What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-27 compared with 2021-07-28 · 62 added, 64 removed, 88 unchanged (59% of the section changed)

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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 2020 and the three and six months ended June 30, 2021 and will likely have an adverse impact on our revenue over the next several quarters.

We believe that these effects caused by the COVID-19 pandemic adversely impacted our revenue in 2020 and the three and nine months ended September 30, 2021 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 June 30, 2021 were $4.3 million and $1.5 million, respectively.

These results compared to revenue of $1.9 million and operating loss of $3.7 million for the three months ended June 30, 2020.

The increase in revenue in the current three month period was primarily due to increase in software license revenue.

Revenue and operating loss for the three months ended September 30, 2021 were $4.2 million and $1.6 million, respectively.

These results compared to revenue of $2.5 million and operating loss of $2.5 million for the three months ended September 30, 2020.

The increase in revenue in the current three month period was primarily due to an increase in software license revenue.

Lower operating loss in the current three month period was primarily due to the increase in revenue, which was partially offset by increased operating expenses.

Revenue and operating loss for the six months ended June 30, 2021 were $8.7 million and $3.0 million, respectively.

These results compared to revenue of $5.4 million and operating loss of $5.0 million for the three months ended June 30, 2020.

The increase in revenue in the current six month period was primarily due to an increase in software license revenue.

Lower operating loss in the current six month period was primarily due to the increase in revenue, which was partially offset by an increased operating expenses related to our increased headcount in sales and engineering resources that are driving growth in new product areas.

Revenue and operating loss for the nine months ended September 30, 2021 were $12.9 million and $4.6 million, respectively.

These results compared to revenue of $7.9 million and operating loss of $7.6 million for the nine months ended September 30, 2020.

The increase in revenue in the current nine month period was primarily due to an increase in software license revenue.

Lower operating loss in the current nine month period was primarily due to the increase in revenue, which was partially offset by increased operating expenses related to our increased headcount in sales and engineering resources that are driving growth in new product areas.

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 increased 321 % from $0.4 million in the three months ended June 30, 2020 to $1.7 million in the same three month period in 2021.

As a percentage of total revenue, software license revenue increased from 22% in the second quarter of 2020 to 40% in the second quarter of the current year.

The $1.3 million increase in software license revenue was due primarily to an increase in license sales related to our fixed amount contracts.

Software license revenue increased 72 % from $2.4 million in the six months ended June 30, 2020 to $4.1 million in the same six month period in 2021.

As a percentage of total revenue, software license revenue increased from 44% in the first six months of 2020 to 47% in the first six months of the current year.

The $1.7 million increase in software license revenue was due primarily to an increase in subscription-based contracts of $0.9 million, a $0.5 increase in license sales related to our fixed amount contracts and $0.3 million of revenue related to sales of AFIX products as a result of our acquisition of AFIX products in the fourth quarter of 2020.

Software license revenue increased 176% from $0.8 million in the three months ended September 30, 2020 to $2.2 million in the same three month period in 2021.

As a percentage of total revenue, software license revenue increased from 32% in the third quarter of 2020 to 53% in the third quarter of the current year.

The $1.4 million increase in software license revenue was due primarily to an increase in subscription based contracts of $0.8 million and $0.6 million in license sales related to our license contracts with fixed amounts.

Software license revenue increased 98% from $3.2 million in the nine months ended September 30, 2020 to $6.3 million in the same nine month period in 2021.

As a percentage of total revenue, software license revenue increased from 40% in the first nine months of 2020 to 49% in the first nine months of the current year.

The $3.1 million increase in software license revenue was due primarily to an increase in subscription-based contracts of $1.5 million and $1.6 million increase in license sales related to our license contracts with fixed amounts .

As described in the strategy section of our Form 10-K for the year ended December 31, 2020, our market strategy is to continue to focus on our legacy government biometrics markets and expand into new commercial biometrics markets.

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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 28% from $1.4 million in the three months ended June 30, 2020 to $1.8 million in the same three month period in 2021.

