What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-02 compared with 2024-11-01 · 49 added, 80 removed, 83 unchanged (61% of the section changed)

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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.

On October 30, 2024 we announced, Robert Eckel, our Chief Executive Officer and a member of our Board of Directors, will resign from this positions effective as of December 31, 2024.

In anticipation of that transition we have engaged an executive strategic advisor to work with the Board and our management to evaluate our market position and sales strategy and provide strategic recommendations.

In addition, we have engaged an executive search firm to assist in the identification of Mr.

Eckel’s successor.

We anticipate that we will recognize approximately $0.9 million of general and administrative expenses during the fourth quarter of 2024 related to this transition.

On October 30, 2024, we announced that Robert Eckel, our Chief Executive Officer and a member of our Board of Directors, would resign from these positions effective December 31, 2024.

Following this announcement, we retained an executive search firm and conducted an extensive search for his successor.

As a result of that process, on February 3, 2025, Ajay Amlani was appointed Chief Executive Officer and a member of our Board of Directors.

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 2024 were $3.8 million and $1.5 million, respectively.

These results compared to revenue of $6.4 million and operating income of $0.7 million for the three months ended September 30, 2023.

The shift from operating income to an operating loss in the current three month period was primarily due to a $2.6 million decrease in revenue along with the impact of a gain of $0.8 million we recorded related to an adjustment in the fair value of contingent acquisition payment related to our Fortr3ssID acquisition in December 2021 in the three months ended September 30, 2023.

These were partially offset by $0.3 million decrease in operating expenses resulting cost-control measures we implemented in the second half of 2023 and the first quarter of 2024, including a reduction of approximately ten percent of our headcount across all departments.

Revenue and operating loss for the nine months ended September 30 2024 were $12.6 million and $4.1 million, respectively.

These results compared to revenue of $13.9 million and operating loss of $4.1 million for the nine months ended September 30, 2023.

Operating loss in the current nine month was impacted primarily by a $1.3 million decrease in revenue, which was partially offset by a $1.2 million decrease in operating expenses resulting from cost-control measures we implemented in the second half of 2023 and the first quarter of 2024,

including a reduction of approximately ten percent of our headcount across all departments.

During the three months ended September 30, 2023, we recorded a gain of $0.8 related to an adjustment in the fair value of contingent acquisition payment related to our Fortr3ssID acquisition in December 2021.

Revenue and operating loss for the three months ended March 31, 2025 were $3.6 million and $1.9 million, respectively.

These results compared to revenue of $4.4 million and operating loss of $1.3 million for the three months ended March 31, 2024.

The decrease in revenue and operating loss in the current three month period was primarily due to a $0.8 million decrease in software license revenue.

The impact of the decrease in revenue on our operating loss was partially offset by $0.2 million decrease in operating expenses resulting from temporary cost reductions related to reduced headcount in the first quarter of 2025.

These and all other financial results are discussed in more detail in the results of operations section that follows.

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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 73% from $4.4 million in the three months ended September 30, 2023 to $1.2 million for the three months ended September 30, 2024.

As a percentage of total revenue, software license revenue decreased from 69% in the third quarter of 2023 to 31% in the current year quarter.

The $3.2 million decrease in software license revenue was due primarily to a decrease in perpetual licenses sales including the impact of $2.9 million of license revenue related to a government contract recognized in the three months ended September 30, 2023.

Software license revenue decreased 32% from $7.5 million in the nine months ended September 30, 2023 to $5.1 million for the nine months ended September 30, 2024.

As a percentage of total revenue, software license revenue decreased from 54% in the nine months ended September 30, 2023 to 41% in the current year period.

The $2.4 million decrease in software license revenue was due primarily to a decrease in perpetual licenses sales including the impact of $2.9 million of license revenue related to a government contract recognized in the three months ended September 30, 2023 and partially offset by $0.3 million increase in license revenue related to subscription contracts.

Software license revenue decreased 39% from $2.1 million in the three months ended March 31, 2024 to $1.3 million for the three months ended March 31, 2025.

As a percentage of total revenue, software license revenue decreased from 49% in the first quarter of 2024 to 36% in the current year quarter.

The $0.8 million decrease in software license revenue was due primarily to a decrease in perpetual licenses sales of $0.3 million due to fewer one-time license deals in the current quarter and a $0.4 million decrease in license revenue related to subscription contracts as a result of timing of renewal of licenses.

Software license sales have historically fluctuated, and we expect software license revenue to continue to fluctuate since these sales are based on the timing of projects with our customers and partners.

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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 19% from $1.9 million in the three months ended September 30, 2023 to $2.3 million in the three months ended September 30, 2024.

As a percentage of total revenue, software maintenance revenue increased from 30% in the third quarter of 2023 to 59% in the current year third quarter.

For the three month period ended September 30, 2024, the increase in software maintenance revenue was primarily due to expansion of our customer base that has purchased and is actively using our perpetual software licenses.

Software maintenance revenue increased 20% from $5.5 million in the nine months ended September 30, 2023 to $6.6 million in the in the nine month period ended September 30, 2024.

As a percentage of total revenue, software maintenance revenue increased from 40% in the first nine months of 2023 to 52% in the current year period.

For the nine month period ended September 30, 2024, the increase in software maintenance revenue was primarily due to software maintenance related to our sales of perpetual software licenses.

Software maintenance revenue was $2.2 million in the three months ended March 31, 2025 and 2024.

As a percentage of total revenue, software maintenance revenue increased from 49% in the first quarter of 2024 to 60% in the current year first quarter.

Services and other revenue .

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Other revenue consists of hardware fees that are included with some of our software licenses.

Services and other revenue increased from $0.1 million in the three months ended September 30, 2024 to $0.4 million in the three months ended September 30, 2024.

As a percentage of total revenue, services and other revenue increased from 2% in the third quarter of 2023 to 11% in the current year quarter.

Services and other revenue increased 5% from $0.8 million in the nine months ended September 30, 2023 to $0.9 million in the nine months ended September 30, 2024.

As a percentage of total revenue, services and other revenue increased from 6% in the nine months ended September 30, 2023 to 7% in the current year period.

Services and other revenue was $0.1 million in the three months ended March 31, 2025 and 2024.

As a percentage of total revenue, services and other revenue increased from 3% in the first quarter of 2024 to 4% in the current year quarter.

Services and other revenue fluctuate dependent on when we commence new projects and when we complete projects that were started in previous periods.

Cost of services and other revenue.

Cost of services and other revenue consists primarily of engineering costs to perform customer services projects and other third-party costs that are included with some of our software licenses.

Cost of revenue.

Cost of revenue consists primarily of engineering costs to perform customer services projects, amortization of intangible assets related to acquisitions, and other third-party costs that are included with some of our software licenses.

Such costs primarily include:

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and iv) hardware costs.

Cost of services and other revenue decreased 34% from $0.4 million in the three months ended September 30, 2023 to $0.3 million the three months ended September 30, 2024.

Cost of services and other revenue as a percentage of total revenue increased from 2% in the third quarter of 2023 to 11% in the current year third quarter.

Cost of services and other revenue decreased 21% from $1.0 million in the nine months ended September 30, 2023 to $0.8 million in the current year period.

Cost of services and other revenue as a percentage of total revenue decreased from 7% in the nine months ended September 30, 2023 to 6% in the current year period.

Gross margins on services and other revenue are a function of:

Cost of revenue decreased 11% from $0.3 million in the three months ended March 31, 2024 to $0.2 million the three months ended March 31, 2025.

Cost revenue as a percentage of total revenue increased from 6% in the first quarter of 2024 to 7% in the current year first quarter.

For first quarter of 2025, cost of revenue of $0.2 million was composed of $0.1 million of engineering costs to perform customer services, $0.1 million of amortization of intangible assets, and $50 thousand for software license and hardware costs.

For first quarter of 2024, cost of revenue of $0.3 million was composed of $0.1 million of engineering costs to perform customer services, $0.1 million of amortization of intangible assets, and $67 thousand for software license and hardware costs.

Gross margins on revenue are a function of:

i) the nature of the projects;

ii) the level of engineering difficulty and labor hours required to complete project tasks;

and iii) how much we were able to charge.

We expect that gross margins on services and other revenue will continue to fluctuate in future periods based on the nature, complexity, and pricing of future projects.

iii) how much we were able to charge;

and iv) product mix.

We expect that gross margins on services and other revenue will continue to fluctuate in future periods based on the nature, complexity, and pricing of future projects and product mix.

Research and development expense.

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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.

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 other revenue, and are not included in research and development expense.

The classification of total engineering costs to research and development expense and cost of services and other revenue was (in thousands):

The classification of total engineering costs to research and development expense and engineering costs to perform customer services included in cost of revenue was (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Research and development expense

Cost of services and other revenue

Engineering costs allocated to cost of revenue

Total engineering costs

Total engineering costs decreased 20% from $2.7 million in the three months ended September 30, 2023 to $2.1 million in the three months ended September 30, 2024.

As a percentage of total revenue, total engineering costs increased from 42% in the three months ended September 30, 2023 to 56% in the same current year quarter.

Total engineering costs decreased 15% from $7.9 million in the nine months ended September 30, 2023 to $6.7 million in the nine months ended September 30, 2024.

As a percentage of total revenue, total engineering costs decreased from 57% in the nine months ended September 30, 2023 to 54% in the same current year period.

The spending decreases for the three and nine months ended September 30, 2024 compared to the same prior year periods were primarily due to decreased headcount.

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.

Total engineering costs decreased 12% from $2.3 million in the three months ended March 31, 2024 to $2.0 million in the three months ended March 31, 2025.

As a percentage of total revenue, total engineering costs increased from 52% in the three months ended March 31, 2024 to 56% in the same current year quarter.

The spending decreases for the three months ended March 31, 2025 compared to the same prior year period was primarily due to decreased headcount.

While costs declined in the first quarter, we anticipate engineering expenses may increase during the remainder of 2025 as we ramp up investment to support strategic product development initiatives.

Selling and marketing expense.

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and ii) advertising and promotion expenses.

Selling and marketing expense decreased 15% from $2.2 million in the three months ended September 30, 2023 to $1.9 million in the same three month period of 2024.

As a percentage of total revenue, selling and marketing expense increased from 34% in the third quarter of 2023 to 48% in the corresponding period in 2024.

Selling and marketing expense decreased 5% from $6.1 million in the nine months ended September 30, 2023 to $5.8 million in the same nine month period of 2024.

As a percentage of total revenue, selling and marketing expense increased from 44% in the nine months ended September 30, 2023 to 46% in the corresponding period in 2024.

The spending decreases for the three and nine months ended September 30, 2024, compared to the same prior year periods were primarily due to one time savings related to the reversal of accrued bonus expense as a result of the departure of our chief revenue officer in September 2024.

We may expand our sales force and marketing efforts to address additional opportunities.

Selling and marketing expense decreased 12% from $1.9 million in the three months ended March 31, 2024 to $1.7 million in the same three month period of 2025.

As a percentage of total revenue, selling and marketing expense increased from 43% in the first quarter of 2024 to 46% in the corresponding period in 2025.

The spending decreases for the three months ended March 31, 2025, compared to the same prior year periods was primarily due to the departure of our chief revenue officer in 2024 who was not replaced until March 2025 and the departure of our chief product officer in 2024.

We expect selling and marketing expense to increase in future periods as we continue to invest in revenue-generating activities.

This includes plans to backfill the chief product officer position and make additional hires across our sales organization to support pipeline growth and capitalize on market opportunities.

General and administrative expense.

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and iv) other administrative expenses, such as insurance costs and bad debt provisions.

General and administrative expense decreased 18% from $2.2 million for the three months ended September 30, 2023 to $1.9 million for the three months ended September 30, 2024.

As a percentage of total revenue, general and administrative was 25% in the third quarter of 2023 and 34% in the corresponding period of 2024.

General and administrative expense decreased 13% from $4.7 million for the nine months ended September 30, 2023 to $4.1 million for the nine months ended September 30, 2024.

As a percentage of total revenue, general and administrative was 34% in the nine months ended September 30, 2024 and 32% in the corresponding period of 2024.

The expense decreases for the three and nine months ended September 30, 2024 compared to the same prior year periods were primarily due to the impact of lower headcount.

General and administrative expense increased 22% from $1.3 million for the three months ended March 31, 2024 to $1.6 million for the three months ended March 31, 2025.

As a percentage of total revenue, general and administrative expense was 30% in the first quarter of 2024 and 45% in the corresponding period of 2025.

The expense increase for the three months ended March 31, 2025 compared to the same prior year period was primarily due to the impact of a $0.1 million signing bonus paid to Mr.

Amlani in connection with his appointment as our chief executive officer and a $0.2 million increase in professional services related to strategic advisor hired as part of our chief executive officer transition.

Fluctuations of general and administrative expenses are expected depending on specific activities in a period.

Fair value adjustment to contingent acquisition payment.

In December 2021, we acquired 100% of the outstanding shares and acquired all of the assets and liabilities of Fortr3ssID for a purchase price of $3.4 million, which consisted of $2.5 million of cash consideration and contingent acquisition payments which were fair valued at $0.9 million at the acquisition date.

The maximum contingent acquisition payments at the time of the acquisition was $4.0 million and required cash payments of up to $2.0 million for set revenue targets in 2022 and another $2.0 million for set revenue targets in 2023.

No revenue targets were achieved in 2022.

The maximum contingent acquisition payment as of September 30, 2023 was $2.0 million.

We determined that as of September 30, 2023 there was a remote probability of reaching the revenue targets in 2023 and that the fair value of the contingent acquisition payment was $0 at September 30, 2023.

As a result, we recorded a $0.8 million gain in the quarter ended September 30, 2023.

We expect that general and administrative costs will decrease for the next few quarters now that we have completed our CEO transition.

Interest Income.

Interest income decreased from $0.4 million in the three months ended September 30, 2023 to $0.3 million in three months ended September 30, 2024.

Interest income decreased from $1.0 million in the nine months ended September 30, 2023 to $0.9 million in nine months ended September 30, 2024.

The dollar decrease in interest income was primarily due to interest income related to an IRS carryback claim that was recognized in the three and nine months ended September 30, 2023.

Interest income was $0.3 million in the three months ended March 31, 2025 and 2024.

We expect interest income to decrease slightly over the remainder of 2025 due to a lower projected average cash balance.

Income taxes .

Total income tax expense was $15 thousand and $0 for the three months ended September 30, 2024 and 2023, respectively and $54 thousand and $0 for the nine months ended September 30, 2024 and 2023,

respectively.

Total income tax expense was $7 thousand and $0 for the three months ended March 31, 2025 and 2024, respectively.

The income tax expense relates to limitations on the usage of net operating loss carryforwards generated in years beginning after December 31, 2017.

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We considered the history of cumulative net losses, estimated future taxable income and prudent and feasible tax planning strategies and we have concluded that it is more likely than not that we will not realize the benefits of our deferred tax assets.

As a result, as of September 30, 2024 and December 31, 2023, we recorded a full valuation allowance against our net deferred tax assets.

As a result, as of March 31, 2025 and December 31, 2024, we recorded a full valuation allowance against our net deferred tax assets.

Liquidity and Capital Resources

At September 30, 2024, we had cash, cash equivalents and marketable securities of $27.4 million, which represented a decrease of $3.5 million from December 31, 2023.

At March 31, 2025, we had cash, cash equivalents and marketable securities of $24.8 million, which represented a decrease of $3.0 million from December 31, 2024.

The decrease in cash, cash equivalents and marketable securities was primarily due to the impact of $2.9 million of cash used in operating activities.

Cash used in operations was $3.8 million in the first nine months of 2024.

Cash used in operations was primarily the result of $3.2 million of net loss and $1.8 million of changes in assets and liabilities, which were partially offset by $1.2 million of non-cash items primarily for depreciation, amortization and stock-based compensation.

Cash provided by investing activities was $5.0 million in the first nine months of 2021, which primarily consisted of net sales of marketable securities.

Cash provided by financing activities was $26 thousand in the first nine months of 2021, which consisted of proceeds from issuance of our common stock and partially offset by the paying income taxes for employees who surrendered shares in connection with stock grants.

Cash used in investing activities was $1.5 million in the first three months of 2025, which primarily consisted of $1.5 million of net sales of marketable securities and $45,000 thousand of purchase of fixed assets.

Cash used by financing activities was $53 thousand in the first three months of 2025, which consisted of cash used to repurchase shares of our common stock.

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 from the date of this filing and to meet our known long-term cash requirements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis