ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,959
|
|
|
$
|
51,612
|
|
Accounts receivable, net
|
|
|
2,936
|
|
|
|
2,010
|
|
Unbilled receivables
|
|
|
3,659
|
|
|
|
3,279
|
|
Prepaid expenses and other current assets
|
|
|
234
|
|
|
|
284
|
|
Total current assets
|
|
|
55,788
|
|
|
|
57,185
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,933
|
|
|
|
4,085
|
|
Deferred tax assets
|
|
|
5,334
|
|
|
|
5,171
|
|
Total assets
|
|
$
|
65,055
|
|
|
$
|
66,441
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
167
|
|
|
$
|
126
|
|
Accrued expenses
|
|
|
1,353
|
|
|
|
1,319
|
|
Deferred revenue
|
|
|
2,345
|
|
|
|
3,024
|
|
Total current liabilities
|
|
|
3,865
|
|
|
|
4,469
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
79
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value; 70,000,000 shares authorized; issued and outstanding 21,514,200 as of June 30, 2019 and 21,515,872 as of December 31, 2018
|
|
|
215
|
|
|
|
215
|
|
Additional paid-in capital
|
|
|
96,300
|
|
|
|
96,376
|
|
Accumulated deficit
|
|
|
(35,404
|
)
|
|
|
(34,694
|
)
|
Total stockholders’ equity
|
|
|
61,111
|
|
|
|
61,897
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
65,055
|
|
|
$
|
66,441
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
1,189
|
|
|
$
|
1,659
|
|
|
$
|
2,725
|
|
|
$
|
3,133
|
|
Software maintenance
|
|
|
1,320
|
|
|
|
1,402
|
|
|
|
2,675
|
|
|
|
2,696
|
|
Services
|
|
|
503
|
|
|
|
699
|
|
|
|
1,344
|
|
|
|
842
|
|
Total revenue
|
|
|
3,012
|
|
|
|
3,760
|
|
|
|
6,744
|
|
|
|
6,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
321
|
|
|
|
370
|
|
|
|
839
|
|
|
|
420
|
|
Research and development
|
|
|
2,091
|
|
|
|
1,887
|
|
|
|
3,851
|
|
|
|
3,762
|
|
Selling and marketing
|
|
|
909
|
|
|
|
1,013
|
|
|
|
1,736
|
|
|
|
1,937
|
|
General and administrative
|
|
|
874
|
|
|
|
871
|
|
|
|
1,595
|
|
|
|
1,656
|
|
Total costs and expenses
|
|
|
4,195
|
|
|
|
4,141
|
|
|
|
8,021
|
|
|
|
7,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent related income
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,183
|
)
|
|
|
(381
|
)
|
|
|
(1,228
|
)
|
|
|
(1,104
|
)
|
Interest income
|
|
|
278
|
|
|
|
201
|
|
|
|
553
|
|
|
|
363
|
|
Loss before provision for (benefit from) income taxes
|
|
|
(905
|
)
|
|
|
(180
|
)
|
|
|
(675
|
)
|
|
|
(741
|
)
|
Provision for (benefit from) income taxes
|
|
|
33
|
|
|
|
8
|
|
|
|
35
|
|
|
|
(58
|
)
|
Net loss
|
|
$
|
(938
|
)
|
|
$
|
(188
|
)
|
|
$
|
(710
|
)
|
|
$
|
(683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
Net loss per share – diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares – basic
|
|
|
21,537
|
|
|
|
21,534
|
|
|
|
21,551
|
|
|
|
21,540
|
|
Weighted-average shares – diluted
|
|
|
21,537
|
|
|
|
21,534
|
|
|
|
21,551
|
|
|
|
21,540
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(710
|
)
|
|
$
|
(683
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
221
|
|
|
|
229
|
|
Stock-based compensation
|
|
|
190
|
|
|
|
208
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(926
|
)
|
|
|
(1,128
|
)
|
Unbilled receivables
|
|
|
(380
|
)
|
|
|
(113
|
)
|
Prepaid expenses and other current assets
|
|
|
50
|
|
|
|
(8
|
)
|
Deferred tax assets
|
|
|
(163
|
)
|
|
|
(152
|
)
|
Accounts payable
|
|
|
41
|
|
|
|
(2
|
)
|
Accrued expenses
|
|
|
(90
|
)
|
|
|
(35
|
)
|
Accrued income taxes
|
|
|
124
|
|
|
|
13
|
|
Deferred revenue
|
|
|
(675
|
)
|
|
|
(511
|
)
|
Net cash used in operating activities
|
|
|
(2,318
|
)
|
|
|
(2,182
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(69
|
)
|
|
|
(134
|
)
|
Net cash used in investing activities
|
|
|
(69
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
22
|
|
|
|
27
|
|
Payments made for taxes of employees who surrendered shares related to unrestricted stock
|
|
|
(49
|
)
|
|
|
(61
|
)
|
Repurchase of common stock
|
|
|
(239
|
)
|
|
|
(137
|
)
|
Net cash used in financing activities
|
|
|
(266
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(2,653
|
)
|
|
|
(2,487
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
51,612
|
|
|
|
51,608
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
48,959
|
|
|
$
|
49,121
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
40
|
|
|
$
|
78
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(in thousands)
(unaudited)
|
|
Three and Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
21,516
|
|
|
$
|
215
|
|
|
$
|
96,376
|
|
|
$
|
(34,694
|
)
|
|
$
|
61,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of unrestricted stock
|
|
|
69
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares surrendered by employees to pay taxes related to unrestricted stock
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
(49
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
Repurchase of common stock
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
(78
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
|
21,551
|
|
|
$
|
216
|
|
|
$
|
96,262
|
|
|
$
|
(34,466
|
)
|
|
$
|
62,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
7
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
177
|
|
|
|
-
|
|
|
|
177
|
|
Repurchase of common stock
|
|
|
(48
|
)
|
|
|
(1
|
)
|
|
|
(161
|
)
|
|
|
-
|
|
|
|
(162
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(938
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
21,514
|
|
|
$
|
215
|
|
|
$
|
96,300
|
|
|
$
|
(35,404
|
)
|
|
$
|
61,111
|
|
|
|
Three and Six Months Ended June 30,
2018
|
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
(Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
21,493
|
|
|
|
215
|
|
|
|
96,246
|
|
|
|
(35,927
|
)
|
|
|
60,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of unrestricted stock
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares surrendered by employees to pay taxes related to unrestricted stock
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
-
|
|
|
|
(61
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
24
