The accompanying notes are an integral part
of the consolidated financial statements.
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 March 31, 2019, and of operations and cash flows for the interim periods ended March 31, 2019 and 2018.
The results of operations for
the interim period ended March 31, 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 March 31, 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 over time 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
over time 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).
|
Returns
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 months ended March 31, 2018 and 2019 (in thousands):
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
In Advance of
|
|
|
|
|
|
Balance at End of
|
|
|
|
Period
|
|
|
Billings
|
|
|
Billings
|
|
|
Period
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
1,429
|
|
|
$
|
33
|
|
|
$
|
(229
|
)
|
|
$
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,279
|
|
|
$
|
1,059
|
|
|
$
|
(420
|
)
|
|
$
|
3,918
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
|
|
|
Revenue
|
|
|
Balance at End of
|
|
|
|
Period
|
|
|
Billings
|
|
|
Recognized
|
|
|
Period
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,932
|
|
|
$
|
758
|
|
|
$
|
(1,294
|
)
|
|
$
|
2,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
3,099
|
|
|
$
|
772
|
|
|
$
|
(1,355
|
)
|
|
$
|
2,516
|
|
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 97% of the remaining performance obligations over the next 12 months, with the
remainder recognized thereafter. As of March 31, 2019 and 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 $50.4 million and $51.6 million as of March 31, 2019 and December 31, 2018, respectively.
We classified our cash equivalents of $48.1 million and $47.9 million as of March 31, 2019 and December 31, 2018 within Level 1
of the fair value hierarchy because they are valued using quoted market prices.
As of March 31, 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 March 31,
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)
|
|
$
|
48,136
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,136
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
|
Net income (loss) per share is calculated as follows
(in thousands, except per share data):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
228
|
|
|
$
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
21,565
|
|
|
|
21,547
|
|
Additional dilutive common stock equivalents
|
|
|
17
|
|
|
|
26
|
|
Diluted shares outstanding
|
|
|
21,582
|
|
|
|
21,573
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
Net income (loss) per share - diluted
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
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
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
1
|
|
|
$
|
-
|
|
Research and development
|
|
|
3
|
|
|
|
5
|
|
Selling and marketing
|
|
|
-
|
|
|
|
1
|
|
General and administrative
|
|
|
10
|
|
|
|
18
|
|
Stock-based compensation expense
|
|
$
|
14
|
|
|
$
|
24
|
|
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. When we grant stock options, we estimate their fair value using the Black-Scholes valuation model. This valuation
model takes into account the exercise price of the award, as well as a variety of significant assumptions. The assumptions used
to estimate the fair value of stock options include the expected term, the expected volatility of our stock over the expected term,
the risk-free interest rate over the expected term, and our expected annual dividend yield. We believe that the valuation technique
and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive
equity awards.
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 month periods ended March 31, 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 $14,000 was charged to expense
in the three months ended March 31, 2019 and we anticipate the remaining $533,000 will be charged to expense ratably over the remaining
three 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 months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,723
|
|
|
$
|
2,069
|
|
United Kingdom
|
|
|
880
|
|
|
|
134
|
|
Rest of World
|
|
|
1,129
|
|
|
|
708
|
|
|
|
$
|
3,732
|
|
|
$
|
2,911
|
|
Revenue by product group for
the three months ended March 31, 2019 and 2018 was (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Biometrics
|
|
$
|
3,472
|
|
|
$
|
2,485
|
|
Imaging
|
|
|
260
|
|
|
|
426
|
|
|
|
$
|
3,732
|
|
|
$
|
2,911
|
|
Revenue by timing of transfer
of goods or services for the three months ended March 31, 2019 and 2018 was (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Goods or services transferred at a point in time
|
|
$
|
1,172
|
|
|
$
|
1,474
|
|
Goods or services transferred over time
|
|
|
2,560
|
|
|
|
1,437
|
|
|
|
$
|
3,732
|
|
|
$
|
2,911
|
|
|
H)
|
Recent Accounting Pronouncements Not Yet Adopted.
|
FASB ASU
No. 2016-13.
In June 2016, the FASB issued Accounting Standard Update No. 2016-13, “Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments.” This new standard replaces the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial
instruments, entities will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing
credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be
recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This
standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted in fiscal years beginning
after December 15, 2018. We are currently evaluating the effect this standard will have on our consolidated financial statements
and related disclosures.
With the exception of the standard
discussed above, there have been no other recently issued accounting pronouncements that are of significance or potential significance
to us that we have not adopted as of March 31, 2019.
|
I)
|
Income Taxes
.
Income tax expense was $3,000 for the three months ended March 31, 2019. Income tax benefit was $66,000 for the three months ended
March 31, 2018. Income tax expense for the three month period ended March 31, 2019 and income tax benefit for the three month
period ended March 31, 2018 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 March 31, 2019, we had a total of $5.2 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.
|
J)
|
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 March 31, 2019, the third party reported and we recorded
$49,000 of income from this arrangement. In the three months ended March 31, 2018, there was no income from this arrangement.
|
ITEM 2: