ISGN iSign Solutions Inc (CE)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2016.

Overview

The Company is a leading supplier of digital transaction management (DTM) software enabling the paperless, secure and cost-effective management of document-based transactions. iSign’s solutions encompass a wide array of functionality and services, including electronic signatures, biometric authentication and simple-to-complex workflow management. These solutions are available across virtually all enterprise, desktop and mobile environments as a seamlessly integrated platform for both ad-hoc and fully automated transactions. iSign’s software can be deployed both on premise and as a cloud-based service, with the ability to easily transition between deployment models.

The Company was incorporated in Delaware in October 1986. Except for the year ended December 31, 2004, in each year since its inception the Company has incurred losses. For the two-year period ended December 31, 2016, net losses attributable to common stockholders aggregated approximately $12,676, and, at September 30, 2017, the Company's accumulated deficit was approximately $131,839.

For the three months ended September 30, 2017, total revenue was $230, an increase of $9, or 4%, compared to total revenue of $221 in the prior year period. For the nine months ended September 30, 2017, total revenue was $655, a decrease of $198, or 23%, compared to total revenue of $853 in the prior year period. The increase in revenue for the three months ended September 30, 2017 is due to higher product revenue partially offset by a decrease in maintenance revenue. The decrease in revenue for the nine months ended September 30, 2017 is due to decreases in both product and maintenance revenue compared to the prior year.

For the three months ended September 30, 2017, the loss from operations was $365, a decrease of $205, or 36%, compared with a loss from operations of $570 in the prior year period. The decrease in the loss for the three months ended September 30, 2017 was due primarily to cost reductions put in place in the beginning of 2016. For the nine months ended September 30, 2017, the loss from operations was $1,388, a decrease of $1,177, or 46%, compared with a loss from operations of $2,565 in the prior year period. The decrease in the loss from operations for the nine months ended September 30, 2017 is primarily attributable to the same factors discussed above.

iSign Solutions Inc.

(In thousands, except per share amounts)

FORM 10-Q

Critical Accounting Policies and Estimates

Refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2016 Form 10-K.

Results of Operations

Revenue

For the three months ended September 30, 2017, product revenue was $65, an increase of $15, or 30%, compared to product revenue of $50 in the prior year period. The increase in product revenue is primarily due to an increase in product licensing revenue. For the three months ended September 30, 2017, maintenance revenue was $165, a decrease of $6, or 4%, compared to maintenance revenue of $171 in the prior year period. This decrease is primarily due to the non-renewal of certain maintenance contracts.

For the nine months ended September 30, 2017, product revenue was $157, a decrease of $116, or 42%, compared to product revenue of $273 in the prior year period. The decrease in product revenue is primarily attributable to a reduction in product licensing sales compared to the prior year. For the nine months ended September 30, 2017, maintenance revenue was $498, a decrease of $82, or 14%, compared to maintenance revenue of $580 in the prior year period. The decrease in maintenance revenue is primarily due to the factors discussed for the three-month period above.

Cost of Sales

For the three months ended September 30, 2017, cost of sales was $27, a decrease of $62, or 70%, compared to cost of sales of $89 in the prior year period. The decrease in cost of sales was primarily due to a decrease in direct labor related to maintenance revenue generating contracts during the three months ended September 30, 2017 compared to the prior year period.

For the nine months ended September 30, 2017, cost of sales was $103, a decrease of $257, or 71%, compared to cost of sales of $360 in the prior year period. The decrease in cost of sales was due to a decrease in direct labor related to transactional and maintenance revenue generating contracts compared to the prior year period.

Operating expenses

Research and Development Expenses

For the three months ended September 30, 2017, research and development expense was $299, an increase of $17, or 6%, compared to research and development expense of $282 in the prior year period. Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance items, and allocated facilities expenses. Research and development expenses increased primarily due to lower allocation of labor costs to cost of sales in comparison to the prior year. Total expenses, before allocations for the three months ended September 30, 2017, were $340, a decrease of $41, or 11%, compared to $381 in the prior year period.

For the nine months ended September 30, 2017, research and development expense was $884, a decrease of $84, or 9%, compared to research and development expense of $968 in the prior year period. The most significant factors in the decrease include a decrease in total salaries and benefits due to the reduction of one engineer in the third quarter of the prior year and reduction in the time commitment of a second engineer working part time. Total expenses, before allocations to cost of sales, for the nine months ended September 30, 2017, were $1,028 a decrease of $340, or 25%, compared to $1,368 in the prior year period.

iSign Solutions Inc.

(In thousands, except per share amounts)

FORM 10-Q

Sales and Marketing Expense

For the three months ended September 30, 2017, sales and marketing expense was $28, a decrease of $24, or 46%, compared to sales and marketing expense of $52 in the prior year period. For the nine months ended September 30, 2017, sales and marketing expense was $136, a decrease of $245, or 64%, compared to sales and marketing expense of $381 in the prior year period. These decreases were primarily attributable to salary and related cost savings implemented in 2016 as part of the Company’s transition to a go to market strategy principally focused on partner integrations.

General and Administrative Expense

For the three months ended September 30, 2017, general and administrative expense was $241, a decrease of $127, or 35%, compared to general and administrative expense of $368 in the prior year period. The decrease was primarily due to reductions in salaries and related expense and professional services including legal and accounting fees compared to the prior year period.

For the nine months ended September 30, 2017, general and administrative expense was $920, a decrease of $789, or 46%, compared to general and administrative expense of $1,709 in the prior year period. The decrease was primarily due to lower legal, accounting and other offering expenses related to the public offering that was completed May 2016, as well as decreases in salaries and certain related expense.

Other Income and Expense, net

For the nine-months ended September 30, 2017, the Company recorded a gain on sale of the source code and rights to one of the Company’s older toolkit software products, net of related costs, of $239. The purchaser granted the Company a fully-paid, royalty-free, worldwide, irrevocable license to use the software to support current and existing customers and partners of the Company. The Company did not retain the right to distribute the software either as a source code or as an object code. However, the Company retained the right to create new non- toolkit software from the original source code and to market, sell and distribute the new non- toolkit software in the ordinary course of business to its customers and partners.

For the three months ended September 30, 2017, interest expense was $29, an increase of $10, compared to interest expense of $19 in the prior year period. The increase is due to an increase in long-term debt compared to the prior year period.

For the nine months ended September 30, 2017, interest expense was $71, a decrease of $127, compared to interest expense of $198 in the prior year period. The decrease was due to the conversion of long-term debt into common stock of the Company in May of 2016.

For the three months ended September 30, 2017, amortization of debt discount was $24, an increase of $7, compared to $17 in the prior year period. The increase was due to the amortization of the warrants issued along with long-term debt in November of 2016.

For the nine months ended September 30, 2017, amortization of debt discount was $72, a decrease of $211, compared to $283 in the prior year period. The decrease was due to the write-off of un-amortized debt discount associated with the conversion of notes payable into shares of Common Stock in May 2016.

For the three and nine months ended September 30, 2017, the gain on derivative liability was $0, a decrease of $156 and $330, respectively, compared to prior year periods.

iSign Solutions Inc.

(In thousands, except per share amounts)

FORM 10-Q

Liquidity and Capital Resources

At September 30, 2017, cash and cash equivalents totaled $164, compared to cash and cash equivalents of $389 at December 31, 2016. The decrease in cash was primarily due to net cash used in operating activities of $967 and the acquisition of property and equipment of $2. The use of cash was partially offset by the proceeds from the issuance of $505 in long-term debt during the nine-month period and the $239 in proceeds from the sale of intangible assets during the nine months ended September 30, 2017. At September 30, 2017, total current assets were $277, compared to total current assets of $582 at December 31, 2016. At September 30, 2017, the Company's principal sources of funds included its aggregated cash and cash equivalents of $164.

At September 30, 2017, accounts receivable net, was $83, a decrease of $54, or 39%, compared to accounts receivable net of $137 at December 31, 2016. The decrease is due primarily to the timing of billings during the three months ended September 30, 2017.

At September 30, 2017, prepaid expenses and other current assets were $30, a decrease of $26, or 46%, compared to prepaid expenses and other current assets of $56 at December 31, 2016. The decrease is due primarily to the expensing of prepaid director and officer insurance premiums during the nine-month period. At September 30, 2017, total current liabilities were $2,498, an increase of $106, or 4%, compared to total current liabilities of $2,392 at December 31, 2016. At September 30, 2017, accounts payable was $1,295, a decrease of $73, or 5%, compared to accounts payable of $1,368 at December 31, 2016. At September 30, 2017, accrued compensation was $200, a decrease of $57, or 22%, compared to accrued compensation of $257 at December 31, 2016. The decreases are due primarily to cost saving measures put in place by the Company. Other accrued liabilities were $622, an increase of $117, or 23%, from $505 at December 31, 2016 due primarily to the accrual of additional deferred professional services.

At September 30, 2017, current deferred revenue as of September 30, 2017 was $377, an increase of $119, or 46%, compared to current deferred revenue of $258 at December 31, 2016. Deferred revenue primarily reflects advance payments for maintenance fees from the Company's licensees that are generally recognized as revenue by the Company when all obligations are met or over the term of the maintenance agreement, whichever is longer. Deferred revenue is recorded when the Company receives advance payment from its customers.

In February 2017, the Company received, from investors and affiliates of the Company, advances aggregating $120 in cash against certain accounts receivable of the Company. Upon collection of an invoice, the Company would repay the advance to the lenders on a pro rata basis together with a 5% advance fee. The Company used the funds received from the above advances for working capital and general corporate purposes. The receivables were collected and the advances were repaid in March 2017, along with $6 in advance fees per the agreement.

In May 2017, the Company issued long-term secured convertible promissory notes to investors and affiliates of the Company aggregating $505 in cash. In addition, certain investors and affiliates of the Company that had taken part in the November 2016 financing discussed above and that also participated in the May 2017 financing, exchanged $250 of unsecured convertible promissory notes received in the November 2016 financing for $250 of the same secured notes issued in the May 2017 financing. The secured notes are mandatorily convertible into Common Stock at a conversion rate of the lesser of $.50 per share or the price per share of Common Stock, upon closing a new financing of at least $1,000 in aggregate proceeds. The secured notes bear interest at the rate of 10% per annum, are due December 31, 2018 and are secured by an interest in all the Company's right, title and interest in, to and under its intellectual property. Should the secured notes remain outstanding following the maturity date an additional 30% of the note’s principal amount shall become due and payable.

The Company is using the funds received from the above financing for working capital and general corporate purposes.

The Company recorded $24 and $72 in debt discount amortization for the three and nine months ended September 30, 2017, respectively, related to the 2016 debt financings.

The Company incurred $29 and $71, respectively, of interest expense for the three and nine months ended September 30, 2017, of which $3 and $9, respectively were paid in cash.

iSign Solutions Inc.

(In thousands, except per share amounts)

The Company has experienced recurring losses from operations that raise a substantial doubt about its ability to continue as a going concern. There can be no assurance that the Company will have adequate capital resources to fund planned operations or that any additional funds will be available to it when needed, or if available, will be available on favorable terms or in amounts required by it. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company's business, results of operations and ability to operate as a going concern.

iSign Solutions Inc.

(In thousands, except per share amounts)

FORM 10-Q