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(496
|
)
|
|
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
|
21,547
|
|
|
$
|
215
|
|
|
$
|
96,209
|
|
|
$
|
(36,423
|
)
|
|
$
|
60,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
7
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
183
|
|
|
|
-
|
|
|
|
183
|
|
Repurchase of common stock
|
|
|
(34
|
)
|
|
|
-
|
|
|
|
(137
|
)
|
|
|
-
|
|
|
|
(137
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(187
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
|
21,520
|
|
|
$
|
215
|
|
|
$
|
96,282
|
|
|
$
|
(36,610
|
)
|
|
$
|
59,887
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
A)
|
Nature of Business.
We are a leading provider of software and services to the biometrics
industry. Our software products are used in government and commercial biometrics systems, which are capable of determining or verifying
an individual’s identity. We also offer engineering services related to software customization, integration, and installation,
as well as complete systems development. We sell our biometrics software products and services globally through systems integrators,
OEMs, and directly to end user customers. We also derive a portion of our revenue from the sale of imaging software.
|
|
B)
|
Basis of Presentation.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and notes necessary
for a complete presentation of our financial position, results of operations and cash flows, in conformity with generally accepted
accounting principles. We filed audited financial statements which included all information and notes necessary for such presentation
for the two years ended December 31, 2018 in conjunction with our 2018 Annual Report on Form 10-K. This Form 10-Q should be read
in conjunction with that Form 10-K.
|
The accompanying unaudited consolidated
balance sheets, statements of operations, statements of cash flows, and statements of stockholders’ equity reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of financial
position at June 30, 2019, and of operations and cash flows for the interim periods ended June 30, 2019 and 2018.
The results of operations for the
interim period ended June 30, 2019 are not necessarily indicative of the results to be expected for the year.
|
C)
|
Revenue Recognition.
Effective January 1, 2018, we adopted Accounting Standards Codification
(“ASC”), Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the full retrospective transition
method.
|
In accordance with ASC 606, revenue
is recognized when a customer obtains control of promised goods and services. The amount of revenue recognized reflects the consideration
to which we expect to be entitled to receive in exchange for these goods and services. In addition, ASC 606 requires disclosures
of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The core principle of the standard
is that we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following
five step model:
|
1.
|
Identify the contract with the customer;
|
|
2.
|
Identify the performance obligations in the contract;
|
|
3.
|
Determine the transaction price;
|
|
4.
|
Allocate the transaction price to the performance obligations in the contract; and
|
|
5.
|
Recognize revenue when (or as) each performance obligation is satisfied.
|
1) Identify the contract with the customer
A contract with a customer exists
when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services
to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) we determine
that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s
intent and ability to pay the promised consideration. We apply judgment in determining the customer’s intent and ability
to pay, which is based on a variety of factors including the customer’s historical payment experience, or in the case of
a new customer, published credit and financial information pertaining to the customer.
We evaluate contract modifications
for the impact on revenue recognition if they have been approved by both parties such that the enforceable rights and obligations
under the contract have changed. Contract modifications are either accounted for using a cumulative effect adjustment or prospectively
over the remaining term of the arrangement. The determination of which method is more appropriate depends on the nature of the
modification, which we evaluate on a case-by-case basis.
We combine two or more contracts
entered into at or near the same time with the same customer and account for them as a single contract if (i) the contracts are
negotiated as a package with a common commercial objective, (ii) the amount of consideration to be paid in one contract depends
on the price or performance of the other contract, or (iii) some or all of the goods or services in one contract would be combined
with some or all of the goods and services in the other contract into a single performance obligation. If two or more contracts
are combined, the consideration to be paid is aggregated and allocated to the individual performance obligations without regard
to the consideration specified in the individual contracts.
2) Identify the performance obligations in the contract
Performance obligations promised
in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of
being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources,
and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other
promises in the contract. To the extent a contract includes multiple promised goods and services, we apply judgment to determine
whether promised goods and services are capable of being distinct and distinct in the context of the contract. If these criteria
are not met, the promised goods and services are accounted for as a combined performance obligation. To identify performance obligations,
we consider all of the goods or services promised in a contract regardless of whether they are explicitly stated or are implied
by customary business practices.
3) Determine the transaction price
The transaction price is determined
based on the consideration we expect to be entitled in exchange for transferring promised goods and services to the customer. Determining
the transaction price requires significant judgment. To the extent the transaction price includes variable consideration, we estimate
the amount of variable consideration that should be included in the transaction price utilizing either the expected value method
or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the
transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue recognized under
the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at
each reporting period. The amount of consideration is not adjusted for a significant financing component if the time between payment
and the transfer of the related good or service is expected to be one year or less under the practical expedient in ASC 606-10-32-18.
Our revenue arrangements are typically accounted for under such expedient, as payment is typically due within 30 to 60 days. As
of June 30, 2019 and 2018, none of our contracts contained a significant financing component.
4) Allocate the transaction price to performance
obligations in the contract
If the contract contains a single
performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative
standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated
entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration
to be received is allocated among the separate performance obligations based on relative SSPs. The SSP is the price at which we
would sell a promised good or service separately to a customer. The best estimate of SSP is the observable price of a good or service
when we sell that good or service separately. A contractually stated price or a list price for a good or service may be the SSP
of that good or service. We use a range of amounts to estimate SSP when we sell each of the goods and services separately and need
to determine whether there is a discount that needs to be allocated based on the relative SSP of the various goods and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we typically
determine the SSP using an adjusted market assessment approach using information that may include market conditions and other observable
inputs. We typically have more than one SSP for individual goods and services due to the stratification of those goods and services
by customers and circumstances. In these instances, we may use information such as the nature of the customer and distribution
channel in determining the SSP.
5) Recognize revenue when or as we satisfy a performance
obligation
We satisfy performance obligations
either over time or at a point in time as discussed in further detail below. Revenue is recognized over time if 1) the customer
simultaneously receives and consumes the benefits provided by our performance, 2) our performance creates or enhances an asset
that the customer controls as the asset is created or enhanced, or 3) our performance does not create an asset with an alternative
use to us and we have an enforceable right to payment for performance completed to date. If we do not satisfy a performance obligation
over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or
service to a customer.
We categorize revenue as software
licenses, software maintenance, or services. In addition to the general revenue recognition policies described above, specific
revenue recognition policies apply to each category of revenue.
Software licenses
Software licenses consist of revenue
from the sale of software licenses for biometrics and imaging applications. Our software licenses are functional intellectual property
and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer.
We recognize revenue from software licenses at a point in time upon delivery, provided all other revenue recognition criteria are
met.
Software maintenance
Software maintenance consists of
revenue from the sale of software maintenance contracts for biometrics and imaging software. Software maintenance contracts entitle
customers to receive software support and software updates, if and when they become available, during the term of the maintenance
contract. Software support and software updates are considered distinct services. However, these distinct services are considered
a single performance obligation consisting of a series of distinct services that are substantially the same and have the same pattern
of transfer to the customer. We recognize software maintenance revenue over time on a straight-line basis over the contract period.
Services
Service revenue consists of fees
from biometrics customers for software engineering services we provide to them. We recognize services revenue over time as the
services are delivered using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted), provided
all other revenue recognition criteria are met.
Refer to Note G – Business
Segments for further information on the disaggregation of revenue, including revenue by geography and category.
Arrangements with multiple
performance obligations
In addition to selling software
licenses, software maintenance and software services on a standalone basis, a significant portion of our contracts include multiple
performance obligations. The various combinations of multiple performance obligations and our revenue recognition for each are
described as follows:
|
•
|
Software licenses and software maintenance. When software licenses and software maintenance contracts
are sold together, the software licenses and software maintenance are generally considered distinct performance obligations. The
transaction price is allocated to the software licenses and the software maintenance based on relative SSP. Revenue allocated to
the software licenses is recognized at a point in time upon delivery, provided all other revenue recognition criteria are met.
Revenue allocated to the software maintenance is recognized on a straight-line basis over the contract period.
|
|
•
|
Software licenses and services. When software licenses and significant customization engineering
services are sold together, they are accounted for as a combined performance obligation, as the software licenses are generally
highly dependent on, and interrelated with, the associated services and therefore are not distinct performance obligations. Revenue
for the combined performance obligation is recognized over time as the services are delivered using an input method (i.e., labor
hours incurred as a percentage of total labor hours budgeted). When software licenses and standard implementation or consulting-type
services are sold together, they are generally considered distinct performance obligations as the software licenses are not dependent
on or interrelated with the associated services. The transaction price in these arrangements is allocated to the software licenses
and services based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery,
provided all other revenue recognition criteria are met. Revenue allocated to the services is recognized over time using an input
method (i.e., labor hours incurred as a percentage of total labor hours budgeted). In arrangements with both software licenses
and services, the software license portion of the arrangement is classified as software license revenue and the services portion
is classified as services revenue in our consolidated statements of operations.
|
|
•
|
Software licenses, software maintenance and services. When we sell software licenses, software
maintenance and software services together, we account for the individual performance obligations separately if they are distinct.
The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software
licenses is recognized at a point in time upon delivery. Revenue allocated to the services is recognized over time using an input
method (i.e., labor hours incurred as a percentage of total labor hours budgeted). Revenue for the software maintenance is recognized
on a straight-line basis over the contract period. However, if the software services are significant customization engineering
services, they are accounted for with the software licenses as a combined performance obligation, as stated above. Revenue for
the combined performance obligation is recognized over time using an input method (i.e., labor hours incurred as a percentage of
total labor hours budgeted).
|
We do not offer rights of return
for our products and services in the normal course of business.
Customer Acceptance
Our contracts with customers generally
do not include customer acceptance clauses.
Contract Balances
When the timing of our delivery
of goods or services is different from the timing of payments made by customers, we recognize either a contract asset (performance
precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay are represented
by the deferred revenue below until the performance obligation is satisfied. Contract assets represent arrangements in which the
good or service has been delivered but payment is not yet due. Our contract assets consist of unbilled receivables. Our contract
liabilities consisted of deferred (unearned) revenue, which is generally related to software maintenance contracts. We classify
deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue.
The following table presents changes
in our contract assets and liabilities during the three and six months ended June 30, 2018 and 2019 (in thousands):
|
|
Balance at
Beginning of
Period
|
|
|
Revenue
Recognized
In Advance of
Billings
|
|
|
Billings
|
|
|
Balance at End of
Period
|
|
Three months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
1,233
|
|
|
$
|
542
|
|
|
$
|
(233
|
)
|
|
$
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,918
|
|
|
$
|
409
|
|
|
$
|
(668
|
)
|
|
$
|
3,659
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Billings
|
|
|
Revenue
Recognized
|
|
|
Balance at End of
Period
|
|
Three months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,396
|
|
|
$
|
1,427
|
|
|
$
|
(1,402
|
)
|
|
$
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,516
|
|
|
$
|
1,228
|
|
|
$
|
(1,320
|
)
|
|
$
|
2,424
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Revenue
Recognized
In Advance of
Billings
|
|
|
Billings
|
|
|
Balance at End of
Period
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
1,429
|
|
|
$
|
575
|
|
|
$
|
(462
|
)
|
|
$
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,279
|
|
|
$
|
1,468
|
|
|
$
|
(1,088
|
)
|
|
$
|
3,659
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Billings
|
|
|
Revenue
Recognized
|
|
|
Balance at End of
Period
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,932
|
|
|
$
|
2,185
|
|
|
$
|
(2,696
|
)
|
|
$
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
3,099
|
|
|
$
|
2,000
|
|
|
$
|
(2,675
|
)
|
|
$
|
2,424
|
|
Remaining Performance Obligations
Remaining performance obligations
represent the transaction price from contracts for which work has not been performed or goods and services have not been delivered.
We expect to recognize revenue on approximately 96% of the remaining performance obligations over the next 12 months, with the
remainder recognized thereafter. As of June 30, 2019 and December 31, 2018, the aggregate amount of the transaction price allocated
to remaining performance obligations for software maintenance contracts with a duration greater than one year was $0.1 million.
Contract Costs
We recognize an other asset for
the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year.
We have determined that certain sales commissions meet the requirements to be capitalized, and we amortize these costs on a consistent
basis with the pattern of transfer of the goods and services in the contract. Total capitalized costs to obtain a contract were
immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets.
We apply a practical expedient to
expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. These costs include
sales commissions on software maintenance contracts with a contract period of one year or less as sales commissions paid on contract
renewals are commensurate with those paid on the initial contract.
|
D)
|
Fair Value Measurements.
The Financial Accounting Standards Board (“FASB”)
Codification defines fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy gives the highest priority to the unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels
of the fair value hierarchy under the FASB Codification are: i) Level 1 – valuations that are based on quoted prices (unadjusted)
in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
ii) Level 2 – valuations that are based on quoted prices in markets that are not active or for which all significant inputs
are observable, either directly or indirectly; and iii) Level 3 – valuations that require inputs that are both significant
to the fair value measurement and unobservable.
|
Cash and cash equivalents, which
primarily include money market mutual funds, were $49.0 million and $51.6 million as of June 30, 2019 and December 31, 2018, respectively.
We classified our cash equivalents of $48.3 million and $47.9 million as of June 30, 2019 and December 31, 2018, respectively,
within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
As of June 30, 2019, our assets
that are measured at fair value on a recurring basis and whose carrying values approximate their respective fair values include
the following (in thousands):
|
|
Fair Value Measurement at June 30, 2019
Using:
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
48,253
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,253
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2018, our assets
that are measured at fair value on a recurring basis and whose carrying values approximate their respective fair values include
the following (in thousands):
|
|
Fair Value Measurement at December 31,
2018 Using:
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
47,939
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,939
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
E)
|
Computation of Earnings per Share.
Basic earnings per share is computed by dividing
net income or loss by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing
net income or loss by the weighted average number of common shares outstanding plus additional common shares that would have been
outstanding if dilutive potential common shares had been issued. For the purposes of this calculation, stock options are considered
common stock equivalents in periods in which they have a dilutive effect. Stock options that are anti-dilutive are excluded from
the calculation. Potential common stock equivalents of 143,000 and 81,376 for the three and six months ended June 30, 2019, respectively,
and 144,727 and 85,657 for the three and six months ended June 30, 2018, respectively, were not included in the per share calculation
for diluted earnings per share, because we had a net loss and the effect of their inclusion would be anti-dilutive.
|
Net loss per share is calculated as follows (in
thousands, except per share data):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(938
|
)
|
|
$
|
(188
|
)
|
|
$
|
(710
|
)
|
|
$
|
(683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
21,537
|
|
|
|
21,534
|
|
|
|
21,551
|
|
|
|
21,540
|
|
Additional dilutive common stock equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted shares outstanding
|
|
|
21,537
|
|
|
|
21,534
|
|
|
|
21,551
|
|
|
|
21,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
Net loss per share - diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
F)
|
Stock-Based Compensation.
The following table
presents stock-based employee compensation expenses included in our unaudited consolidated statements of comprehensive income
(in thousands):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Research and development
|
|
|
36
|
|
|
|
32
|
|
|
|
38
|
|
|
|
37
|
|
Selling and marketing
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
5
|
|
General and administrative
|
|
|
130
|
|
|
|
140
|
|
|
|
140
|
|
|
|
158
|
|
Stock-based compensation expense
|
|
$
|
177
|
|
|
$
|
184
|
|
|
$
|
190
|
|
|
$
|
208
|
|
Stock Option Grants
. We may
grant stock options under our 2001 Nonqualified Stock Plan although we have not granted any stock options since the first quarter
of 2012.
Unrestricted Stock Grants
.
We also grant unrestricted shares of stock under our 2001 Nonqualified Stock Plan. Stock-based compensation expense for stock grants
is determined based on the fair market value of our stock on the date of grant, provided the number of shares in the grant is fixed
on the grant date.
We granted shares of unrestricted
stock in 2019 and 2018 that affected financial results for the three and six month periods ended June 30, 2019 and 2018. These
grants are described below.
2019 Grant.
On March 25, 2019,
we granted 143,000 shares of unrestricted stock to directors, officers and employees. The shares will be issued in two equal installments
shortly after June 30, 2019 and December 31, 2019, provided each grantee is serving as a director, officer or employee on those
dates. The total stock-based compensation expense related to this grant is $547,000, of which $177,000 and $190,000 was charged
to expense in the three and six months ended June 30, 2019 and we anticipate the remaining $357,000 will be charged to expense
ratably over the remaining two quarters of 2019.
2018 Grant
. In March 2018,
we granted 138,000 shares of unrestricted stock to directors, officers and employees. The shares were issued in two equal installments
shortly after June 30, 2018 and December 31, 2018. We expensed the entire $580,000 stock-based compensation expense related to
this grant in 2018. We issued shares of common stock related to this grant as follows: i) 57,592 net shares of common stock were
issued in early July 2018 after employees surrendered 11,408 shares for which we paid $51,000 of withholding taxes on their behalf;
and ii) 55,278 net shares of common stock were issued in early January 2019 after employees surrendered 13,722 shares for which
we paid $49,000 of withholding taxes on their behalf.
|
G)
|
Business Segments
. We organize ourselves into a single segment that reports to the
chief operating decision maker.
|
We conduct our operations in the
United States and sell our products and services to domestic and international customers. Revenues were generated from the following
geographic regions for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,728
|
|
|
$
|
1,522
|
|
|
$
|
3,451
|
|
|
$
|
3,591
|
|
United Kingdom
|
|
|
466
|
|
|
|
1,374
|
|
|
|
1,345
|
|
|
|
1,508
|
|
Rest of World
|
|
|
818
|
|
|
|
864
|
|
|
|
1,948
|
|
|
|
1,572
|
|
|
|
$
|
3,012
|
|
|
$
|
3,760
|
|
|
$
|
6,744
|
|
|
$
|
6,671
|
|
Revenue by product group for the
three and six months ended June 30, 2019 and 2018 was (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biometrics
|
|
$
|
2,877
|
|
|
$
|
3,403
|
|
|
$
|
6,349
|
|
|
$
|
5,888
|
|
Imaging
|
|
|
135
|
|
|
|
357
|
|
|
|
395
|
|
|
|
783
|
|
|
|
$
|
3,012
|
|
|
$
|
3,760
|
|
|
$
|
6,744
|
|
|
$
|
6,671
|
|
Revenue by timing of transfer of
goods or services for the three and six months ended June 30, 2019 and 2018 was (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods or services transferred at a point in time
|
|
$
|
957
|
|
|
$
|
1,064
|
|
|
$
|
2,128
|
|
|
$
|
2,538
|
|
Goods or services transferred over time
|
|
|
2,055
|
|
|
|
2,696
|
|
|
|
4,616
|
|
|
|
4,133
|
|
|
|
$
|
3,012
|
|
|
$
|
3,760
|
|
|
$
|
6,744
|
|
|
$
|
6,671
|
|
|
H)
|
Income
Taxes.
Income tax expense
was $33,000 and $35,000 for the three and six months ended June 30, 2019, respectively.