As a percentage of total revenue, software maintenance revenue decreased from 73% in the second quarter of 2020 to 41% in the current year quarter.

Software maintenance revenue increased 21% from $2.7 million in the six months ended June 30, 2020 to $3.3 million in the same six month period in 2021.

As a percentage of total revenue, software maintenance revenue decreased from 51% in the first six months of 2020 to 38% in the first six months of the current year.

For the three and six month periods ended June 30, 2021, the dollar increase in software maintenance revenue was primarily due to software maintenance revenue related to our acquisition of AFIX in the fourth quarter of 2020.

Software maintenance revenue increased 12% from $1.4 million in the three months ended September 30, 2020 to $1.5 million in the same three month period in 2021.

As a percentage of total revenue, software maintenance revenue decreased from 55% in the third quarter of 2020 to 37% in the current year quarter.

Software maintenance revenue increased 18% from $4.1 million in the nine months ended September 30, 2020 to $4.8 million in the same nine month period in 2021.

As a percentage of total revenue, software maintenance revenue decreased from 52% in the first nine months of 2020 to 38% in the first nine months of the current year.

For the three and nine month periods ended September 30, 2021, the dollar increase in software maintenance revenue was primarily due to software maintenance revenue related to our acquisition of AFIX in the fourth quarter of 2020.

Services and other revenue .

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Services and other revenue will fluctuate when we commence new projects and/or when we complete projects that were started in previous periods.

Services and other revenue increased from $0.1 million in the three months ended June 30, 2020 to $0.8 million in the same three month period in 2021.

As a percentage of total revenue, services revenue increased from 5% in the second quarter of 2020 to 18% in the second quarter of the current year.

Services and other revenue increased from $0.3 million in the six months ended June 30, 2020 to $1.3 million in the same six month period in 2021.

As a percentage of total revenue, services revenue increased from 5% in the first six months of 2020 to 15% in the first six months of the current yea.

For the three and six month period ended June 30, 2021, the dollar increase in services and other revenue was primarily due to higher services revenue in the current year period related to higher services revenue from services customers.

Services and other revenue increased from $0.3 million in the three months ended September 30, 2020 to $0.5 million in the same three month period in 2021.

As a percentage of total revenue, services revenue decreased from 14% in the third quarter of 2020 to 11% in the third quarter of the current year.

Services and other revenue increased from $0.6 million in the nine months ended September 30, 2020 to $1.7 million in the same nine month period in 2021.

As a percentage of total revenue, services and other revenue increased from 8% in the first nine months of 2020 to 14% in the first nine months of the current year.

For the three and nine month periods ended September 30, 2021, the dollar increase in services and other revenue was primarily due more services performed by us with system integrators resulting in higher services revenue in the current year period.

Cost of sales .

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

Cost of sales consists of engineering costs to perform customer services projects and other third - party costs that are include d with some of our software licenses.

Such costs primarily include:

i) engineering

salaries, stock-based compensation, fringe benefits, and facilities;

i ) engineering salaries, stock-based compensation, fringe benefits, and facilities;

ii) engineering consultants and contractors ;

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and iv) hardware costs .

Cost of sales increased from $0.2 million in the three months ended June 30, 2020 to $0.3 million in the same three month period in 2021.

Cost of sales as a percentage of services revenue decreased from 165% in the second quarter of 2020 to 40% in the second quarter of the current year.

Cost of sales increased from $0.3 million in the six months ended June 30, 2020 to $0.7 million in the same six month period in 2021.

Cost of sales as a percentage of services revenue decreased from 116% in the first six month s of 2020 to 54% in the first six months of the current year.

Cost of sales increased from $0.1 million in the three months ended September 30, 2020 to $0.2 million in the same three month period in 2021.

Cost of sales as a percentage of services revenue increased from 48% in the third quarter of 2020 to 50% in the third quarter of the current year.

Cost of sales increased from $0.5 million in the nine months ended September 30, 2020 to $0.9 million in the same nine month period in 2021.

Cost of sales as a percentage of services revenue decreased from 81% in the first nine month’s of 2020 to 53% in the first nine months of the current year.

The increase in cost of services expense was primarily due to third-party software and hardware costs related to a project from our AFIX product line as well as higher service and other revenue resulting from higher active contracts with services during the period.

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Research and development expense

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Total engineering costs

Total engineering costs were $2.6 million in the three months ended June 30, 2020 and $2.7 million for the same period in 2021.

Total engineering costs were $2.5 million in the three months ended September 30, 2020 and $2.6 million for the same period in 2021.

As a percentage of total revenue, total engineering costs decreased from 100% in 2020 to 61% in 2021.

Total engineering costs were $5.0 million in the six months ended June 30, 2020 and $5.5 million for the same period in 2021.

As a percentage of total revenue, research and total engineering costs decreased from 93% in 2020 to 63% in 2021.

As the table immediately above indicates, total engineering costs in the three months ended June 30, 2021 increased by $0.1 million compared to the same period last year and by $0.4 million in six months ended June 30, 2021 compared to the same period in 2020.

The spending increase for the three and six months ended June 30, 2021 compared to the same prior year periods was primarily due to higher employee costs due to increased headcount.

Total engineering costs were $7.5 million in the nine months ended September 30, 2020 and $8.0 million for the same period in 2021.

As a percentage of total revenue, total engineering costs decreased from 95% in 2020 to 62% in 2021.

As the table immediately above indicates, total engineering costs in the three months ended September 30, 2021 increased by $0.1 million compared to the same period last year and by $0.5 million in nine months ended September 30, 2021 compared to the same period in 2020.

The spending increase for the three and nine months ended September 30, 2021 compared to the same prior year periods was primarily due to higher employee costs due to increased headcount.

These increases were partially offset by a decrease in spending on third-party development costs.

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and ii) advertising and promotion expenses.

Selling and marketing expense increased 27% from $1.2 million in the three months ended June 30, 2020 to $1.5 million in the same three month period of 2021.

As a percentage of total revenue, selling and marketing expense decreased from 62% in the second quarter of 2020 to 35% in the corresponding period in 2021.

Selling and marketing expense increased 2 8 % from $ 2.5 million in the six months ended June 30, 2020 to $ 3.2 million in the same six month period of 2021.

As a percentage of total revenue, selling and marketing expense de creased from 46 % in the first six months of 2020 to 36 % in the corresponding period in 2021.

The dollar increase in selling and marketing expense in the three and six months ended June 30, 2021 was primarily due to higher employee costs due to increased headcount and contracted sales agents.

Selling and marketing expense in creased 2 5 % from $ 1.

3 million in the three months ended September 30, 20 20 to $ 1.

6 million in the same three m onth period of 202 1 .

As a percentage of total revenue, s elling and marketing expense de creased from 53 % in the third quarter of 20 20 to 39 % in the corresponding period in 202 1 .

Selling and marketing expense increased 27% from $3.8 million in the nine months ended September 30, 2020 to $4.8 million in the same nine month period of 2021.

As a percentage of total revenue, selling and marketing expense decreased from 48% in the first nine months of 2020 to 37% in the corresponding period in 2021.

The dollar increase in selling and marketing expense in the three and nine months ended September 30, 2021 was primarily due to higher employee costs due to increased headcount and contracted sales agents.

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 10% from $1.8 million in the three months ended June 30, 2020 to $1.6 million in the same three month period in 2021.

As a percentage of total revenue, general and administrative expense decreased from 97% in the second quarter of 2020 to 38% in the corresponding period in 2021.

The decrease in general and administrative expense was primarily due costs incurred in the second quarter of 2020 related to the COVID-19 pandemic, including turnover of over 50% of our administrative personnel, which did not recur in the corresponding period of 2021, which was partially offset by higher employee related costs of our administrative personnel and professional services in 2021.

General and administrative expense increased 4% from $3.0 million in the six months ended June 30, 2020 to $3.1 million in the same six month period in 2021.

As a percentage of total revenue, general and administrative expense decreased from 55% in the first six months of 2020 to 35% in the corresponding period in 2021.

The decrease in general and administrative expense was primarily due to costs incurred in the second quarter of 2020 related to the COVID-19 pandemic, including turnover of over 50% of our administrative personnel, which did not recur in the corresponding period of 2021, which was partially offset by higher employee related costs of our administrative personnel and professional services in 2021.

Interest income.

Interest income decreased 95% from $19 thousand in the three months ended June 30, 2020 to $1 thousand in the same three month period in 2021.

Interest income decreased 99% from $0.2 million in the six months ended June 30, 2020 to $2 thousand in the same six month period in 2021.

For the three and six month period, 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.

General and administrative expense increased 30% from $1.2 million in the three months ended September 30, 2020 to $1.6 million in the same three month period in 2021.

As a percentage of total revenue, general and administrative expense decreased from 49% in the third quarter of 2020 to 38% in the corresponding period in 2021.

The increase in general and administrative expense was primarily due costs higher employee related costs of our administrative personnel and professional services in 2021.

General and administrative expense increased 11% from $4.2 million in the nine months ended September 30, 2020 to $4.6 million in the same nine month period in 2021.

As a percentage of total revenue, general and administrative expense decreased from 53% in the first nine months of 2020 to 36% in the corresponding period in 2021.

The decrease in general and administrative expense was primarily due to costs incurred in the second quarter of 2020 related to the COVID-19 pandemic, including turnover of over 50% of our administrative personnel, which did not recur in the corresponding period of 2021, which was partially offset due to higher employee-related costs of our administrative personnel and professional services in 2021.

Income taxes .

We had no income tax benefit for the three and six months ended June 30, 2021 and $0.5 million and $0.7 million of income tax benefit, respectively, for the three and six months ended June 30, 2020.

We had no income tax benefit for the three and nine months ended September 30, 2021 and $0.7 million and $1.4 million of income tax benefit, respectively, for the three and nine months ended September 30, 2020.

Income tax benefit was based on the U.S.

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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 2020 net operating loss to the five year carryback period.

The carryback of the 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 June 30, 2021, 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 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 loss.

We recorded a full valuation allowance against our net deferred tax assets as of June30, 2021.

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, as we decided to carry back the loss reported on the filed 2020 tax return.

Upon filing our the 2020, we have reclassified the federal tax credit as a current receivable.

Due to the recent loss history, continued investments in the Company, and our future projections of income, we will benefit from the 2020 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.

We recorded a full valuation allowance against our net deferred tax assets as of September 30, 2021.

Liquidity and Capital Resources

At June 30, 2021, we had cash and cash equivalents of $35.2 million, which represented a decrease of $3.4 million from December 31, 2020.

At September 30, 2021, we had cash and cash equivalents of $33.3 million, which represented a decrease of $5.3 million from December 31, 2020.

The decrease in cash and cash equivalents was primarily due to the following factors:

Cash used in operations was $3.3 million in the first six months of 2021.

Cash used in operations was $5.2 million in the first nine months of 2021.

Cash used in operations was primarily the result of $4.6 million of net loss and $2.2 million of changes in assets and liabilities, which were partially offset by $1.6 million of non-cash items primarily for depreciation, amortization and stock-based compensation.

Cash used in investing activities was $21 thousand in the first six months of 2021, which consisted of purchases of property and equipment.

Cash used in financing activities was $30 thousand in the first six months of 2021.

Cash used in investing activities was $21 thousand in the first nine months of 2021, which consisted of purchases of property and equipment.

Cash used in financing activities was $29 thousand in the first nine months of 2021.

Financing activity cash usage was primarily the result of paying income taxes for employees who surrendered shares in connection with stock grants which was partially offset by proceeds received in connection with the exercise of stock awards.

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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