The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
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, 2019 in conjunction with our 2019 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, 2020, and of operations and cash flows for the interim periods ended March 31, 2020 and 2019.
The results of operations for
the interim period ended March 31, 2020 are not necessarily indicative of the results to be expected for the year.
|
C)
|
Revenue Recognition. 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, 2020 and 2019, 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 under a perpetual license or subscription based model
for either a fixed term or 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).
|
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, 2019 and 2020 (in thousands):
|
|
Balance at Beginning of Period
|
|
|
Revenue Recognized
In Advance of Billings
|
|
|
Billings
|
|
|
Balance at End of Period
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,279
|
|
|
$
|
1,059
|
|
|
$
|
(420
|
)
|
|
$
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
3,315
|
|
|
$
|
183
|
|
|
$
|
(273
|
)
|
|
$
|
3,225
|
|
|
|
Balance at Beginning of Period
|
|
|
Billings
|
|
|
Revenue
Recognized
|
|
|
Balance at End of Period
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
3,099
|
|
|
$
|
772
|
|
|
$
|
(1,355
|
)
|
|
$
|
2,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
2,837
|
|
|
$
|
1,148
|
|
|
$
|
(1,368
|
)
|
|
$
|
2,617
|
|
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 66% of the remaining performance obligations over the next 12 months, with the
remainder recognized thereafter. As of March 31, 2020 the aggregate amount of the transaction price allocated to remaining performance
obligations for software maintenance contracts with a duration greater than one year was $1.4 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 $46.9 million and $47.7 million as of March 31, 2020 and December 31, 2019, respectively.
We classified our cash equivalents of $46.3 million and $46.2 million as of March 31, 2020 and December 31, 2019, respectively,
within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
As of March 31, 2020, our assets
that are measured at fair value on a recurring basis and whose carrying values approximate their respective fair values included
the following (in thousands):
|
|
Fair Value Measurement at March 31, 2020 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)
|
|
$
|
46,322
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
46,322
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2019, our
assets that are measured at fair value on a recurring basis and whose carrying values approximate their respective fair values
included the following (in thousands):
|
|
Fair Value Measurement at December 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)
|
|
$
|
46,174
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
46,174
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
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 68,681 for the three months ended March 31, 2020 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 income (loss) per share is calculated as follows
(in thousands, except per share data):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,060
|
)
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
21,522
|
|
|
|
21,565
|
|
Additional dilutive common stock equivalents
|
|
|
-
|
|
|
|
17
|
|
Diluted shares outstanding
|
|
|
21,522
|
|
|
|
21,582
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
Net income (loss) per share - diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
1
|
|
|
$
|
1
|
|
Research and development
|
|
|
4
|
|
|
|
3
|
|
Selling and marketing
|
|
|
25
|
|
|
|
-
|
|
General and administrative
|
|
|
53
|
|
|
|
10
|
|
Stock-based compensation expense
|
|
$
|
83
|
|
|
$
|
14
|
|
Stock Option Grants. We may grant stock options
under our 2001 Nonqualified Stock Plan. 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.
We did not grant any stock options
during the three months ended March 31, 2019 or 2020.
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 2020 and 2019 that affected financial results for the three month periods ended March 31, 2020 and 2019. The accounting
treatment of unrestricted stock awards is described below:
On March 27, 2020, we granted
210,000 shares of unrestricted stock to directors, officers and employees. The shares will be issued in two equal installments
shortly after June 30, 2020 and December 31, 2020, 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 $533,000, of which $10,000 was charged to expense in
the three months ended March 31, 2020. We anticipate the remaining $523,000 will be charged to expense ratably over the remaining
three quarters of 2020.
In September 2019, we granted
15,000 shares of unrestricted stock to an officer, which were issued in January 2020. The total stock-based compensation expense
related to this grant was $41,000 and was expensed in 2019
In September 2019, we granted
80,000 shares of unrestricted stock to an officer, which are to be issued in four equal installments shortly after September 19,
2020, September 19, 2021, September 19, 2022 and September 19, 2023, provided the grantee is serving as a director, officer or
employee on those dates. The total stock-based compensation expense related to this grant is $220,000, of which $16,000 was charged
to expense in 2019 and $14,000 was charged to expense in the first quarter of 2020. We anticipate the remaining $190,000 will be
charged to expense ratably over the next fourteen quarters.
In October 2019, we granted 7,500
shares of unrestricted stock to an officer, which were issued in January 2020. The total stock-based compensation expense related
to this grant was $22,000 and was expensed in 2019.
In October 2019, we granted 40,000
shares of unrestricted stock to an officer, which are to be issued in four equal installments shortly after October 1, 2020, October
1, 2021, October 1, 2022 and October 1, 2023, provided the grantee is serving as a director, officer or employee on those dates.
The total stock-based compensation expense related to this grant is $117,000, of which $7,000 was charged to expense in 2019 and
$7,000 was charged to expense in the first quarter of 2020. We anticipate the remaining $103,000 will be charged to expense ratably
over the next fourteen quarters.
In March 2019, we granted 143,000
shares of unrestricted stock to directors, officers and employees. The shares were issued in two equal installments shortly after
June 30, 2019 and December 31, 2019. We expensed $547,000 of stock-based compensation expense related to this grant in the year
ended December 31, 2019. There was no unamortized stock-based compensation charge associated with this stock grant as of December
31, 2019.
We issued shares of common stock
related to the March 2019 grant as follows: i) 58,548 net shares of common stock were issued in early July 2019 after employees
surrendered 12,952 shares for which we paid $43,000 of withholding taxes on their behalf; and ii) 56,605 net shares of common stock
were issued in early January 2020 after employees surrendered 14,895 shares for which we paid $50,000 of withholding taxes on their
behalf.