Income tax expense for the three and six month periods ended June 30, 2019 were based
on the U.S. statutory rate of 21%, increased by state income taxes, and reduced by permanent
adjustments
and research tax
credits.
|
As
of June 30, 2019, we had a total of $5.3 million of deferred tax assets for which we had recorded no valuation allowance. We have
assessed the need for a valuation allowance on our deferred tax assets. Based on our assessment of future sources of income,
including reversing deferred tax liabilities, and future earnings, we have determined that it is more likely than not that the
deferred tax assets will be realized, and therefore there is no valuation allowance required for the deferred tax assets. We will
continue to assess the level of valuation allowance in future periods. Should evidence regarding the realizability of tax assets
change at a future point in time, the valuation allowance will be adjusted accordingly.
|
I)
|
Income from patent arrangement.
We entered into an arrangement with an unaffiliated
third party in 2010 under which we assigned certain patents in return for royalties on proceeds from patent monetization efforts
by the third party. The third party has engaged in various patent monetization activities, including enforcement, litigation and
licensing. In the three months ended June 30, 2019, there was no revenue from this arrangement. In the six months ended June 30,
2019, the third party reported and we recorded $49,000 of income from this arrangement. In the three and six months ended June
30, 2018, there was no income from this arrangement.
|
ITEM 2:
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
Cautionary Statement for Purposes of the “Safe Harbor”
Provisions of the Private Securities Litigation Reform Act of 1995
Some of the information in this Form 10-Q
contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking
words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,”
“continue” and similar words. You should read statements that contain these words carefully because they: (1) discuss
our future expectations; (2) contain projections of our future operating results or financial condition; or (3) state other “forward-looking”
information. However, we may not be able to predict future events accurately. The risk factors listed in our Annual Report on Form
10-K for the year ended December 31, 2018, as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties
and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.
You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Form 10-Q could
materially and adversely affect our business.
Summary of Operations
We are primarily engaged in the development
and sale of biometrics products and services. Our software products are used in government and commercial biometrics systems to
identify or authenticate people. Principal government applications of biometrics systems include border control, visitor screening,
law enforcement, national defense, intelligence, secure credentialing, access control, and background checks. Principal commercial
applications include: i) user authentication for login and access to mobile devices, computers, networks, and software programs;
ii) user authentication for financial transactions and purchases (online and in-person); iii) physical access control to buildings,
and iv) screening and background checks of prospective employees and customers. We sell our software and services globally through
systems integrators and OEMs, and directly to end user customers. 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.
Summary of Financial Results
We use revenue and operating income 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, 2019 were $3.0 million and $1.2 million, respectively. These results compared to revenue of $3.8 million and operating
loss of $0.4 million in the three months ended June 30, 2018. Lower revenue and higher operating loss in the current three month
period were primarily due to: i) lower biometrics software license sales, ii) lower imaging software license sales; and iii) lower
services revenue. This was partially offset by lower total costs and expenses.
Revenue and operating loss for the six months
ended June 30, 2019 were $6.74 million and $1.2 million, respectively. These results compared to revenue of $6.67 million and operating
loss of $1.1 million in the six months ended June 30, 2018. Higher revenue was primarily due to higher services revenue, which
was partially offset by lower imaging software license sales. Higher operating loss was primarily due to higher total costs and
expenses, which was partially offset by higher revenue and income from a patent arrangement.
These and all other financial results are discussed
in more detail in the results of operations section that follows.
Results of Operations
Software licenses.
Software licenses
consist of revenue from the sale of biometrics and imaging software products. 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 28% from
$1.7 million in the three months ended June 30, 2018 to $1.2 million in the same three month period in 2019. As a percentage of
total revenue, software license revenue decreased from 44% in the second quarter of 2018 to 39% in the current year quarter. The
$470,000 decrease in software license revenue was due to a $235,000 decrease in biometrics software license sales, and a $235,000
decrease in imaging software license sales. The reasons for the changes in biometrics and imaging software license sales were:
|
i)
|
Biometrics software licenses – Biometrics software license sales were $1.1 million in the
second quarter of 2019 versus $1.3 million in the same quarter last year. The dollar decrease was primarily due to lower revenue
from the software license agreement we entered into with a systems integrator in the second quarter of 2018 and was partially offset
by higher software license sales to other customers. We recognized $170,000 of software license revenue from this agreement in
the second quarter of 2019. We also provide engineering services to this systems integrator pursuant to this arrangement. We expect
our development effort on this project to continue for approximately the next two to three quarters.
|
|
ii)
|
Imaging software licenses – Imaging software license sales were $0.1 million in the second
quarter of 2019 versus $0.3 million in the same quarter last year. The dollar decrease was primarily due to an imaging sale to
a systems integrator customer in the second quarter of 2018, whereas we had no such sales in the corresponding period of 2019.
|
Software license revenue decreased 13% from
$3.1 million in the six months ended June 30, 2018 to $2.7 million in the same six month period in 2019. As a percentage of total
revenue, software license revenue decreased from 47% in the first six months of 2018 to 40% in the current year six month period.
The $408,000 decrease in software license revenue was due to a $437,000 decrease in imaging software license sales, which was partially
offset by a $29,000 increase in biometrics software license sales. The reasons for the changes in imaging and biometrics software
license sales were:
|
i)
|
Imaging software licenses – Imaging software license sales were $0.3 million in the first
six months of 2019 versus $0.7 million in the same period last year. The dollar decrease was primarily due to imaging license sales
to two systems integrator customers in the first six months of 2018, whereas we had no such sales in the corresponding period of
2019.
|
|
ii)
|
Biometrics software licenses – Biometrics software license sales were $2.5 million in the
first six months of 2019 versus $2.4 million in the same six month period last year. The dollar increase was primarily due to slightly
higher license sales to our biometrics customers. Although we had lower revenue from the software license agreement we entered
into with a systems integrator in the second quarter of 2018, this was more than offset by higher software license sales to other
customers.
|
As described in the strategy section of our
Form 10-K for the year ended December 31, 2018, our market strategy is to continue to focus on our legacy government biometrics
markets and expand into new commercial biometrics markets. We are unable to predict future revenue from commercial markets as these
are emerging markets.
Software maintenance
. Software
maintenance consists of revenue from the sale of software maintenance contracts. 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 decreased 6% from
$1.4 million in the three months ended June 30, 2018 to $1.3 million in the same three month period in 2019. As a percentage of
total revenue, software maintenance revenue increased from 37% in the second quarter of 2018 to 44% in the current year quarter.
Software maintenance revenue decreased 1% from
$2.70 million in the six months ended June 30, 2018 to $2.68 million in the same six month period in 2019. As a percentage of total
revenue, software maintenance revenue was 40% for both six month periods.
For the three and six month periods ended June
30, 2019, the dollar decrease in software maintenance revenue was primarily due to lower retention of maintenance renewals in those
periods.
Services
.
Services consist
of fees we charge to perform software development, integration, installation, and customization services. Similar to software license
revenue, services revenue depends on our ability to win biometrics systems projects either directly with end user customers or
in conjunction with channel partners. Services revenue will fluctuate when we commence new projects and/or when we complete projects
that were started in previous periods.
Services revenue decreased from $0.7 million
in the three months ended June 30, 2018 to $0.5 million in the same three month period in 2019. As a percentage of total revenue,
services revenue decreased from 19% in the second quarter of 2018 to 17% in the current year quarter.
For the three month period ended June 30, 2019,
the dollar decrease in services revenue was primarily due to lower services revenue in the current year quarter related to the
software license agreement we entered into with a systems integrator in the second quarter of 2018 for a large project. This decrease
was partially offset by higher services revenue from other service customers.
Services revenue increased 59% from $0.8 million
in the six months ended June 30, 2018 to $1.3 million in the same six month period in 2019. As a percentage of total revenue, services
revenue increased from 13% in the first six months of 2018 to 20% in the corresponding period of 2019.
For the six month period ended June 30, 2019,
the dollar increase in services revenue was primarily due to higher services revenue related to the software license agreement
we entered into with a systems integrator in the second quarter of 2018 for a large project, and higher service revenue from other
service customers.
We expect our development effort on this large
project to continue for approximately the next two to three quarters.
Services backlog was $0.3 million as of June
30, 2019.
Cost of Services.
Cost of services
consists of engineering costs to perform customer services projects. Such costs primarily include: i) engineering salaries, stock-based
compensation, fringe benefits, and facilities; and ii) engineering consultants and contractors.
Cost of services decreased from $370,000 in
the three months ended June 30, 2018 to $321,000 in the same three month period in 2019. Cost of services as a percentage of services
increased from 53% in the first quarter of 2018 to 64% in the current year quarter, which means that gross margins decreased from
47% to 36%. The dollar decrease in cost of services was primarily due to lower service revenue in the second quarter of 2019.
Cost of services increased 100% from $420,000
in the six months ended June 30, 2018 to $839,000 in the same six month period in 2019. Cost of services as a percentage of services
increased from 50% in the first six months of 2018 to 62% in the corresponding period of 2019, which means that gross margins decreased
from 50% to 38%. The dollar increase in cost of services was primarily due to higher service revenue in the second quarter of 2019.
Research and development expense.
Research
and development expense consists of costs for: 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. 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 are not included in research and development expense.
The classification of total engineering costs
to research and development expense and cost of services was (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
2,091
|
|
|
$
|
1,887
|
|
|
$
|
3,851
|
|
|
$
|
3,762
|
|
Cost of services
|
|
|
321
|
|
|
|
370
|
|
|
|
839
|
|
|
|
420
|
|
Total engineering costs
|
|
$
|
2,412
|
|
|
$
|
2,257
|
|
|
$
|
4,690
|
|
|
$
|
4,182
|
|
Research and development expense increased
11% from $1.9 million in the three months ended June 30, 2018 to $2.1 million in 2019. As a percentage of total revenue, research
and development expense increased from 50% in 2018 to 69% in 2019.
Research and development expense increased
from $3.8 million in the six months ended June 30, 2018 to $3.9 million in the same six month period in 2019. As a percentage of
total revenue, research and development expense increased from 56% in the first six months of 2018 to 57% in the corresponding
period of 2019.
As the table immediately above indicates, total
engineering costs in the second quarter of 2019 increased by $155,000 compared to the same period last year. Total engineering
costs increased by $508,000 for the six months ended June 30, 2019 as compared to the same period last year. For both the three
and six month periods, the spending increase was primarily due to higher spending on third-party development costs and to a lesser
extent on higher employee costs. The increase was partially offset by lower recruiting fees and other costs. Higher spending on
third-party development costs was primarily due to a third-party vendor that was engaged to assist in our software development.
We anticipate that we will continue to focus
our future research and development activities on enhancing our existing products and developing new products.
Selling and marketing expense.
Selling and marketing expense primarily consists of costs for: i) sales and marketing personnel, including salaries, sales commissions,
stock-based compensation, fringe benefits, travel, and facilities; and ii) advertising and promotion expenses.
Sales and marketing expense decreased 10% from
$1.0 million in the three months ended June 30, 2018 to $0.9 million in the same three month period of 2019. As a percentage of
total revenue, sales and marketing expense increased from 27% in the second quarter of 2018 to 30% in the corresponding period
in 2019. The dollar decrease in sales and marketing expense was primarily due to lower employee costs due to lower headcount, and
lower sales commissions.
Sales and marketing expense decreased 10% from
$1.9 million in the six months ended June 30, 2018 to $1.7 million in the same six month period of 2019. As a percentage of total
revenue, sales and marketing expense decreased from 29% in the first six months of 2018 to 26% in the corresponding period in 2019.
The dollar decrease in sales and marketing expense was primarily due to lower employee costs due to lower headcount, and lower
travel costs.
General and administrative expense.
General
and administrative expense consists primarily of costs for: i) officers, directors and administrative personnel, including salaries,
bonuses, director compensation, stock-based compensation, fringe benefits, and facilities; ii) professional fees, including legal
and audit fees; iii) public company expenses; and iv) other administrative expenses, such as insurance costs and bad debt provisions.
General and administrative expense increased
less than 1% from $871,000 in the three months ended June 30, 2018 to $874,000 in the same three month period in 2019. As a percentage
of total revenue, general and administrative expense increased from 23% in the second quarter of 2018 to 29% in the corresponding
period in 2019. The increase in general and administrative expense was primarily due to higher employee costs that were partially
offset by lower professional fees.
General and administrative expense decreased
4% from $1.7 million in the six months ended June 30, 2018 to $1.6 million in the same six month period in 2019. As a percentage
of total revenue, general and administrative expense decreased from 25% in the first six months of 2018 to 24% in the corresponding
period in 2019. The decrease in general and administrative expense was primarily due to lower professional fees, and lower stock-based
compensation costs.
Patent related income.
We entered
into an arrangement with an unaffiliated third party in 2010 under which we assigned certain patents in return for royalties on
proceeds from patent monetization efforts by the third party. The third party has engaged in various patent monetization activities,
including enforcement, litigation and licensing. In the three months ended June 30, 2019, there was no revenue from this arrangement.
In the six months ended June 30, 2019, the third party reported and we recorded $49,000 of income from this arrangement. In the
three and six months ended June 30, 2018, there was no income from this arrangement. We continue to have a contractual relationship
with this third party. However, we are unable to predict how much more income we might receive from this arrangement, if any, because
we do not know whether any patent monetization efforts by the third party will be successful.
Interest income.
Interest income
increased 38% from $201,000 in the three months ended June 30, 2018 to $278,000 in the same three month period in 2019. Interest
income increased 52% from $363,000 in the six months ended June 30, 2018 to $553,000 in the same six month period in 2019. For
the three and six month periods, the dollar increase in interest income was primarily due to higher interest rates within our money
market accounts.
Income taxes.
Income
tax expense was $33,000 and $35,000 for the three and six months ended June 30, 2019, respectively. Income tax expense for the
three and six month periods ended June 30, 2019 were based on the U.S. statutory rate of 21%, increased by state income taxes,
and reduced by permanent adjustments and research tax credits.
As
of June 30, 2019, we had a total of $5.3 million of deferred tax assets for which we had recorded no valuation allowance. We have
assessed the need for a valuation allowance on our deferred tax assets. Based on our assessment of future sources of income,
including reversing deferred tax liabilities, and future earnings, we have determined that it is more likely than not that the
deferred tax assets will be realized, and therefore there is no valuation allowance required for the deferred tax assets. We will
continue to assess the level of valuation allowance in future periods. Should evidence regarding the realizability of tax assets
change at a future point in time, the valuation allowance will be adjusted accordingly.
Liquidity and Capital Resources
At June 30, 2019, we had cash and cash equivalents
of $49.0 million, which represented a decrease of $2.7 million from December 31, 2018. The decrease in cash and cash equivalents
was primarily due to the following factors:
Cash used in operations was $2.3 million in
the first six months of 2019. Cash used in operations was primarily the result of $0.7 million of net loss and $2.0 million of
changes in assets and liabilities. Cash used from these sources was partially offset by the add back of $0.4 million of non-cash
items primarily for depreciation, amortization, and stock-based compensation.
Cash used in investing activities was $69,000
in the first six months of 2019. This cash usage consisted of purchases of property and equipment.
Cash used in financing activities was $266,000
in the first six months of 2019. Financing activity cash usage was the result of $239,000 used to buy back stock under our stock
repurchase program and $49,000 used to pay income taxes for employees who surrendered shares in connection with stock grants. Cash
used for these purposes was partially offset by $22,000 of proceeds from 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.
Recently Adopted Accounting Pronouncements
None.
ITEM 3: