Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (All dollar amounts are rounded to thousands, except per share data)
Overview
We are a prominent technology company engaged in developing, integrating and marketing identity verification solutions to address challenges that include commercial retail and banking fraud prevention. Our products include solutions for preventing identity fraud across any industry delivered via smartphone, tablet, POS integration or other electronic devices.
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Critical Accounting Policies and the Use of Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, allowance for credit losses, revenue recognition (including breakage revenue), and the fair value of stock options under our stock-based compensation plans. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates.
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, stock-based compensation, deferred taxes, goodwill and intangible asset valuation and impairment, and commitments and contingencies. These policies and our procedures related to these policies are summarized below and described in further detail in the Notes to Financial Statements.
Valuation of long-lived assets
Our long-lived assets include property and equipment, goodwill, and intangible assets. As of December 31, 2023, the balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization and impairments, were $666, $8,102 and $575, respectively. As of December 31, 2022, the balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization and impairments, were $749, $8,102 and $273, respectively. Reference Note 2, “Significant Accounting Policies”; Note 4, “Property and Equipment”; and Note 5, “Goodwill and Intangible Assets” in the Notes to Financial Statements for details on the Company’s valuations of our long-lived assets.
Revenue Recognition and Deferred Revenue
SaaS fees and service revenues are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with our software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access our software. In certain instances, customization services are determined to be essential to the functionality of the delivered software. Under Accounting Standards Codification (“ASC”) 606, “ Revenue from Contracts with Customers, ” revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. We measure revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. The Company adopted an additional revenue model where customers purchase a predetermined number of transactions for the term of the contract, where revenue for these transactions is recognized on a per transaction basis. The Company estimates the number of transactions that will be unused by the end of each contract period and recognized a portion of that revenue as breakage revenue each reporting period. Reference Note 2, “Significant Accounting Policies,” in the Notes to Financial Statements for additional details on the Company’s recognized and deferred revenue.
Stock-based Compensation
We account for the issuance of stock-based compensation awards to employees in accordance with ASC 718, “ Compensation – Stock Compensation ”, which requires that the cost resulting from all stock-based compensation payment transactions be recognized in the financial statements. This pronouncement establishes fair value as the measurement objective in accounting for stock-based compensation payment arrangements and requires all companies to apply a fair value-based measurement method in accounting for all stock-based compensation payment transactions with employees. Reference Note 9, “Stockholders' Equity,” in the Notes to Financial Statements for details on the Company’s stock-based compensation plans.
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Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We have recorded a full valuation allowance for our net deferred tax assets as of December 31, 2023 and 2022, due to the uncertainty of the realizability of those assets. Reference Note 8, “Income Taxes,” in the Notes to Financial Statements for details on the Company’s deferred income taxes.
Commitments and Contingencies
From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. Reference Note 10, “Commitments and Contingencies,” in the Notes to Financial Statements for details on the Company’s commitments and contingencies.
As of December 31, 2023, we determined we have a historical state sales and use tax liability related to prior years. The Company is subject to sales and use taxes in jurisdictions where it has economic nexus. We have reviewed nexus in the various states, along with having conversations with state taxing authorities, and legal counsel in assessing our historical tax obligation. During the year ended December 31, 2023, the Company determined that a sales tax liability related to the periods of 2018 through 2023 was probable and determined an estimated liability. The estimated liability was $1.1 million as of December 31, 2023. See Note 12 in the Notes to Financial Statements for more details.
Results of Operations
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2023
TO THE YEAR ENDED DECEMBER 31, 2022
REVENUES . Revenues for the year ended December 31, 2023 increased $2,940 or 18% to $18,906 compared to $15,966 for the year ended December 31, 2022. The increase in revenues is primarily the result of higher SaaS revenue for the current period. SaaS revenues, which consists of software licensed on a subscription basis, increased $2,867 or 18% to $18,595 for the year ended December 31, 2023 compared to $15,728 for the year ended December 31, 2022.
GROSS PROFIT . Gross profit increased by $2,840 or 19%, to $17,531 for the year ended December 31, 2023, compared to $14,691 in the year ended December 31, 2022. Our gross profit, as a percentage of revenues, was 92.7% and 92.0% for the years ended December 31, 2023 and 2022, respectively.
OPERATING EXPENSES. Operating expenses, which consist of selling, general and administrative expenses and research and development expenses, increased by $1,086, or 6% to $19,807 for the year ended December 31, 2023 from $18,721 for the year ended December 31, 2022. Selling, general and administrative expenses increased by $2,420, or 19%, to $15,127 for the year ended December 31, 2023, compared to $12,707 for the year ended December 31, 2022. This increase was primarily driven by higher general and administrative costs, specifically a sales tax accrual that the company evaluated as well as headcount-related expenses tied to non-restructuring severance expenses. Research and development expenses decreased $1,334, or 22%, to $4,680 for the year ended December 31, 2023, compared to $6,014 for the year ended December 31, 2022. This decrease was primarily due to the capitalization of certain software development expenses, as well as lower personnel costs and their related stock-compensation expenses.
INTEREST INCOME (EXPENSE) AND OTHER INCOME (EXPENSE) . Interest income was $234 for the year ended December 31, 2023, compared to interest expense of $(5) during the year ended December 31, 2022.
INCOME TAXES . Our provision (benefit) for income taxes was $(62) for the year ended December 31, 2023, compared to a provision for income taxes of $124 during the year ended December 31, 2022.
NET LOSS . As a result of the factors noted above, we had net losses of $(1,980), or $(0.10) per share, for the year ended December 31, 2023 as compared to a net loss of $(4,159), or $(0.22) per share, for the year ended December 31, 2022.
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Liquidity and Capital Resources
As of December 31, 2023, we had cash and cash equivalents of $3,980 short-term investments of $5,000, working capital (defined as current assets minus current liabilities) of $7,843, total assets of $23,808 and stockholders’ equity of $17,276.
For the year ended December 31, 2023, our cash decreased by $1,216. Cash used in operating activities was $(647) for the year ended December 31, 2023 as compared to cash used in operating activities of $(3,480) for the year ended December 31, 2022. Cash used in investing activities for the year ended December 31, 2023 was $(414) compared to $(5,072) for the year ended December 31, 2022. Cash used in financing activities was $(155) for the year ended December 31, 2023 as compared to cash provided by financing activities of $97 for the year ended December 31, 2022.
On February 6, 2019, we entered a revolving credit facility with Citi Personal Wealth Management that allows for borrowings up to the lesser of (i) $2,000 or (ii) the collateralized balance in our existing fixed income investment account with Citi Personal Wealth Management. The facility bears interest at a rate consistent of Citi Personal Wealth Management’s Base Rate (8.50% and 7.50% at December 31, 2023 and December 31, 2022) minus 2% subject to certain limitations. Interest is payable monthly and as of December 31, 2023, there were no amounts outstanding under this facility and unused availability under this facility was $2,000.The Company is not subject to any financial covenants related to this revolving line of credit. This line will remain open as long as the Company keeps a depository relationship with the financial institution.
In February 2023, the Company entered into a financing arrangement related to insurance premiums totaling $49 with an interest rate of 9.47%. The monthly loan payments of $5 were to be paid to a financing company over a period of 11 months. As of December 31, 2023, the Company had no remaining commitments related to this financing arrangement.The Company was not subject to any financial covenants related to this insurance financing arrangement.
We currently anticipate that our available cash, expected cash from operations and availability under the revolving credit agreement will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months from the date of filing.
We keep the option open to raise additional funds to respond to business contingencies which may include the need to fund more rapid expansion, fund additional marketing expenditures, develop new markets for our technology, enhance our operating infrastructure, respond to competitive pressures, or acquire complementary businesses or necessary technologies. There can be no assurance that we will be able to secure the additional funds when needed or obtain such on terms satisfactory to us, if at all.
Adjusted EBITDA and Use as a Non-GAAP Measure
We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adjusting net loss for certain reductions such as interest and other income (expense) and certain addbacks such as non-restructuring severance expenses, sales tax accrual, provisions for income taxes, depreciation, amortization and stock-based compensation expense. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing our financial results with other companies that also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as impairments of long-lived assets and goodwill, sales tax accrual, amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and provisions for income taxes, investors can evaluate our operations and can compare the results on a more consistent basis to the results of other companies. We have included any severance-related expenses for terminated positions that will not be replaced as "non-restructuring severance expenses" within Adjusted EBITDA. In addition, Adjusted EBITDA is one of the primary measures management uses to monitor and evaluate financial and operating results.
We consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful measure of our historical operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes non-restructuring severance expenses, sales tax accrual, provisions for income taxes, interest and other (expense) income, impairments of long-lived assets and goodwill, stock-based compensation expense, all of which impact our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit multiple periods. We believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should
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not be considered in isolation or as a substitute for net loss presented in accordance with GAAP. Adjusted EBITDA as defined by us may not be comparable with similarly named measures provided by other companies.
The reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA is as follows:
Year Ended December 31,
2023 2022
Net loss $ (1,980) $ (4,159)
Reconciling items:
Non-restructuring severance expenses 548 58
Provision for income taxes (62) 124
Sales tax accrual 227 308
Interest and other expense (income) (234) 5
Depreciation and amortization 282 285
Stock-based compensation including liability classified awards 1,596 2,455
Adjusted EBITDA $ 377 $ (924)
Net Operating Loss Carry Forwards
Our available net operating loss (“NOL”) as of December 31, 2023 was approximately $26.3 million, of which $10.9 million expires between 2035 and 2037. In accordance with the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), U.S. NOLs arising in a tax year ending after 2017 in the amount of $15.4 million will not expire, but are subject to 80% limitation on utilization. In addition to the NOLs, the Company has approximately $700 thousand of research and development credits.
Recently Issued Accounting Pronouncements
Except as discussed below, we do not expect the impact of the future adoption of recently issued accounting pronouncements to have a material impact on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to measure credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. We adopted the new standard on January 1, 2023 and was applied prospectively. We reviewed our business processes and controls to support the recognition and disclosure as required under the new standard. The adoption of this new standard did not have a material impact on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which enhances reporting requirements under Topic 280. The enhanced disclosure requirements include: title and position of the Chief Operating Decision Maker (CODM), significant segment expenses provided to the CODM, extending certain annual disclosures to interim periods, clarifying single reportable segment entities must apply ASC 280 in its entirety, and permitting more than one measure of segment profit or loss to be reported under certain circumstances. This change is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. This change will apply retrospectively to all periods presented. The Company is currently evaluating the impact of this ASU on its financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740), which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. This change will apply on a prospective basis to annual financial statements for periods beginning after the
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effective date. However, retrospective application in all prior periods presented is permitted. The Company is currently evaluating the impact of this ASU on its financial statements.
Off-Balance Sheet Arrangements
We have never entered any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered any options on non-financial assets.