Performance Share Award.
In September 2019, we granted 20,000 shares of stock to an officer as a performance share award under our 2001 Nonqualified Stock
Plan. The shares were issued in September 2019 and were forfeitable if the grantee was not serving as a director, officer or employee
on March 19, 2020. Stock-based compensation expense for this stock grant was determined based on the fair market value of our stock
on the date of grant, as the number of shares in the grant was fixed on the grant date. The total stock-based compensation expense
related to this grant was $55,000, of which $31,000 was charged to expense in 2019 and $24,000 was charged to expense in the first
quarter of 2020.
In October 2019, we granted
10,000 shares of stock to an officer as a performance share award under our 2001 Nonqualified Stock Plan. The shares were issued
in October 2019 and were forfeitable if the grantee was not serving as a director, officer or employee on April 1, 2020. Stock-based
compensation expense for this stock grant was determined based on the fair market value of our stock on the date of grant, as the
number of shares in the grant was fixed on the grant date. The total stock-based compensation expense related to this grant was
$29,000, of which $15,000 was charged to expense in 2019 and $14,000 was charged to expense in the first quarter of 2020.
|
G)
|
Business Segments. We organize ourselves into a single segment that reports to the
chief operating decision maker.
|
We conduct our operations in
the United States and sell our products and services to domestic and international customers. Revenues were generated from the
following geographic regions for the three months ended March 31, 2020 and 2019 (in thousands):
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Three Months Ended
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|
|
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March 31,
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|
|
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2020
|
|
|
2019
|
|
|
|
|
|
|
|
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United States
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$
|
2,011
|
|
|
$
|
1,723
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United Kingdom
|
|
|
687
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|
|
|
880
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Rest of World
|
|
|
820
|
|
|
|
1,129
|
|
|
|
$
|
3,518
|
|
|
$
|
3,732
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Revenue by product group for
the three months ended March 31, 2020 and 2019 was (in thousands):
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Three Months Ended
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|
|
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March 31,
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|
|
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2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Biometrics
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|
$
|
3,263
|
|
|
$
|
3,472
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|
Imaging
|
|
|
255
|
|
|
|
260
|
|
|
|
$
|
3,518
|
|
|
$
|
3,732
|
|
Revenue by timing of transfer
of goods or services for the three months ended March 31, 2020 and 2019 was (in thousands):
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|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
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Goods or services transferred at a point in time
|
|
$
|
1,952
|
|
|
$
|
1,172
|
|
Goods or services transferred over time
|
|
|
1,566
|
|
|
|
2,560
|
|
|
|
$
|
3,518
|
|
|
$
|
3,732
|
|
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H)
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Income Taxes. Income
tax benefit was $0.1 million for the three months ended March 31, 2020. Income tax benefit for the three month period ended March
31, 2020 and income tax expense for the three month period ended March 31, 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.
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The Coronavirus Aid, Relief
and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The Act contained specific relief and stimulus measures
including allowing net operating losses originating in 2018 through 2020 to be carried back five years to offset taxable income
in the carryback period.
Separately, the enactment of
the Tax Cut and Jobs Act in 2017 allowed taxpayers to claim a refund for alternative minimum tax credits over a period of years.
The CARES Act enacted during the quarter allows for the entire amount of the credit to be refunded in 2020.
We have reviewed the impact
of the CARES Act enactment on the income tax provision and have determined that, as a result of the net operating loss carryback
provision, we can obtain a tax benefit if we were to carry back the forecasted 2020 net operating loss to the five year carryback
period.
The carryback of the estimated
loss would result in a refundable alternative minimum tax credit of approximately $736,000 and an increase in research credit carryforwards
previously utilized. The alternative minimum tax credit can be refunded in the future, if we decide to carry back the loss reported
on the filed 2020 tax return instead of electing to carry the loss forward. Due to the recent loss history and continued uncertainty
surrounding our future projections of income, we will benefit from the current year loss to the extent of the available tax refund
and will maintain a full valuation allowance on all other deferred tax assets, including any increase in research credit carryforward
resulting from a potential carryback.
As of the end of the period,
we have not made a determination on whether to elect to carry forward the 2020 operating loss, however, the alternative minimum
tax refund potential on carryback represents a minimum tax benefit we can obtain from the estimated 2020 loss. We can realize a
tax benefit to the extent of the carryback refund potential as it is considered a source of income against which to utilize the
2020 estimated loss.
The
total estimated benefit of the alternative minimum tax refund of $736,000 is included in our projection of our annual effective
rate and results in a year to date benefit of approximately $146,000 as of March 31, 2020. We recorded the year to date tax benefit
as a long term tax receivable.
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I)
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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, 2020, there was no revenue from this arrangement. In the three months ended March
31, 2019, the third party reported and we recorded $49,000 of income from this arrangement.
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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.
Future patent sales are likely
to be minimal as our remaining patents and patent applications pertain primarily to biometrics and imaging compression. Our current
intent is to retain these patents for use in the business.
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J)
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Recently Adopted Accounting Pronouncements. FASB ASU No. 2019-12. In December 2019,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU was issued to reduce the complexity of the reporting
information for financial statement users. We adopted the standard on January 1, 2020. The adoption of the standard does not result
in any adjustment to our financial statements.
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K)
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Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU
2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,
which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This
guidance was to be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. In November
2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic
815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for us, as a smaller reporting company,
until fiscal year 2023. We are continuing to assess the impact of the standard on our consolidated financial statements.
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ITEM 2: