
|
|
1,949
|
|
|
|
4,625
|
|
|
|
6,565
|
|
|
|
$
|
2,474
|
|
|
$
|
3,010
|
|
|
$
|
7,883
|
|
|
$
|
9,754
|
|
Contract Balances
When the timing of our delivery
of goods or services is different from the timing of payments made by customers, we recognize either a contract asset (performance
precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay are represented
by the deferred revenue below until the performance obligation is satisfied.
Our contract assets consist
of unbilled receivables. Our contract liabilities consist of deferred (unearned) revenue, which is generally related to software
maintenance contracts. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize
revenue.
The following table presents
changes in our contract assets and liabilities during the nine months ended September 30, 2019 and 2020 (in thousands):
|
|
Balance at
Beginning of
Period
|
|
|
Revenue
Recognized
In Advance of
Billings
|
|
|
Billings
|
|
|
Balance at End of
Period
|
|
Three months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,659
|
|
|
$
|
796
|
|
|
$
|
(200
|
)
|
|
$
|
4,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
2,018
|
|
|
$
|
492
|
|
|
$
|
(283
|
)
|
|
$
|
2,227
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Billings
|
|
|
Revenue
Recognized
|
|
|
Balance at End of
Period
|
|
Three months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,424
|
|
|
$
|
2,514
|
|
|
$
|
(1,290
|
)
|
|
$
|
3,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,961
|
|
|
$
|
1,400
|
|
|
$
|
(1,320
|
)
|
|
$
|
3,041
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Revenue
Recognized
In Advance of
Billings
|
|
|
Billings
|
|
|
Balance at End of
Period
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,279
|
|
|
$
|
2,264
|
|
|
$
|
(1,288
|
)
|
|
$
|
4,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,315
|
|
|
$
|
752
|
|
|
$
|
(1,840
|
)
|
|
$
|
2,227
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Billings
|
|
|
Revenue
Recognized
|
|
|
Balance at End of
Period
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
3,099
|
|
|
$
|
4,514
|
|
|
$
|
(3,965
|
)
|
|
$
|
3,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,837
|
|
|
$
|
4,284
|
|
|
$
|
(4,080
|
)
|
|
$
|
3,041
|
|
Remaining Performance Obligations
Remaining performance obligations
represent the transaction price from contracts for which work has not been performed or goods and services have not been delivered.
We expect to recognize revenue on approximately 63% of the remaining performance obligations over the next 12 months, with the
remainder recognized thereafter. As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining
performance obligations for software maintenance contracts with a duration greater than one year was $2.4 million.
Note 3 – Fair Value Measurements
The FASB Codification defines
fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The three levels of the fair value hierarchy under the FASB Codification are: i) Level 1 – valuations that are based on quoted
prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at
the measurement date; ii) Level 2 – valuations that are based on quoted prices in markets that are not active or for which
all significant inputs are observable, either directly or indirectly; and iii) Level 3 – valuations that require inputs that
are both significant to the fair value measurement and unobservable.
Cash and cash equivalents, which
primarily include money market mutual funds, were $42.3 million and $47.7 million as of September 30, 2020 and December 31,
2019, respectively. As of September 30, 2020, our assets that are measured at fair value on a recurring basis and whose carrying
values approximate their respective fair values included the following (in thousands):
|
|
Fair Value Measurement at September 30, 2020 Using:
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
41,447
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
41,447
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2019,
our assets that are measured at fair value on a recurring basis and whose carrying values approximate their respective fair values
included the following (in thousands):
|
|
Fair Value Measurement at December 31, 2019 Using:
|
|
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
|
|
|
|
Significant Other
Observable Inputs
|
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
46,174
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
46,174
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 4 – Computation of Earnings per Share
Basic earnings per share is
computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income or loss by the weighted average number of common shares outstanding plus additional common shares
that would have been outstanding if dilutive potential common shares had been issued. For the purposes of this calculation, stock
options are considered common stock equivalents in periods in which they have a dilutive effect. Stock options that are anti-dilutive
are excluded from the calculation. Potential common stock equivalents were not included in the per share calculation for diluted
earnings per share, because we had a net loss and the effect of their inclusion would be anti-dilutive.
Net income (loss) per share is calculated as follows
(in thousands, except per share data):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(1,777
|
)
|
|
$
|
(151
|
)
|
|
$
|
(5,978
|
)
|
|
$
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
21,476
|
|
|
|
21,523
|
|
|
|
21,452
|
|
|
|
21,541
|
|
Additional dilutive common stock equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted shares outstanding
|
|
|
21,476
|
|
|
|
21,523
|
|
|
|
21,452
|
|
|
|
21,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
Net loss per share - diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
Note 5 – Stock-based compensation
The following table presents
stock-based employee compensation expenses included in our unaudited consolidated statements of comprehensive income (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of services
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
15
|
|
Research and development
|
|
|
53
|
|
|
|
38
|
|
|
|
108
|
|
|
|
75
|
|
Selling and marketing
|
|
|
48
|
|
|
|
4
|
|
|
|
121
|
|
|
|
8
|
|
General and administrative
|
|
|
139
|
|
|
|
142
|
|
|
|
319
|
|
|
|
283
|
|
Stock-based compensation expense
|
|
$
|
244
|
|
|
$
|
190
|
|
|
$
|
557
|
|
|
$
|
380
|
|
Stock Options. We granted
stock option for 260,000 shares in the three and nine months ended September 30, 2019. We granted stock options for 50,000
shares in the nine months ended September 30, 2020. We did not grant any stock options in the three months ended September 30,
2020.
Unrestricted Stock Grants.
We grant unrestricted shares of stock under our 2001 Nonqualified Stock Plan. Stock-based compensation expense for stock grants
is determined based on the fair market value of our stock on the date of grant, provided the number of shares in the grant is fixed
on the grant date.
We granted shares of unrestricted
stock in 2020 and 2019 that affected financial results for the three and nine month periods ended September 30, 2020 and 2019.
These grants are described below.
We did not grant any shares of
unrestricted stock in the three months ended September 30, 2020. In March and May 2020 we granted an aggregate 243,000
shares of unrestricted stock to directors, officers, and employees. The shares were scheduled to be issued in two equal installments
shortly after June 30, 2020 and December 31, 2020, provided each grantee is serving as a director, officer or employee
on those dates. The total stock-based compensation expense related to these grants is $0.7 million, of which $0.4 million was charged
to expense in the nine months ended September 30, 2020. We anticipate the remaining $0.3 million will be charged to expense
in the fourth quarter of 2020. We issued 109,773 shares of common stock related to the March and May 2020 grants in early
July 2020 after employees surrendered 11,727 shares for which we paid $75,000 of withholding taxes on their behalf.
In 2019 we granted 285,500 shares
of unrestricted stock to directors, officers, and employees. We granted 120,000 shares which will be issued in four equal installments
on their anniversary in September and October of 2020, 2021, 2022, and 2023, provided the grantee is serving as a director,
officer, or employee on those dates. We also granted 165,500 shares throughout March, September, and October of 2019.
We issued 71,500 and 94,000 shares shortly after September 30 2019 and December 31, 2019, respectively. The
total stock-based compensation expense related to the 285,500 shares granted in 2019 is $947,000, of which $633,000 was charged
to expense in the 2019 and $63,000 was charged to expense in the nine months ended September 30, 2020. We anticipate the remaining
$251,000 will be charged to expense ratably through 2023. We issued shares of common stock related to the March 2019 grant
as follows: i) 58,548 net shares of common stock were issued in early July 2019 after employees surrendered 12,952 shares
for which we paid $43,000 of withholding taxes on their behalf; and ii) 56,605 net shares of common stock were issued in early
January 2020 after employees surrendered 14,895 shares for which we paid $50,000 of withholding taxes on their behalf. We
also issued 20,000 shares of common stock related to a September 2019 grant in September 2020.
We issued shares of common stock
related to the March 2019 grant as follows: i) 58,548 net shares of common stock were issued in early July 2019 after
employees surrendered 12,952 shares for which we paid $43,000 of withholding taxes on their behalf; and ii) 56,605 net shares of
common stock were issued in early January 2020 after employees surrendered 14,895 shares for which we paid $50,000 of withholding
taxes on their behalf.
We issued 109,773 shares of common
stock related to the March and May 2020 grant in early July 2020 after employees surrendered 11,727 shares for which
we paid $75,000 of withholding taxes on their behalf. We also issued 20,000 shares of common stock related to September 2019
grant in September 2020.
Performance Share Award.
In September 2019, we granted 20,000 shares of stock to an officer as a performance share award under our 2001 Nonqualified
Stock Plan. The shares were issued in September 2019 and were forfeitable if the grantee was not serving as a director, officer
or employee on March 19, 2020. Stock-based compensation expense for this stock grant was determined based on the fair market
value of our stock on the date of grant, as the number of shares in the grant was fixed on the grant date. The total stock-based
compensation expense related to this grant was $55,000, of which $31,000 was charged to expense in 2019 and $24,000 was charged
to expense in the nine months ended September 30, 2020.
In October 2019, we granted
10,000 shares of stock to an officer as a performance share award under our 2001 Nonqualified Stock Plan. The shares were issued
in October 2019 and were forfeitable if the grantee was not serving as a director, officer or employee on April 1, 2020.
Stock-based compensation expense for this stock grant was determined based on the fair market value of our stock on the date of
grant, as the number of shares in the grant was fixed on the grant date. The total stock-based compensation expense related to
this grant was $29,000, of which $15,000 was charged to expense in 2019 and $14,000 was charged to expense in the nine months ended
September 30, 2020.
Note
6 – Stock Repurchase Program
On April 30, 2020, the Board of Directors approved
a program authorizing the Company to purchase up to $10 million of its common stock, of which $0.7 million had been utilized as
of September 30, 2020. During the three and nine months ended September 30, 2020, the Company repurchased 83,000 shares
and 222,000 shares of its common stock for $0.2 million and $0.7 respectively. The shares may be purchased from time to time in
the open market or through privately negotiated transactions at management’s discretion, depending upon market conditions
and other factors. The authorization to repurchase Company stock expires on December 31, 2021. Repurchases will be made under
the program using the Company’s own cash resources and will been accordance with Rule 10b-18 under the Securities Exchange
Act of 1934 and other applicable laws, rules and regulations. The program does not obligate the Company to acquire any particular
amount of common stock and the program may be modified or suspended at any time at the Company’s discretion.
Note
7 – Income Taxes
Income tax benefit was $0.7
million and $1.4 million for the three and nine months ended September 30, 2020, respectively. Income tax expense for the
three and nine month periods ended September 30, 2020 were based on the U.S. statutory rate of 21%, increased by state income
taxes, and reduced by permanent adjustments and research tax credits. The Coronavirus Aid, Relief and Economic Security Act (CARES
Act) was signed into law on March 27, 2020. The CARES Act contained specific relief and stimulus measures including allowing
net operating losses originating in 2018 through 2020 to be carried back five years to offset taxable income in the carryback period.
Separately, the enactment of
the Tax Cut and Jobs Act in 2017 allowed taxpayers to claim a refund for alternative minimum tax credits over a period of years.
The CARES Act enacted during the first quarter of 2020 allows for the entire amount of the credit to be refunded in 2020.
We have reviewed the impact
of the CARES Act enactment on the income tax provision and have determined that, as a result of the net operating loss carryback
provision, we can obtain a tax benefit if we were to carry back the forecasted 2020 net operating loss to the five year carryback
period.
The carryback of the estimated
loss would result in a refundable federal tax credit of approximately $1.5 million and an increase in research credit carryforwards
previously utilized. The federal tax credit can be refunded in the future, if we decide to carry back the loss reported on the
filed 2020 tax return instead of electing to carry the loss forward. Due to the recent loss history, continued investments in the
company, and our future projections of income, we will benefit from the current year loss to the extent of the available tax refund
and will maintain a full valuation allowance on all other deferred tax assets, including any increase in research credit carryforward
resulting from a potential carryback.
As of the end of the period,
we have not made a determination on whether to elect to carry forward the 2020 operating loss, however, the federal tax refund
potential on carryback represents a minimum tax benefit we can obtain from the estimated 2020 loss. We can realize a tax benefit
to the extent of the carryback refund potential as it is considered a source of income against which to utilize the 2020 estimated
loss.
The total estimated benefit
of the federal tax refund of $1.5 million is included in our projection of our annual effective rate and results in a year to
date benefit of approximately $1.2 million. We recorded the year to date tax benefit as a long term tax receivable.
ITEM 2:
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
Cautionary Statement for Purposes of the “Safe Harbor”
Provisions of the Private Securities Litigation Reform Act of 1995
Some of the information in this Quarterly
Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,”
“believe,” “estimate,” “continue” and similar words. You should read statements that contain
these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future operating
results or financial condition; or (3) state other “forward-looking” information. However, we may not be able
to predict future events accurately. The risk factors listed in this Quarterly Report on Form 10-Q and our Annual Report on
Form 10-K for the year ended December 31, 2019, as well as any cautionary language in this Quarterly Report on Form 10-Q,
provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations
we describe in our forward-looking statements. You should be aware that the occurrence of any of the events described in these
risk factors and elsewhere in this Quarterly Report on Form 10-Q could materially and adversely affect our business.
Summary of Operations
We are primarily engaged in the development
and sale of biometrics products, solutions and services. Our software products are used in government and commercial systems and
applications and fulfill a broad range of functions critical to secure biometric enrollment, authentication, identification and
transactions. Principal government applications of biometrics systems include border control, visa applicant screening, law enforcement,
national defense, intelligence, secure credentialing, access control, and background checks. Principal commercial applications
include: i) user enrollment and authentication used for login to mobile devices, computers, networks, and software programs; ii)
user authentication for financial transactions and purchases (online and in-person); iii) physical access control to buildings;
and iv) identity proofing of prospective employees and customers. We sell our biometrics software products and services globally
through a multifaceted distribution strategy using systems integrators, OEMs, VARs, partners, and directly to end user customers.
We also derive a portion of our revenue from the sale of imaging software licenses to OEMs and systems integrators that incorporate
our software into medical imaging products and medical systems.
Due to the COVID-19 pandemic we have been
unable to: (i) conduct face-to-face meetings with customers and prospective customers, (ii) present in-person demonstrations
of our software solutions, (iii) attend trade shows and conferences which typically generate future sales opportunities or
(iv) meet with prospective strategic partners. We believe that these effects caused by the COVID-19 pandemic adversely impacted
our revenue in the second and third quarters of 2020 and will likely have an adverse impact on our revenue over the next several
quarters.
Summary of Financial Results
We use revenue and results of operations
to summarize financial results as we believe these measurements are the most meaningful way to understand our operating performance.
Revenue and operating loss for the three
months ended September 30, 2020 were $2.4 million and $2.6 million, respectively. These results compared to revenue of $3.0
million and operating loss of $1.2 million for the three months ended September 30, 2019. Lower revenue in the current three
month period was primarily due to lower license and services revenue associated with delays caused by the COVID-19 pandemic. Higher
operating loss in the current three month period was primarily due to lower revenue and higher operating expenses including previous
investment in sales and engineering resources driving growth in new product areas and expenses related to turnover of administrative
personnel and COVID-19 remote working costs.
Revenue and operating loss for the nine
months ended September 30, 2020 were $7.8 million and $7.7 million, respectively. These results compared to revenue of $9.8
million and operating loss of $2.4 million in the nine months ended September 30, 2019. Lower revenue was primarily due to
lower license and services revenue. Higher operating loss was primarily due to lower revenue and higher operating expenses including
previous investment in sales and engineering resources driving growth in new product areas and expenses related to turnover of
administrative personnel and COVID-19 remote working costs.
These and all other financial results are
discussed in more detail in the results of operations section that follows.
Results of Operations
Software licenses. Software
licenses consist of revenue from the sale of biometrics and imaging software products. Sales of software products depend on our
ability to win proposals to supply software for biometrics systems projects either directly to end user customers or indirectly
through channel partners.
Software license revenue decreased 42%
from $1.1 million in the three months ended September 30, 2019 to $0.7 million in the same three month period in 2020. As
a percentage of total revenue, software license revenue decreased from 38% in the second quarter of 2019 to 28% in the current
year quarter. The $0.4 million decrease in software license revenue was due primarily to a decrease in biometrics software license
sales to $0.4 million in the third quarter of 2020 versus $0.7 million in the same quarter last year. The dollar decrease was primarily
due to delays in new software procurements caused by the COVID-19 pandemic and lower revenue from the software license agreement
we entered into with a systems integrator in the second quarter of 2018 for a large project with follow-on sales in 2019 and 2020.
We recognized $0.1 million of software license revenue from this agreement in the third quarter of 2019.
As described in the strategy section of
our Form 10-K for the year ended December 31, 2019, our market strategy is to continue to focus on our legacy government
biometrics markets and expand into new commercial biometrics markets. We are unable to predict future revenue from commercial markets
as these are emerging markets.
Software license revenue decreased 21%
from $3.9 million in the nine months ended September 30, 2019 to $3.0 million in the same nine month period in 2020. As a
percentage of total revenue, software license revenue decreased from 40% in the first nine months of 2019 to 39% in the current
year nine month period. The $0.8 million decrease in software license revenue was primarily due to a $0.7 million decrease in biometrics
software license sales. The dollar decrease was primarily due to aforementioned delays in new software procurements caused by the
COVID-19 pandemic and lower revenue from the aforementioned software license agreement we entered into with a systems integrator
in 2018. We recognized $0.5 million of software license revenue from this agreement in the nine months ended September 30,
2019.
Software maintenance. Software
maintenance consists of revenue from the sale of software maintenance contracts. Software maintenance contracts entitle customers
to receive software support and software updates, if and when they become available, during the term of the contract.
Software maintenance revenue increased
6% from $1.3 million in the three months ended September 30, 2019 to $1.4 million in the same three month period in 2020.
As a percentage of total revenue, software maintenance revenue increased from 43% in the third quarter of 2019 to 58% in the current
year quarter.
Software maintenance revenue increased
4% from $4.0 million in the nine months ended September 30, 2019 to $4.1 million in the same nine month period in 2020. As
a percentage of total revenue, software maintenance revenue increased from 40% for the first nine months of 2019 to 53% in the
current year nine month period.
For the three and nine month periods ended
September 30, 2020, the slight dollar increase in software maintenance revenue was primarily due to slightly higher retention
of maintenance renewals in those periods.
Services. Services
consist of fees we charge to perform software development, integration, installation, and customization services. Similar to software
license revenue, services revenue depends on our ability to win biometrics systems projects either directly with end user customers
or in conjunction with channel partners. Services revenue will fluctuate when we commence new projects and/or when we complete
projects that were started in previous periods.
Services revenue decreased from $0.6 million
in the three months ended September 30, 2019 to $0.3 million in the same three month period in 2020. As a percentage of total
revenue, services revenue decreased from 19% in the third quarter of 2019 to 14% in the current year quarter.
For the three month period ended September 30,
2020, the dollar decrease in services revenue was primarily due to lower services revenue in the current year quarter related to
the software license agreement we entered into with a systems integrator in the second quarter of 2018 for a large project. This
decrease was partially offset by higher services revenue from other service customers.
Services revenue decreased 68% from $1.9
million in the nine months ended September 30, 2019 to $0.6 million in the same nine month period in 2020. As a percentage
of total revenue, services revenue decreased from 20% in the first nine months of 2019 to 8% in the corresponding period of 2020.
For the nine month period ended September 30,
2020, the dollar decrease in services revenue was primarily due to lower services revenue related to the software license agreement
we entered into with a systems integrator in the second quarter of 2018 for a large project, and lower service revenue from other
direct to government customers.
Cost of services. Cost of
services consists of engineering costs to perform customer services projects. Such costs primarily include: i) engineering salaries,
stock-based compensation, fringe benefits, and facilities; and ii) engineering consultants and contractors.
Cost of services decreased from $0.3 million
in the three months ended September 30, 2019 to $0.1 million in the same three month period in 2020. Cost of services as a
percentage of services decreased from 46% in the second quarter of 2019 to 45% in the current year quarter, which means that gross
margins increased from 54% to 55%. The decrease in cost of services expense was primarily due to lower service revenue in the third
quarter of 2020 resulting from fewer active contracts with services.
Cost of services decreased 56% from $1.1
million in the nine months ended September 30, 2019 to $0.5 million in the same nine month period in 2020. Cost of services
as a percentage of services increased from 57% in the first nine months of 2019 to 78% in the corresponding period of 2020, which
means that gross margins decreased from 43% to 22%. The decrease in cost of services expense was primarily due to lower service
revenue in the nine months ended September 30, 2020 resulting from fewer active contracts with services during this period.
The decrease in the gross margin was primarily due to the aforementioned timing of costs compared to the recognition of revenue
on projects.
Research and development expense.
Research and development expense consists of costs for: i) engineering personnel, including salaries, stock-based compensation,
fringe benefits, and facilities; ii) engineering consultants and contractors, and iii) other engineering expenses such as supplies,
equipment depreciation, dues and memberships and travel. Engineering costs incurred to develop our technology and products are
classified as research and development expense. As described in the cost of services section, engineering costs incurred to provide
engineering services for customer projects are classified as cost of services, and are not included in research and development
expense.
The classification of total engineering
costs to research and development expense and cost of services was (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development expense
|
|
$
|
2,332
|
|
|
$
|
2,071
|
|
|
$
|
7,027
|
|
|
$
|
5,922
|
|
Cost of services
|
|
|
149
|
|
|
|
267
|
|
|
|
483
|
|
|
|
1,106
|
|
Total engineering costs
|
|
$
|
2,481
|
|
|
$
|
2,338
|
|
|
$
|
7,510
|
|
|
$
|
7,028
|
|
Research and development expense increased
13% from $2.1 million in the three months ended September 30, 2019 to $2.3 million in 2020. As a percentage of total revenue,
research and development expense increased from 69% in 2019 to 99% in 2020.
Research and development expense increased
from $5.9 million in the nine months ended September 30, 2019 to $7.0 million in the same nine month period in 2020. As a
percentage of total revenue, research and development expense increased from 61% in the first nine months of 2019 to 90% in the
corresponding period of 2020.
As the table immediately above indicates,
total engineering costs in the third quarter of 2020 increased by $0.1 million compared to the same period last year. Total engineering
costs increased by $0.5 million for the nine months ended September 30, 2020 as compared to the same period last year. For
both the three and nine month periods, the spending increase was primarily due to higher employee costs due to increased headcount.
This increase was partially offset by a decrease in spending on third-party development costs. Lower spending on third-party development
costs was primarily due to a decrease in spending with a third-party software development vendor that has been providing services
since 2016.
We anticipate that we will continue to
focus our future research and development activities on enhancing our existing products and developing new products with our growing
internal resources.
Selling and marketing expense.
Selling and marketing expense primarily consists of costs for: i) sales and marketing personnel, including salaries, sales commissions,
stock-based compensation, fringe benefits, travel, and facilities; and ii) advertising and promotion expenses.
Sales and marketing expense increased 40%
from $0.9 million in the three months ended September 30, 2019 to $1.3 million in the same three month period of 2020. As
a percentage of total revenue, sales and marketing expense increased from 31% in the third quarter of 2019 to 55% in the corresponding
period in 2020. The dollar increase in sales and marketing expense was primarily due to higher employee costs due to increased
headcount and contracted sales agents.
Sales and marketing expense increased 42%
from $2.7 million in the nine months ended September 30, 2019 to $3.8 million in the same nine month period of 2020. As a
percentage of total revenue, sales and marketing expense increased from 27% in the first nine months of 2019 to 49% in the corresponding
period in 2020. The dollar increase in sales and marketing expense was primarily due to higher employee costs due to increased
headcount and contracted sales agents.
General and administrative expense.
General and administrative expense consists primarily of costs for: i) officers, directors and administrative personnel,
including salaries, bonuses, director compensation, stock-based compensation, fringe benefits, and facilities; ii) professional
fees, including legal and audit fees; iii) public company expenses; and iv) other administrative expenses, such as insurance costs
and bad debt provisions.
General and administrative expense increased
32% from $0.9 million in the three months ended September 30, 2019 to $1.2 million in the same three month period in 2020.
As a percentage of total revenue, general and administrative expense increased from 30% in the third quarter of 2019 to 51% in
the corresponding period in 2020. The increase in general and administrative expense was primarily due to costs related to the
COVID-19 pandemic and higher employee related costs of our administrative personnel.
General and administrative expense increased
66% from $2.5 million in the nine months ended September 30, 2019 to $4.2 million in the same nine month period in 2020. As
a percentage of total revenue, general and administrative expense increased from 26% in the first nine months of 2019 to 54% in
the corresponding period in 2020. The increase in general and administrative expense was primarily due to costs related to the
COVID-19 pandemic and turnover of over 50% our administrative personnel. Costs included $0.7 million of severance and transition
expense, $0.2 million of legal fees, $0.1 million of bad debt expense and $0.2 million computer hardware and software related to
remote working.
Patent related income. We
entered into an arrangement with an unaffiliated third party in 2010 under which we assigned certain patents in return for royalties
on proceeds from patent monetization efforts by the third party. The third party has engaged in various patent monetization activities,
including enforcement, litigation and licensing. In the three and nine months ended September 30, 2020, there was no revenue
from this arrangement. For three and nine months ended September 30, 2019, revenue was $0 and $49,000 respectively from this
arrangement. We continue to have a contractual relationship with this third party. However, we are unable to predict how much more
income we might receive from this arrangement, if any, because we do not know whether any patent monetization efforts by the third
party will be successful.
Interest income. Interest
income decreased 97% from $0.3 million in the three months ended September 30, 2019 to $7,000 in the same three month period
in 2020. Interest income decreased 78% from $0.8 million in the nine months ended September 30, 2019 to $0.2 million in the
same nine month period in 2020. For the three and nine month periods, the decrease in interest income was primarily due to lower
interest rates within our money market accounts as a result of the financial markets response to the COVID-19 pandemic. We expect
these lower interest rates to continue for the foreseeable future.
Income taxes. Income tax
benefit was $0.7 million and $1.4 million for the three and nine months ended September 30, 2020, respectively. Income tax
benefit for the three and nine month periods ended September 30, 2020 were based on the U.S. statutory rate of 21%, increased
by state income taxes, and reduced by permanent adjustments and research tax credits.
The Coronavirus Aid, Relief and Economic
Security Act (CARES Act) was signed into law on March 27, 2020. The Act contained specific relief and stimulus measures including
allowing net operating losses originating in 2018 through 2020 to be carried back five years to offset taxable income in the carryback
period.
Separately, the enactment of the Tax Cut
and Jobs Act in 2017 allowed taxpayers to claim a refund for federal tax credits over a period of years. The CARES Act enacted
during the first quarter allows for the entire amount of the credit to be refunded.
We have reviewed the impact of the CARES
Act enactment on the income tax provision and have determined that, as a result of the net operating loss carryback provision,
we can obtain a tax benefit if we were to carry back the forecasted 2020 net operating loss to the five year carryback period.
The carryback of the estimated loss would
result in a refundable federal tax credit of approximately $1.5 million and an increase in research credit carryforwards previously
utilized. The federal tax credit can be refunded in the future, if we decide to carry back the loss reported on the filed 2020
tax return instead of electing to carry the loss forward. Due to the recent loss history and continued uncertainty surrounding
our future projections of income, we will benefit from the current year loss to the extent of the available tax refund and will
maintain a full valuation allowance on all other deferred tax assets, including any increase in research credit carryforward resulting
from a potential carryback.
As of the end of the period, we have not
made a determination on whether to elect to carry forward the 2020 operating loss, however, the federal tax refund potential on
carryback represents a minimum tax benefit we can obtain from the estimated 2020 loss. We can realize a tax benefit to the extent
of the carryback refund potential as it is considered a source of income against which to utilize the 2020 estimated loss.
The total estimated benefit of the federal
tax refund of $1.5 million is included in our projection of our annual effective rate and results in a year to date benefit of
approximately $1.2 million as of September 30, 2020. We recorded the year to date tax benefit as a long term tax receivable.
Liquidity and Capital Resources
At September 30, 2020, we had cash
and cash equivalents of $42.3 million, which represented a decrease of $5.4 million from December 31, 2019. The decrease in
cash and cash equivalents was primarily due to the following factors:
Cash used in operations was $4.2 million
in the first nine months of 2020. Cash used in operations was primarily the result of $6.1 million of net loss that was partially
offset by $0.9 million of changes in assets and liabilities, and the add back of $1.0 million of non-cash items primarily for depreciation,
amortization and stock-based compensation.
Cash used in investing activities was $0.5
million in the first nine months of 2020. This cash usage consisted of purchases of property and equipment primarily for software
development.
Cash used in financing activities was $0.8
million in the first nine months of 2020. Financing activity cash usage was the primarily the result of $0.7 million used to buy
back stock under our stock repurchase program and $0.1 million used to pay income taxes for employees who surrendered shares in
connection with stock grants.
While we cannot assure you that we will
not require additional financing, or that such financing will be available to us, we believe that our cash and cash equivalents
will be sufficient to fund our operations for at least the next twelve months.
Recently Adopted Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Item
1.
ITEM 4:
Controls and Procedures
Under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective.
There were no changes in our internal control
over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.