What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-29 compared with 2022-04-27 · 53 added, 39 removed, 98 unchanged (48% of the section changed)

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Additionally, the purchase consideration includes a contingent consideration arrangement wherein the seller is entitled to cash payments of up to $4.0M based on revenue targets in 2022 and 2023.

The fair value of the contingent consideration was determined to be $0.9M at December 31, 2021 and March 31, 2022 and is included in the purchase price consideration.

The fair value of the contingent consideration was determined to be $0.9M at December 31, 2021 and June 30, 2022 and is included in the purchase price consideration.

The acquisition of FortressID, expands the Company’s offerings around identity proofing, enhancing its onboarding, verification and authentication offerings to directly address financial compliance requirements and enable organizations to mitigate risk and curtail increasing fraud.

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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 March 31, 2022 were $4.7 million and $1.3 million, respectively.

These results compared to revenue of $4.2 million and operating loss of $1.6 million for the three months ended March 31, 2021.

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 three months ended June 30, 2022 were $4.2 million and $1.4 million, respectively.

These results compared to revenue of $4.3 million and operating loss of $1.5 million for the three months ended June 30, 2021.

The slight decrease in revenue in the current three month period was primarily due to a decrease in services and other revenue.

Lower operating loss in the current three month period was due to slightly lower operating expenses, which was partially offset by a decrease in services and other revenue.

Revenue and operating loss for the six months ended June 30, 2022, were $8.9 million and $2.6 million, respectively.

These results compared to revenue of $8.7 million and operating loss of $3.0 million for the six months ended June 30, 2021.

The slight increase in revenue in the current six month period was primarily due to increases in software license revenue and software maintenance revenue, which were partially offset by lower services and other revenue.

Lower operating loss in the current six month period was primarily due to the slight increase in revenue.

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 in creased 1 1 % from $ 2.4 million in the three months ended March 31, 202 1 to $ 2.

6 million in the same three m onth period in 20 2 2 .

As a percentage of total revenue, software license revenue in creased from 54 % in the first quarter of 20 2 1 to 56 % in the first quarter of the current year .

The $ 0.2 million in crease in software license revenue was due primarily to a n in crease in subscription - based contracts of $0.

5 million , which was partially offset by a $0.

3 million decrease in license sales related to our license contracts with fixed amount s .

Software license revenue increased 17% from $1.7 million in the three months ended June 30, 2021 to $2.0 million in the same three month period in 2022.

As a percentage of total revenue, software license revenue increased from 40% in the second quarter of 2021 to 48% in the current year quarter.

The $0.3 million increase in software license revenue was due primarily to an increase in license sales related to our license contracts with fixed amounts.

Software license revenue increased 14% from $4.1 million in the six months ended June 30, 2021 to $4.6 million in the same six month period in 2022.

As a percentage of total revenue, software license revenue increased from 47% in the first six months of 2021 to 52% in the first six months of the current year.

The $0.5 million increase in software license revenue was due primarily to an increase in subscription-based contracts.

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 8% from $1.5 million in the three months ended March 31, 2021 to $1.7 million in the same three month period in 2022.

As a percentage of total revenue, software maintenance revenue was 35% in both the first quarter of 2021 and 2022.

For the three month period ended March 31, 2022, the increase in software maintenance revenue was primarily due to software maintenance renewals rate related to license contracts with fixed amounts.

Software maintenance revenue increased 3% and was $1.8 million in the three months ended June 30, 2021 and 2022.

As a percentage of total revenue, software maintenance revenue increased from 41% in the current quarter of 2021 to 43% in the current year quarter.

Software maintenance revenue increased 5% from $3.3 million in the six months ended June 30, 2021 to $3.5 million in the same six month period in 2022.

As a percentage of total revenue, software maintenance revenue increased from 38% in the first six months of 2021 to 39% in the first six months of the current year.

For the three and six month period ended June 30, 2022, the increase in software maintenance revenue was primarily due to software maintenance renewals related to license contracts with fixed amounts.

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 decreased from $0.5 million in the three months ended March 31, 2021 to $0.4 million in the same three month period in 2022.

As a percentage of total revenue, services and other revenue decreased from 12% in the first quarter of 2021 to 9% in the first quarter of the current year.

For the three month period ended March 31, 2022, the decrease in services and other revenue was primarily due to less services performed by us with system integrators resulting in lower services revenue in the current year period.

Services and other revenue decreased from $0.8 million in the three months ended June30, 2021 to $0.4 million in the same three month period in 2022.

As a percentage of total revenue, services and other revenue decreased from 18% in the second quarter of 2021 to 9% in the current year second quarter.

Services and other revenue decreased from $1.3 million in the six months ended June 30, 2021 to $0.8 million in the same six month period in 2022.

As a percentage of total revenue, services revenue decreased from 15% in the first six months of 2021 to 9% in the first six months of the current year.

For the three and six month periods ended June 30, 2022, the decrease in services and other revenue was primarily due to less services performed by us with system integrators resulting in lower services revenue in the current year period.

Cost of services and other revenue.

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and iv) hardware costs.

Cost of services and other revenue decreased from $0.4 million in the three months ended March 31, 2021 to $0.3 million in the same three month period in 2022.

Cost of services and other revenue as a percentage of services and other revenue increased from 74% in the first quarter of 2021 to 78% in the first quarter of the current year.

The decrease in cost of services and other revenue was primarily due to lower service and other revenue resulting from less active contracts with services during the period.

Cost of services and other revenue was $0 .

3 million in the three months ended June 30, 2021 and 2022 .

Cost of services and other revenue as a percentage of services and other revenue in creased from 40 % in the current quarter of 202 1 to 81 % in the current year quarter .

Cost of services and other revenue decreased $0.1 million from $0.7 million in the six months ended June 30, 2021 to $0.6 million in the six months ended June 30, 2022.

Cost of sales as a percentage of services and other revenue increased from 54% in the first six months of 2021 to 79% in the first six months of the current year.

The increase in cost of services and other revenue as a percentage of services and other revenue was primarily due to lower service and other revenue resulting from less active contracts with services during the period.

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

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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 sales , a nd are not included in 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 sales, and are not included in research and development expense.

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

Three Months Ended

Six Months Ended

Research and development expense

Cost of services

Cost of sales

Total engineering costs

Total engineering costs were $2.8 million in the three months ended March 31, 2021 and $2.7 million for the same period in 2022.

Total engineering costs were $2.7 million in the three months ended June 30, 2021 and $2.6 million for the same period in 2022.

As a percentage of total revenue, total engineering costs decreased from 63% in 2021 to 60% in 2022.

As the table immediately above indicates, total engineering costs in the three months ended March 31, 2022 decreased by $0.1 million compared to the same period last year.

The spending decrease for the three months ended March 31, 2022 compared to the same prior year period was primarily due to lower employee costs due to decreased headcount.

A decrease in spending on third-party development costs also contributed to the decrease in total engineering costs.

Total engineering costs were $5.5 million in the six months ended June 30, 2021 and $5.4 million for the same period in 2022.

As a percentage of total revenue, research and total engineering costs decreased from 63% in 2021 to 59% in 2022.

As the table immediately above indicates, total engineering costs in the three and six months ended June 30, 2022, decreased slightly by $0.1 million compared to the corresponding periods last year.

The spending decrease for the three and six months ended June 30, 2022, compared to the same prior year periods was primarily due to lower employee costs 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.

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and ii) advertising and promotion expenses.

Selling and marketing expense increased 8% from $1.7 million in the three months ended March 31, 2021 to $1.8 million in the same three month period of 2022.

As a percentage of total revenue, selling and marketing expense increased from 37% in the first quarter of 2021 to 38% in the corresponding period in 2022.

The dollar increase in selling and marketing expense in the three months ended March 31, 2022 was primarily due to higher employee costs due to increased headcount and contracted sales agents.

Selling and marketing expense decreased slightly 6% from $1.5 million in the three months ended June 30, 2021 to $1.4 million in the same three month period of 2022.

As a percentage of total revenue, selling and marketing expense decreased from 35% in the second quarter of 2021 to 33% in the corresponding period in 2022.

Selling and marketing expense was $ 3.2 million in the six months ended June 30, 202 1 and 2022.

As a percentage of total revenue, selling and marketing expense was 3 6% in the first six months of 202 1 and 2022 .

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

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

General and administrative expense increased 2% from $1.4 million in the three months ended March 31, 2021 to $1.5 million in the same three month period in 2022.

As a percentage of total revenue, general and administrative expense decreased from 33% in the first quarter of 2021 to 31% in the corresponding period in 2022.

The increase in general and administrative expense was primarily due costs higher employee related costs of our administrative personnel and professional services in 2022.

General and administrative expense were relatively consistent at $1.6 million in the three months ended June 30, 2021 and 2022.

As a percentage of total revenue, general and administrative was 38% in the second quarter of 2021 and 2022.

General and administrative expense were relatively consistent at $3.1 million in the six months ended June 30, 2021 and 2022.

As a percentage of total revenue, general and administrative was 35% in the six months ended 2021 and 2022.

We expect general and administrative expense to increase in absolute dollars, but to decrease as a percentage of net revenues and to fluctuate depending on specific activities in a period.

Income taxes .

We had no income tax benefit for the three months ended March 31, 2022 and 2021.

We had no income tax benefit for the three and six months ended June 30, 2022 and 2021.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020.

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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 maintained a full valuation allowance against our net deferred tax assets as of March 31, 2022 and December 31, 2021.

We maintained a full valuation allowance against our net deferred tax assets as of June 30, 2022 and December 31, 2021.

Liquidity and Capital Resources

At March 31, 2022, we had cash and cash equivalents of $25.1 million, which represented a decrease of $4.9 million from December 31, 2021.

At June 30, 2022, we had cash and cash equivalents of $25.0 million, which represented a decrease of $5.0 million from December 31, 2021.

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

Cash used in operations was $2.4 million in the first three months of 2022.

Cash used in operations was $2.6 million in the first six months of 2022.

Cash used in operations was primarily the result of $2.6 million of net loss and $1.2 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 used in investing activities was $2.5 million in the first three months of 2022, which consisted of our investment in Note Receivable.

Cash used in financing activities was $0 in the first three months of 2022.

Cash used in investing activities was $2.5 million in the first six months of 2022, which primarily consisted of our investment in Note Receivable.

Cash provided by in financing activities was $0.1 million in the first six months of 2022, which primarily consisted of proceeds from issuance of common stock as part of our employee stock purchase plan.

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