Attached files
| file | filename |
|---|---|
| EX-32 - IMAGEWARE SYSTEMS INC | ex32-1.htm |
| EX-31.2 - IMAGEWARE SYSTEMS INC | ex31-2.htm |
| EX-31.1 - IMAGEWARE SYSTEMS INC | ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2016
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
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For the transition period from _________ to _________
Commission file number 001-15757
IMAGEWARE SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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33-0224167
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(State or Other Jurisdiction of Incorporation or
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(IRS Employer Identification No.)
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Organization)
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10815 Rancho Bernardo Rd., Suite 310
San Diego, CA 92127
(Address of Principal Executive Offices)
(858) 673-8600
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes [X] No
[ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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[ ]
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Accelerated filer
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[X]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[ ]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-12 of the Exchange Act). Yes
[ ] No [X]
The number of shares of common stock, with $0.01 par value,
outstanding on November 11th, 2016 was 94,807,303.
IMAGEWARE SYSTEMS, INC.
INDEX
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5
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23
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38
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38
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39
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40
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41
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PART I
ITEM 1. FINANCIAL STATEMENTS
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except for share and per share data)
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September 30,
2016
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December 31,
2015
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ASSETS
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(Unaudited)
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Current
Assets:
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Cash
and cash equivalents
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$1,685
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$3,352
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Accounts
receivable, net of allowance for doubtful accounts of $3 at
September 30, 2016 and December 31, 2015
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199
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349
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Inventory,
net
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81
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46
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Other
current assets
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237
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69
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Total
Current Assets
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2,202
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3,816
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Property
and equipment, net
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115
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162
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Other
assets
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30
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98
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Intangible
assets, net of accumulated amortization
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109
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117
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Goodwill
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3,416
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3,416
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Total Assets
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$5,872
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$7,609
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LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
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Current
Liabilities:
|
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Accounts
payable
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$216
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$198
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Deferred
revenue
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1,383
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1,059
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Accrued
expense
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818
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1,149
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Lines
of credit payable to related parties, net of discount
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2,026
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—
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Total
Current Liabilities
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4,443
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2,406
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Pension
obligation
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1,615
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1,511
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Total
Liabilities
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6,058
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3,917
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Shareholders’
Equity (Deficit):
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Preferred
stock, authorized 4,000,000 shares:
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Series
B Convertible Redeemable Preferred Stock, $0.01 par value;
designated 750,000 shares, 389,400 shares issued, and 239,400
outstanding at September 30, 2016 and December 31, 2015;
liquidation preference $620 and $607 at September 30, 2016 and
December 31, 2015, respectively.
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2
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2
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Series
E Convertible Redeemable Preferred Stock, $0.01 par value;
designated 12,000 shares, 12,000 shares issued and outstanding at
September 30, 2016 and December 31, 2015; liquidation preference
$12,000 and $12,240 at September 30, 2016 and December 31, 2015,
respectively.
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—
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—
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Series
F Convertible Redeemable Preferred Stock, $0.01 par value;
designated 2,000 shares, 2,000 and 0 shares issued and outstanding
at September 30, 2016 and December 31, 2015; liquidation preference
$2,000 and $0 at September 30, 2016 and December 31, 2015,
respectively.
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—
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—
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Common Stock, $0.01 par value, 150,000,000 shares authorized;
94,814,007 and 94,077,599 shares issued at September 30, 2016 and
December 31, 2015, respectively, and 94,807,303 and 94,070,895
shares outstanding at September 30, 2016 and December 31, 2015,
respectively.
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947
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940
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Additional
paid-in capital
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153,844
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149,902
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Treasury
stock, at cost 6,704 shares
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(64)
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(64)
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Accumulated
other comprehensive loss
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(1,242)
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(1,195)
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Accumulated
deficit
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(153,673)
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(145,893)
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Total
Shareholders’ Equity (Deficit)
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(186)
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3,692
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Total Liabilities and Shareholders’ Equity
(Deficit)
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$5,872
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$7,609
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except share and per share amounts)
(Unaudited)
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Three Months
Ended
September 30,
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Nine Months Ended
September 30, |
||
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2016
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2015
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2016
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2015
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Revenue:
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Product
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$209
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$552
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$968
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$1,952
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Maintenance
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639
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629
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1,919
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1,916
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848
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1,181
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2,887
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3,868
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Cost of revenue:
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Product
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32
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124
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162
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786
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Maintenance
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200
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197
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624
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618
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Gross
profit
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616
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860
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2,101
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2,464
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Operating expense:
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General
and administrative
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904
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907
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2,810
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2,611
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Sales
and marketing
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717
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663
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2,133
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2,030
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Research
and development
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1,301
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1,203
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3,932
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3,350
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Depreciation
and amortization
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33
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40
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103
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123
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2,955
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2,813
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8,978
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8,114
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Loss
from operations
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(2,339)
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(1,953)
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(6,877)
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(5,650)
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Interest
expense, net
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89
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1
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135
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436
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Other
income, net
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—
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(99)
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(200)
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(145)
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Loss
before income taxes
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(2,428)
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(1,855)
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(6,812)
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(5,941)
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Income
tax expense
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3
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3
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10
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11
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Net
loss
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(2,431)
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(1,858)
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(6,822)
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(5,952)
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Preferred
dividends
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(317)
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(306)
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(986)
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(812)
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Net
loss available to common shareholders
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$(2,748)
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$(2,164)
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$(7,808)
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$(6,764)
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Basic and diluted loss per common share - see Note 3:
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Net
loss
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$(0.03)
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$(0.02)
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$(0.07)
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$(0.06)
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Preferred
dividends
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(0.00)
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(0.00)
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(0.01)
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(0.01)
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Basic
and diluted loss per share available to common
shareholders
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$(0.03)
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$(0.02)
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$(0.08)
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$(0.07)
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Basic
and diluted weighted-average shares outstanding
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94,550,721
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93,876,339
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94,309,309
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93,690,097
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
(Unaudited)
|
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
|
||
|
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2016
|
2015
|
2016
|
2015
|
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Net
loss
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$(2,431)
|
$(1,858)
|
$(6,822)
|
$(5,952)
|
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Other
comprehensive income (loss):
|
|
|
|
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Foreign
currency translation adjustment
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(16)
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—
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(46)
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46
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Comprehensive
loss
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$(2,447)
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$(1,858)
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$(6,868)
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$(5,906)
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
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Nine Months Ended
September 30,
|
|
|
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2016
|
2015
|
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Cash flows from operating activities
|
|
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Net
loss
|
$(6,822)
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$(5,952)
|
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Adjustments
to reconcile net loss to net cash used by operating
activities:
|
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Depreciation
and amortization
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103
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123
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Amortization
of debt issuance costs and beneficial conversion
feature
|
85
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426
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Reduction
in accrued expense from the expiration of statute of
limitations
|
(200)
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—
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Warrants
issued in lieu of cash paid for services
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—
|
80
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Stock-based
compensation
|
859
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665
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Change
in assets and liabilities
|
|
|
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Accounts
receivable
|
150
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(777)
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Inventory
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(35)
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539
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Other
assets
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(134)
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(53)
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Accounts
payable
|
18
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(128)
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Deferred
revenue
|
324
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(502)
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Accrued
expense
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(131)
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(76)
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Pension
obligation
|
104
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33
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|
Total
adjustments
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1,143
|
330
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Net
cash used in operating activities
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(5,679)
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(5,622)
|
|
|
|
|
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Cash flows from investing activities
|
|
|
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Purchase
of property and equipment
|
(47)
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(73)
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Net
cash used in investing activities
|
(47)
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(73)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Proceeds
from exercised stock options
|
1
|
34
|
|
Proceeds
from issuance of preferred stock, net of issuance
costs
|
1,979
|
9,955
|
|
Proceeds
from lines of credit, net of repayments
|
2,150
|
400
|
|
Dividends
paid
|
(25)
|
(25)
|
|
Net
cash provided by financing activities
|
4,105
|
10,364
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
(46)
|
46
|
|
Net
increase (decrease) in cash and cash equivalents
|
(1,667)
|
4,715
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
3,352
|
218
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$1,685
|
$4,933
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash
paid for interest
|
$1
|
$1
|
|
Cash
paid for income taxes
|
$—
|
$—
|
|
Summary
of non-cash investing and financing activities:
|
|
|
|
Beneficial
conversion feature of convertible debt
|
$176
|
$146
|
|
Conversion
of related party notes into Series E Preferred
|
$—
|
$1,978
|
|
Stock
dividend on Series E Preferred
|
$923
|
$774
|
|
Stock
dividend on Series F Preferred
|
$12
|
$—
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE
SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND
DESCRIPTION OF BUSINESS
Overview
ImageWare Systems, Inc. (the
“Company”) is incorporated in the state of Delaware.
The Company is a pioneer and leader in the market for biometrically
enabled software-based identity management solutions. The Company
develops mobile and cloud-based identity management solutions
providing biometric, secure credential and law enforcement
technologies. Our patented biometric product line includes our
flagship product, the Biometric Engine®, a hardware and
algorithm independent multi-biometric engine that enables the
enrollment and management of unlimited population
sizes. Our identification products are used to create,
issue and manage secure credentials, including national IDs,
passports, driver's licenses, smart cards and access control
credentials. Our digital booking products provide law enforcement
with integrated mug shots, fingerprint live scans, and
investigative capabilities. The Company is headquartered
in San Diego, California, with offices in Portland, Oregon, Mexico,
and Ottawa, Ontario.
Recent Developments
Creation of Series F Convertible Redeemable Preferred Stock and
Series F Financing
On September 2, 2016, the Company filed the
Certificate of Designations, Preferences, and Rights of the Series
F Convertible Preferred Stock (“Certificate of
Designations”) with the
Delaware Division of Corporations, designating 2,000 shares of its
preferred stock as Series F Convertible Redeemable Preferred Stock
(“Series F
Preferred”). Shares of
Series F Preferred rank junior to the Company’s Series B
Convertible Redeemable Preferred Stock, Series E Convertible
Redeemable Preferred Stock and existing indebtedness, and accrue
dividends at a rate of 10% per annum, payable on a quarterly basis
in shares of the Company’s common stock, $0.01 par value
("Common Stock"). Each
share of Series F Preferred has a liquidation preference of $1,000
per share (“Liquidation
Preference”), and is
convertible, at the option of the holder, into that number of
shares of the Company’s Common Stock equal to the Liquidation
Preference, divided by $1.50 (the “Series F Conversion
Shares”).
On September 7, 2016, the Company and Cap 1 LLC, a
family client of Summer Road LLC (the “Investor”), entered into a Securities Purchase
Agreement (the “Purchase Agreement”), wherein the Investor agreed to purchase
2,000 shares of Series F Preferred for $1,000 per share (the
“Series F
Financing”), resulting in
gross proceeds to the Company of $2,000,000 net of issuance costs
of approximately $21,000.
Key Product Introduction
On
November 14, 2016, the Company introduced GoVerifyID®
Enterprise Suite, a multi-modal, multi-factor biometric
authentication solution for the enterprise market. An
algorithm-agnostic solution, GoVerify ID Enterprise Suite is an
end-to-end biometric platform that seamlessly integrates with an
enterprise’s existing Microsoft infrastructure, offering
businesses a turnkey biometric solution for quick deployment.
The Company feels that this product has the potential to
dramatically accelerate adoption of its biometric solution due to
the worldwide prevalence of enterprise use of the Microsoft
infrastructure.
Working
across the entire enterprise ecosystem, GoVerifyID Enterprise Suite
offers a consistent user experience and centralized administration
with the highest level of security, flexibility, and usability.
Specific benefits include:
●
Mobile-workforce
friendly—With
GoVerifyID Enterprise Suite user authentication
logins are possible for a tablet or laptop even when disconnected
from the corporate network. Additionally, GoVerifyID Enterprise
offers a consistent user authentication experience across all login
environments.
●
Hybrid cloud—GoVerifyID Enterprise Suite is linked from
the cloud to an enterprise’s Microsoft infrastructure and is
backward compatible with Windows 7, 8 and 10. Additionally, because
the solution is SaaS-based it can easily scale to process hundreds
of millions of transactions and store just as many
biometrics.
●
Seamless
integration—GoVerifyID
Enterprise Suite is a snap-in to the Microsoft Management console
and can be centrally managed at the server. Additionally, the
solution allows for seamless movement as it integrates with Active
Directory using an organization’s existing Microsoft security
infrastructure.
Liquidity, Capital Resources
and Going Concern
Historically, our principal sources of cash have
included customer payments from the sale of our products, proceeds
from the issuance of common and preferred stock and proceeds from
the issuance of debt, including our Lines of Credit (defined
below). Our principal uses of cash have included cash used in
operations, payments relating to purchases of property and
equipment and repayments of borrowings. We expect that our
principal uses of cash in the future will be for product
development including customization of identity management products
for enterprise and consumer applications, further development of
intellectual property, development of Software-as-a-Service
(“SaaS”) capabilities for existing products as
well as general working capital and capital expenditure
requirements. We expect that, as our revenue grows, our sales and
marketing and research and development expense will continue to
grow, albeit at a slower rate and, as a result, we will need to
generate significant net revenue to achieve and sustain income from
operations.
Reliance on Lines of Credit
On March 9, 2016, the
Company and Neal Goldman, a director of the Company
(“Goldman”),
entered into the fourth amendment (the "Fourth
Amendment") to the convertible
promissory note and line of credit previously issued by the Company
to Goldman on March 27, 2013 (the "Goldman
LOC"). The Fourth
Amendment (i) provides the Company with the ability to borrow up to
$5.0 million under the terms of the Goldman LOC; (ii) permits
Goldman to convert the outstanding principal, plus any accrued but
unpaid interest due under the Goldman LOC (the "Outstanding
Balance"), into shares of the
Company's Common Stock for $1.25 per share; and (iii) extends the
maturity date of the Goldman LOC to June 30,
2017.
In addition, on March
9, 2016, the Company and Charles Crocker, also a director of the
Company (“Crocker”),
entered into a new line of credit and promissory note (the
"New
Crocker LOC"), in the principal
amount of $500,000. The New Crocker LOC accrues interest at a rate
of 8% per annum, and matures on the earlier to occur of June 30,
2017 or such date that the Company consummates a debt and/or equity
financing resulting in net proceeds to the Company of at least $3.5
million. All outstanding amounts due under the terms of the New
Crocker LOC are convertible into shares of the Company's Common
Stock at $1.25 per share.
As of September 30,
2016, $1,650,000 was outstanding under the terms of the Goldman LOC
and $500,000 was outstanding under the terms of the New Crocker LOC
(together, the “Lines
of Credit”). We
anticipate needing to increase our borrowings under the Lines of
Credit to continue to fund our working capital needs, thereby
increasing the aggregate indebtedness due and payable on or before
June 30, 2017.
We
currently do not anticipate generating sufficient revenue and
profit to repay these borrowings in full when due. Therefore,
unless the holders of the notes issued under the Lines of Credit
convert any outstanding balance into shares of Common Stock, we
will need to seek an extension of the maturity date of the Lines of
Credit on or before June 30, 2017. If remaining available
borrowings under our Lines of Credit are insufficient or we are
unable to extend the maturity date of the Lines of Credit, we will
be required to raise additional capital through debt and/or equity
financing to continue operations. No assurances can be given that
any such financing will be available to us on favorable terms, if
at all. At this time, we do not have any commitments for
alternative financing or for an extension of the maturity date of
the Lines of Credit.
Going Concern
As
reflected in the accompanying condensed consolidated financial
statements, the Company has continuing losses, negative working
capital and negative cash flows from operations. Available
borrowings under our existing Lines of Credit may be insufficient
to provide for our working capital needs for the next twelve
months. As a result, we may need to raise additional capital
through debt and/or equity financing to execute our business plan.
In addition, in the event we are unable to raise additional
capital, we may be required to sell certain of the Company’s
assets or license the Company’s technologies to others. These
uncertainties raise substantial doubt about the Company’s
ability to continue as a going concern.
In
view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts
shown in the accompanying condensed consolidated balance sheet is
dependent upon continued operations of the Company, which, in turn,
is dependent upon the Company’s ability to continue to raise
capital and generate positive cash flows from operations. However,
the Company operates in markets that are emerging and highly
competitive. There is no assurance that the Company will operate at
a profit or generate positive cash flows in the
future.
The
condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a
going concern.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF
PRESENTATION
Basis of Presentation
The accompanying
condensed consolidated balance sheet as of December 31, 2015, which
has been derived from audited financial statements, and the
unaudited interim condensed consolidated financial statements have
been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”)
and the rules and regulations of the Securities and Exchange
Commission (“SEC”)
related to a quarterly report on Form 10-Q. Certain information and
note disclosures normally included in annual financial statements
prepared in accordance with GAAP have been condensed or omitted
pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the
information not misleading. The interim financial statements
reflect all adjustments, which, in the opinion of management, are
necessary for a fair statement of the results for the periods
presented. All such adjustments are of a normal and recurring
nature. These unaudited condensed consolidated financial statements
should be read in conjunction with the Company’s audited
financial statements for the year ended December 31, 2015, which
are included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2015 that was filed with the SEC on
March 15, 2016.
Operating
results for the three and nine months ended September 30, 2016 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 2016, or any other future
periods.
Significant Accounting Policies
Principles of Consolidation
The
condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been
eliminated.
Operating Cycle
Assets
and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying
condensed consolidated balance sheets, although they will be
recognized in the consolidated statement of operations in the
normal course of contract completion which may take more than one
operating cycle.
Use of Estimates
The
preparation of the condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements, and
the reported amounts of revenue and expense during the reporting
period. Significant estimates include the allowance for doubtful
accounts receivable, inventory carrying values, deferred tax asset
valuation allowances, accounting for loss contingencies,
recoverability of goodwill and acquired intangible assets and
amortization periods, assumptions used in the Black-Scholes model
to calculate the fair value of share-based payments, and
assumptions used in the application of fair value methodologies to
calculate the fair value of pension assets and obligations. Actual
results could differ from estimates.
Cash and Cash Equivalents
The
Company defines cash equivalents as highly liquid investments with
original maturities of less than 90 days that are not held for sale
in the ordinary course of business.
Accounts Receivable
In
the normal course of business, the Company extends credit without
collateral requirements to its customers that satisfy pre-defined
credit criteria. Accounts receivable are recorded net of an
allowance for doubtful accounts. The Company records its allowance
for doubtful accounts based upon an assessment of various factors.
The Company considers historical experience, the age of the
accounts receivable balances, the credit quality of its customers,
current economic conditions and other factors that may affect
customers’ ability to pay to determine the level of allowance
required. Accounts receivable are written off against
the allowance for doubtful accounts when all collection efforts by
the Company have been unsuccessful.
Inventories
Finished goods inventories are stated at the lower
of cost, determined using the average cost method, or
market. See Note 4, “Inventory”, below.
Fair Value of Financial Instruments
For
certain of the Company’s financial instruments, including
accounts receivable, accounts payable, accrued expense, deferred
revenue and notes payable to related-parties, the carrying amounts
approximate fair value due to their relatively short
maturities.
Revenue Recognition
The
Company recognizes revenue from the following major revenue
sources:
●
Long-term
fixed-price contracts involving significant
customization
●
Fixed-price
contracts involving minimal customization
●
Software
licensing
●
Sales
of computer hardware and identification media
●
Post-contract customer support
(“PCS”)
The Company’s revenue recognition policies
are consistent with GAAP including the Financial Accounting
Standards Board (“FASB”), Accounting Standards Codification
(“ASC”) 985-605, Software Revenue
Recognition, ASC 605-35,
Revenue
Recognition, Construction-Type and Production-Type
Contracts, SEC Staff Accounting
Bulletin 104, and ASC 605-25, Revenue Recognition, Multiple
Element Arrangements.
Accordingly, the Company recognizes revenue when all of the
following criteria are met: (i) persuasive evidence that an
arrangement exists, (ii) delivery has occurred or services have
been rendered, (iii) the fee is fixed or determinable and (iv)
collectability is reasonably assured.
The Company recognizes revenue and profit as work
progresses on long-term, fixed-price contracts involving
significant amounts of hardware and software customization using
the percentage of completion method based on costs incurred to
date, compared to total estimated costs upon completion. The
primary components of costs incurred are third party software and
direct labor cost including fringe benefits. Revenue
recognized in excess of amounts billed are classified as current
assets under “Costs and estimated earnings in excess of
billings on uncompleted contracts”. Amounts billed to
customers in excess of revenue recognized are classified as current
liabilities under “Billings in excess of costs and estimated
earnings on uncompleted contracts”. Revenue from contracts
for which the Company cannot reliably estimate total costs, or
there are not significant amounts of customization, are recognized
upon completion. For contracts that
require significant amounts of customization that the Company
accounts for under the completed contract method of revenue
recognition, the Company defers revenue recognition until customer
acceptance is received. For contracts containing either extended or
dependent payment terms, revenue recognition is deferred until such
time as payment has been received by the Company.
The Company also generates
non-recurring revenue from the licensing of its software. Software
license revenue is recognized upon the execution of a license
agreement, upon deliverance, when fees are fixed and determinable,
when collectability is probable and when all other significant
obligations have been fulfilled. The Company also generates revenue
from the sale of computer hardware and identification media.
Revenue for these items is recognized upon delivery of these
products to the customer. The Company’s revenue from periodic
maintenance agreements is generally recognized ratably over the
respective maintenance periods provided no significant obligations
remain and collectability of the related receivable is probable.
Amounts collected in advance for maintenance services are included
in current liabilities under "Deferred revenue". Sales
tax collected from customers is excluded from
revenue.
Customer Concentration
For
the three months ended September 30, 2016, one customer
accounted for approximately 22% or $185,000 of our total revenue
and had trade receivables at September 30, 2016 of $0. For the nine
months ended September 30, 2016, two customers accounted for
approximately 31% or $903,000 of our total revenue and had trade
receivables at September 30, 2016 of $53,000.
For
the three months ended September 30, 2015, two customers
accounted for approximately 26% or $312,000 of our total revenue
and had trade receivables at September 30, 2015 of $792,000, all of
which was collected subsequent to September 30, 2015. For the nine
months ended September 30, 2015, three customers accounted for
approximately 35% or $1,353,000 of our total revenue and had trade
receivables at September 30, 2015 of $792,000, all of which was
collected subsequent to September 30, 2015.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (the
“FASB”), or other standard setting bodies, which
are adopted by us as of the specified effective
date.
FASB ASU 2014-09.
In May 2014, FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with
Customers, which requires an
entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to
customers. ASU No. 2014-09 will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In
July 2015, the FASB finalized a one-year deferral of the effective
date of the new standard. For public entities, the deferral results
in the new revenue standard being effective for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2017. Calendar year-end public companies are therefore required
to apply the revenue guidance beginning in their 2018 interim and
annual financial statements. The standard permits the use of either
the retrospective or cumulative effect transition method. We are
currently evaluating the effect that ASU No. 2014-09 will have on
our consolidated financial statements and related
disclosures.
FASB ASU No.
2014-15. In August 2014, the
FASB issued ASU No. 2014-15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern, which provides
guidance on management’s responsibility in evaluating whether
there is substantial doubt about a company’s ability to
continue as a going concern and to provide related footnote
disclosures. ASU 2014-15 will be effective in the fourth quarter of
2016, with early adoption permitted. The Company is currently
evaluating the impact of its pending adoption of ASU 2014-15 on its
consolidated financial statements.
FASB ASU No.
2015-11. In July 2015, the FASB
issued ASU 2015-11, “Simplifying the Measurement of
Inventory (Topic 330): Simplifying the Measurement of
Inventory”. The
amendments in ASU 2015-11 require an entity of measure inventory at
the lower of cost or market. Market could be replacement cost, net
realizable value, or net realizable value less an approximately
normal profit margin. The amendments do not apply to inventory that
is measured using last-in, first out (LIFO) or the retail inventory
method. The amendments apply to all other inventory,
which includes inventory that is measured using first-in, first-out
(FIFO) or average cost. For public business entities, the
amendments in ASU 2015-11 are effective for fiscal years beginning
after December 15, 2016, including interim periods within those
fiscal years. The amendments should be applied prospectively with
earlier application permitted as of the beginning of an interim or
annual reporting period. We do not expect adoption of ASU No.
2015-11 to have a significant impact on our consolidated financial
statements.
FASB ASU No.
2016-01. In January 2016, the
FASB issued ASU 2016-01, “Financial
Instruments—Overall - Recognition and Measurement of
Financial Assets and Financial Liabilities”.
The amendments in this ASU address
certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments and apply to all entities that
hold financial assets or owe financial liabilities. The amendments
in this ASU also simplify the impairment assessment of equity
investments without readily determinable fair values by requiring
assessment for impairment qualitatively at each reporting period.
That impairment assessment is similar to the qualitative assessment
for long-lived assets, goodwill, and indefinite-lived intangible
assets. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal
years, with earlier application permitted for financial statements
that have not been issued. An entity should apply the amendments by
means of a cumulative-effect adjustment to the balance sheet as of
the beginning of the fiscal year of adoption. We plan to adopt the
provisions of this ASU for our fiscal year beginning January 1,
2018 and are currently evaluating the impact the adoption of this
new accounting standard will have on our consolidated financial
statements.
FASB ASU No.
2016-02. In February 2016, the
FASB issued ASU No. 2016-02, “Leases”.
This guidance will result in key changes to lease accounting and
will aim to bring leases onto balance sheets to give investors,
lenders, and other financial statement users a more comprehensive
view of a company's long-term financial obligations as well as the
assets it owns versus leases. The new leasing standard will be
effective for fiscal years beginning after December 15, 2018, and
for interim periods within those fiscal years. The Company is
currently evaluating the impact this guidance will have on our
consolidated financial statements as well as the expected adoption
method.
FASB ASU No.
2016-06. In March 2016, the
FASB issued Accounting Standards Update No. 2016-06,
Derivatives and
Hedging (Topic 815) – Contingent Put and Call Options in Debt
Instruments (“ASU
2016-06”), which will reduce diversity of practice in
identifying embedded derivatives in debt instruments. ASU 2016-06
clarifies that the nature of an exercise contingency is not subject
to the “clearly and closely” criteria for purposes of
assessing whether the call or put option must be separated from the
debt instrument and accounted for separately as a derivative. This
guidance is effective for fiscal years beginning after December 15,
2016 and interim periods within those fiscal years. The Company is
currently assessing the impact that adopting this new accounting
standard will have on its consolidated financial statements and
footnote disclosures.
FASB ASU No.
2016-08. In March 2016, the
FASB issued Accounting Standards Update No. 2016-08,
Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU
2016-08 clarifies the implementation guidance on principal versus
agent considerations. The guidance includes indicators to assist an
entity in determining whether it controls a specified good or
service before it is transferred to the customers. This guidance is
effective for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years. The Company is
currently assessing the impact that adopting this new accounting
standard will have on its consolidated financial statements and
footnote disclosures.
FASB ASU No.
2016-09. In March 2016, the
FASB issued Accounting Standards Update No. 2016-09,
Compensation
– Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09
identifies areas for simplification involving several aspects of
accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity
or liabilities, an option to recognize gross stock compensation
expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. This ASU
is effective for fiscal years beginning after December 15, 2016 and
interim periods within those annual periods. The Company is
currently assessing the impact that adopting this new accounting
standard will have on its consolidated financial statements and
footnote disclosures.
FASB ASU No.
2016-10. In April 2016, the
FASB issued Accounting Standards Update No. 2016-10,
Revenue from
Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 provides
further implementation guidance on identifying performance
obligations and also improves the operability and understandability
of the licensing implementation guidance. This guidance is
effective for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years. The Company is
currently assessing the impact that adopting this new accounting
standard will have on its consolidated financial statements and
footnote disclosures.
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. ASU 2016-13 changes the impairment model for most
financial assets and certain other instruments. For trade and other
receivables, held-to-maturity debt securities, loans and other
instruments, entities will be required to use a new forward-looking
“expected loss” model that will replace today’s
“incurred loss” model and generally will result in the
earlier recognition of allowances for losses. For
available-for-sale debt securities with unrealized losses, entities
will measure credit losses in a manner similar to current practice,
except that the losses will be recognized as an allowance. This
guidance is effective for fiscal years beginning after December 15,
2019 including interim periods within those fiscal years. The
Company is currently evaluating the potential impact of adoption of
this standard on its consolidated financial
statements.
FASB ASU No. 2016-15.
In August
2016, the FASB issued Accounting Standards Update No.
2016-15, Statement
of Cash Flows (Topic 230) Classification
of Certain Cash Receipts and Cash
Payments. ASU
2016-15 eliminates the diversity in practice related to the
classification of certain cash receipts and payments for debt
prepayment or extinguishment costs, the maturing of a zero coupon
bond, the settlement of contingent liabilities arising from a
business combination, proceeds from insurance settlements,
distributions from certain equity method investees and beneficial
interests obtained in a financial asset securitization. ASU 2016-15
designates the appropriate cash flow classification, including
requirements to allocate certain components of these cash receipts
and payments among operating, investing and financing
activities. This guidance is
effective for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years.
The
retrospective transition method, requiring adjustment to all
comparative periods presented, is required unless it is
impracticable for some of the amendments, in which case those
amendments would be prospectively as of the earliest date
practicable. The Company is currently assessing the impact that
adopting this new accounting standard will have on its consolidated
financial statements and footnote disclosures.
NOTE 3. NET LOSS PER COMMON SHARE
Basic
loss per common share is calculated by dividing net loss available
to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted loss
per common share is calculated by dividing net loss available to
common shareholders for the period by the weighted-average number
of common shares outstanding during the period, adjusted to
include, if dilutive, potential dilutive shares consisting of
convertible preferred stock, convertible notes payable, stock
options and warrants, calculated using the treasury stock and
if-converted methods. For diluted loss per share
calculation purposes, the net loss available to common shareholders
is adjusted to add back any preferred stock dividends and any
interest on convertible debt reflected in the condensed
consolidated statement of operations for the respective
periods.
The
table below presents the computation of basic and diluted loss per
share:
|
(Amounts in thousands except share and per share
amounts)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
|
2016
|
2015
|
2015
|
2016
|
|
Numerator
for basic and diluted loss per share:
|
|
|
|
|
|
Net
loss
|
$(2,431)
|
$(1,858)
|
$(6,822)
|
$(5,952)
|
|
Preferred
dividends
|
(317)
|
(306)
|
(986)
|
(812)
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
$(2,748)
|
$(2,164)
|
$(7,808)
|
$(6,764)
|
|
|
|
|
|
|
|
Denominator
for basic and dilutive loss per share – weighted-average
shares outstanding
|
94,550,721
|
93,867,339
|
94,309,309
|
93,690,097
|
|
|
|
|
|
|
|
Net
loss
|
$(0.03)
|
$(0.02)
|
$(0.07)
|
$(0.06)
|
|
Preferred
dividends
|
(0.00)
|
(0.00)
|
(0.01)
|
(0.01)
|
|
|
|
|
|
|
|
Basic
and diluted loss per share available to common
shareholders
|
$(0.03)
|
$(0.02)
|
$(0.08)
|
$(0.07)
|
The
following potential dilutive securities have been excluded from the
computations of diluted weighted-average shares outstanding as
their effect would have been antidilutive:
|
Potential Dilutive Securities
|
|
For the Three and Nine Months Ended
September 30,
|
|
|||||
|
|
|
2016
|
|
|
2015
|
|
||
|
Convertible notes payable
|
|
1,759,888
|
|
|
—
|
|
||
|
Convertible
preferred stock
|
|
|
7,696,123
|
|
|
|
6,362,790
|
|
|
Stock
options
|
|
|
6,529,510
|
|
|
|
5,361,969
|
|
|
Warrants
|
|
|
425,000
|
|
|
|
466,666
|
|
|
Total potential dilutive securities
|
|
|
16,410,521
|
|
|
|
12,191,425
|
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories
of $81,000 as of September 30, 2016 were comprised of work in
process of $64,000 representing direct labor costs on in-process
projects and finished goods of $17,000 net of reserves for obsolete
and slow-moving items of $3,000.
Inventories of $46,000 as of December 31, 2015 were comprised of
work in process of $42,000 representing direct labor costs on
in-process projects and finished goods of $4,000 net of reserves
for obsolete and slow-moving items of $3,000.
Intangible Assets
The
Company has intangible assets in the form of trademarks, trade
names and patents. The carrying amounts of the Company’s
acquired trademark and trade name intangible assets were $0 as of
September 30, 2016 and December 31, 2015, respectively, which
include accumulated amortization of $347,000 as of September 30,
2016 and December 31, 2015. Amortization expense for the intangible
assets was $0 for the three and nine months ended September 30,
2016 and $3,000 and $9,000 for three and nine months ended
September 30, 2015, respectively. All intangible assets were
amortized over their estimated useful lives with no estimated
residual values. Any costs incurred by the Company to renew or
extend the life of intangible assets will be evaluated under ASC
No. 350, Intangibles – Goodwill and Other, for proper
treatment.
The
carrying amounts of the Company’s patent assets were $109,000
and $117,000 as of September 30, 2016 and December 31, 2015,
respectively, which include accumulated amortization of $550,000
and $542,000 as of September 30, 2016 and December 31, 2015,
respectively. Amortization expense for patent assets was $3,000 and
$8,000 for the three and nine months ended September 30, 2016 and
2015, respectively. Patent assets are being amortized on a
straight-line basis over their weighted-average remaining life of
approximately 9.75 years.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
|
Fiscal Year Ended December 31,
|
Estimated Amortization
Expense
($ in thousands)
|
|
2016
(3 months)
|
$3
|
|
2017
|
12
|
|
2018
|
12
|
|
2019
|
12
|
|
2020
|
12
|
|
Thereafter
|
58
|
|
Totals
|
$109
|
Goodwill
The
Company annually, or more frequently if events or circumstances
indicate a need, tests the carrying amount of goodwill for
impairment. A two-step impairment test is used to first
identify potential goodwill impairment and then measure the amount
of goodwill impairment loss, if any. The first step was conducted
by determining and comparing the fair value, employing the market
approach, of the Company’s reporting unit to the carrying
value of the reporting unit. The Company continues to have only one
reporting unit, Identity Management. Based on the results of this
impairment test, the Company determined that its goodwill was not
impaired as of September 30, 2016 and December 31,
2015.
NOTE 5. LINES OF CREDIT WITH RELATED
PARTIES
Outstanding
lines of credit consist of the following:
|
($ in thousands)
|
September 30,
2016
|
December 31,
2015
|
|
Lines
of Credit
|
|
|
|
8%
convertible lines of credit. Face value of advances under lines of
credit $2,150 at September 30, 2016 and $0 at December 31, 2015.
Discount on advances under lines of credit is $124 at September 30,
2016 and $0 at December 31, 2015. Maturity date is June 30,
2017.
|
$2,026
|
$—
|
|
|
|
|
|
Total
lines of credit to related parties
|
2,026
|
—
|
|
Less
current portion
|
(2,026)
|
—
|
|
Long-term
lines of credit to related parties
|
$—
|
$—
|
In March 2013, the
Company entered into the Goldman LOC with available borrowings of
up to $2.5 million. In March 2014, borrowings under the Goldman LOC
were increased to an aggregate total of $3.5 million (the
“Amendment”). Pursuant to the terms and conditions of
the Amendment, Goldman had the right to convert up to $2.5 million
of the outstanding balance of the Goldman LOC into shares of the
Company's Common Stock for $0.95 per share. Any remaining
outstanding balance was convertible into shares of the Company's
Common Stock for $2.25 per share.
As consideration for the initial
Goldman LOC, the Company issued a warrant to Goldman, exercisable
for 1,052,632 shares of the Company’s Common Stock (the
"LOC
Warrant"). The LOC Warrant had
a term of two years from the date of issuance and an exercise price
of $0.95 per share. As consideration for entering into
the Amendment, the Company issued a second warrant to Goldman,
exercisable for 177,778 shares of the Company’s Common Stock
(the “Amendment
Warrant”). The Amendment
Warrant expired on March 27, 2015 and had an exercise price of
$2.25 per share.
The
Company estimated the fair value of the LOC Warrant using the
Black-Scholes option pricing model using the following assumptions:
term of two years, a risk free interest rate of 2.58%, a dividend
yield of 0%, and volatility of 79%. The Company recorded the fair
value of the LOC Warrant as a deferred financing fee of
approximately $580,000 to be amortized over the life of the Goldman
LOC. The Company estimated the fair value of the Amendment Warrant
using the Black-Scholes option pricing model using the following
assumptions: term on one year, a risk free interest rate of 2.58%,
a dividend yield of 0% and volatility of 74%. The Company recorded
the fair value of the Amendment Warrant as an additional deferred
financing fee of approximately $127,000 to be amortized over the
life of the Goldman LOC.
During the three and nine months ended September 30, 2016, the
Company recorded approximately $9,000 and 33,000, respectively.
During the three and nine months ended September 30, 2015, the
Company recorded approximately $0 and $41,000, respectively in
deferred financing fee amortization expense which is recorded as a
component of interest expense in the Company’s condensed
consolidated statements of operations.
In April 2014, the Company and Goldman
entered into a further amendment to the Goldman LOC to decrease the
available borrowings to $3.0 million (the
“Second
Amendment”). Contemporaneous with the
execution of the Second Amendment, the Company entered into a new
unsecured line of credit with available borrowings of up to
$500,000 (the “Crocker LOC”) with Crocker, which amount was
convertible into shares of the Company’s Common Stock for
$2.25 per share. As a result of these amendments, total available
borrowings under aggregate lines of credit available to the Company
remained unchanged at a total of $3.5 million. In connection with
the Second Amendment, Goldman assigned and transferred to Crocker
one-half of the Amendment Warrant.
In December 2014, the Company and Goldman
entered into a further amendment to the Goldman LOC to increase the
available borrowing to $5.0 million and extended the maturity date
of the Goldman LOC to March 27, 2017 (the
“Third
Amendment”). Also, as a
result of the Third Amendment, Goldman had the right to convert up
to $2.5 million of the Outstanding Balance into shares of the
Company’s Common Stock for $0.95 per share, the next $500,000
Outstanding Balance into shares of Common Stock for $2.25 per share
and any remaining Outstanding Balance thereafter into shares of
Common Stock for $2.30 per share. The Third Amendment also modified
the definition of a “Qualified
Financing” to mean a debt
or equity financing resulting in gross proceeds to the Company of
at least $5.0 million.
In February 2015, as a result of the
Series E Financing discussed under Note 6,
“Equity”, below, the Company issued 1,978 shares of
Series E Convertible Redeemable Preferred Stock
(“Series E
Preferred”) to Goldman to
satisfy $1.95 million in principal borrowings under the Goldman LOC
plus approximately $28,000 in accrued interest. As a
result of the Series E Financing, the Company’s borrowing
capacity under the Goldman LOC was reduced to $3.05 million with
the maturity date unchanged and the Crocker LOC was terminated in
accordance with its terms.
On March 9, 2016, the Company and Goldman entered into
the Fourth Amendment, that (i) provides the Company with the
ability to borrow up to $5.0 million under the terms of the Goldman
LOC; (ii) permits Goldman to convert the Outstanding Balance into
shares of the Company's Common Stock for $1.25 per share; and (iii)
extends the maturity date of the Goldman LOC to June 30,
2017.
In addition, on March 9, 2016, the Company and
Crocker entered into the New Crocker LOC in the principal amount of
$500,000. The New Crocker LOC shall accrue interest at a rate of 8%
per annum, and matures on the earlier to occur of June 30, 2017 or
such date that the Company consummates a debt and/or equity
financing resulting in net proceeds to the Company of at least $3.5
million. All outstanding amounts due under the terms of the New
Crocker LOC shall be convertible into the Company's Common Stock at
$1.25 per share.
As of September 30, 2016, $2,150,000 was
outstanding under the terms of the Lines of Credit and
approximately $3,350,000 remains available under the Lines of
Credit for additional borrowings.
The Company evaluated the Lines of Credit and
determined that the instruments contain a contingent beneficial
conversion feature, i.e. an embedded conversion right that enables
the holder to obtain the underlying Common Stock at a price below
market value. The beneficial conversion feature is contingent as
the terms of the conversion do not permit the Company to compute
the number of shares that the holder would receive if the
contingent event occurs (i.e. future borrowings under the Line of
Credit). The Company has considered the accounting for this
contingent beneficial conversion feature using the guidance in ASC
470, Debt. The guidance in ASC 470 states that a contingent
beneficial conversion feature in an instrument shall not be
recognized in earnings until the contingency is resolved. The
beneficial conversion features of future borrowings under the Line
of Credit will be measured using the intrinsic value
calculated at the date the contingency is resolved using the
conversion price and trading value of the Company’s Common
Stock at the date the Lines of Credit were issued (commitment
date). Pursuant to borrowings made during the 2015 year, the
Company recognized approximately $146,000 in beneficial conversion
feature as debt discount. As a result of the retirement of all
amounts outstanding under the Lines of Credit in 2015, the Company
recognized all remaining unamortized debt discount of approximately
$385,000 as a component of interest expense during the three months
ended March 31, 2015. As there was $2,150,000 in borrowings under
the Lines of Credit during the nine months ended September 30,
2016, the Company recorded approximately $176,000 in debt discount
attributable to the beneficial conversion feature during the nine
months ended September 30, 2016. During the three and nine months
ended September 30, 2016, the Company accreted approximately
$39,000 and $52,000, respectively, of debt discount as a component
of interest expense.
NOTE 6. EQUITY
The
Company’s Certificate of Incorporation, as amended,
authorized the issuance of two classes of stock to be designated
“Common Stock” and “preferred stock”. The
preferred stock may be divided into such number of series and with
the rights, preferences, privileges and restrictions as the Board
of Directors may determine.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B
Convertible Redeemable Preferred (“Series B
Preferred”) redeemable at
the option of the Company, outstanding as of September 30, 2016 and
December 31, 2015. At September 30, 2016 and December
31, 2015, the Company had cumulative undeclared dividends of
approximately $21,000 and $8,000, respectively. There
were no conversions of Series B Preferred into Common Stock during
the nine months ended September 30, 2016 or
2015.
Series E Convertible Redeemable Preferred Stock
On January 29, 2015, the Company filed the
Certificate of Designations, Preferences, and Rights of the Series
E Convertible Redeemable Preferred Stock
(“Series
E Preferred”) with the
Delaware Secretary of State, designating 12,000 shares of the
Company’s preferred stock, par value $0.01 per share, as
Series E Preferred. Shares of Series E Preferred accrue dividends
at a rate of 8% per annum if the Company chooses to pay accrued
dividends in cash, and 10% per annum if the Company chooses to pay
accrued dividends in shares of Common Stock. Each share of Series E
Preferred has a liquidation preference of $1,000 per share
(“Series E Liquidation
Preference”) and is convertible, at the option of the
holder, into that number of shares of the Company’s Common
Stock equal to the Series E Liquidation Preference, divided by
$1.90. Each holder of the Series E Preferred is entitled to vote on
all matters, together with the holders of Common Stock, on an as
converted basis.
Any
time after the six-month period following the issuance date, in the
event the arithmetic average of the closing sales price of the
Company’s Common Stock is or was at least $2.85 for twenty
(20) consecutive trading days, the Company may redeem all or a
portion of the Series E Preferred outstanding upon thirty (30)
calendar days prior written notice in cash at a price per share of
Series E Preferred equal to 110% of the Series E Liquidation
Preference, plus all accrued and unpaid dividends. Also,
simultaneous with the occurrence of a Change of Control transaction
(as defined in the Certificate of Designations), the Company, at
its option, shall have the right to redeem all or a portion of the
outstanding Series E Preferred in cash at a price per share of
Series E Preferred equal to 110% of the Liquidation Preference
Amount plus all accrued and unpaid dividends.
In February 2015 the Company consummated a
registered direct offering conducted without an underwriter or
placement agent. In connection therewith, the Company issued 12,000
shares of Series E Preferred to certain investors at a price of
$1,000 per share, with each share convertible into 526.32 shares of
the Company’s Common Stock at $1.90 per share (the
“Series E
Financing”).
The
Company had 12,000 shares of Series E Preferred outstanding as of
September 30, 2016 and December 31, 2015. At September
30, 2016 and December 31, 2015, the Company had cumulative
undeclared dividends of $0 and $240,000,
respectively. There were no conversions of Series E
Preferred into Common Stock during the nine months ended September
30, 2016. The Company issued the holders of Series E Preferred
245,583 shares of Common Stock on September 30, 2016 as payment of
dividends due on this date. For the nine month period ended
September 30, 2016, the Company has issued the holders of Series E
Preferred 721,243 shares of Common Stock as payment of dividends
due.
Series F Convertible Redeemable Preferred Stock
In September 2016, we filed the Certificate of
Designations, Preferences, and Rights of the Series F Convertible
Preferred Stock (the “Certificate of
Designations”) with the
Delaware Division of Corporations, designating 2,000 shares of our
preferred stock as Series F Convertible Redeemable Preferred Stock
(“Series F
Preferred”). Shares of
Series F Preferred rank junior to shares of Series B Preferred and
Series E Preferred, as well as our existing indebtedness, and
accrue dividends at a rate of 10% per annum, payable on a quarterly
basis in shares of Common Stock.
Each share of Series F Preferred has a liquidation
preference of $1,000 per share (“Liquidation
Preference”), and is
convertible, at the option of the holder, into that number of
shares of the Company’s Common Stock equal to the Series F
Liquidation Preference, divided by $1.50 (the
“Series F Conversion
Shares”).
Any
time after the six-month period following the issuance date, in the
event the arithmetic average of the closing sales price of the
Company’s Common Stock is or was at least $2.50 for twenty
(20) consecutive trading days, the Company may redeem all or a
portion of the Series F Preferred outstanding upon thirty (30)
calendar days prior written notice in cash at a price per share of
Series F Preferred equal to 110% of the Series F Liquidation
Preference, plus all accrued and unpaid dividends. Also,
simultaneous with the occurrence of a Change of Control transaction
(as defined in the Certificate of Designations), the Company, at
its option, shall have the right to redeem all or a portion of the
outstanding Series F Preferred in cash at a price per share of
Series F Preferred equal to 110% of the Liquidation Preference
Amount plus all accrued and unpaid dividends.
In September 2016, the Company offered and sold
2,000 shares of Series F Preferred for $1,000 per share (the
“Series F
Financing”), resulting in
gross proceeds to the Company of $2,000,000 net of issuance costs
of approximately $21,000.
The
Company had 2,000 shares of Series F Preferred outstanding as of
September 30, 2016 and no shares outstanding at December 31,
2015. At September 30, 2016, the Company had cumulative
undeclared dividends of $0. There were no conversions of
Series F Preferred into Common Stock during the nine months ended
September 30, 2016. The Company issued the holders of Series F
Preferred 10,136 shares of Common Stock on September 30, 2016 as
payment of dividends due on this date.
Common Stock
The
following table summarizes Common Stock activity for the nine
months ended September 30, 2016:
|
|
Common Stock
|
|
Shares
outstanding at December 31, 2015
|
94,070,895
|
|
Shares
issued as payment of stock dividend on Series E
Preferred
|
721,243
|
|
Shares
issued as payment of stock dividend on Series F
Preferred
|
10,136
|
|
Shares
issued pursuant to cashless warrant exercises
|
2,403
|
|
Share
issued pursuant to option exercises for cash
|
2,626
|
|
Shares
outstanding at September 30, 2016
|
94,807,303
|
During
the nine months ended September 30, 2016, the Company issued
721,243 and 10,136 shares of Common Stock as payment of the
accumulated Series E Preferred and Series F Preferred dividends,
respectively. During the nine months ended September 30, 2016, the
Company issued 2,403 shares of Common Stock pursuant to the
cashless exercise of 25,000 warrants and issued 2,626 shares of
Common Stock pursuant to the exercise of 2,626 options for cash
proceeds of approximately $1,000.
Warrants
The
following table summarizes warrant activity for the following
periods:
|
|
Warrants
|
Weighted- Average
Exercise Price
|
|
Balance
at December 31, 2015
|
450,000
|
$0.67
|
|
Granted
|
—
|
—
|
|
Expired
/ Canceled
|
—
|
—
|
|
Exercised
|
(25,000)
|
1.10
|
|
Balance
at September 30, 2016
|
425,000
|
$0.67
|
As of September 30, 2016, warrants to purchase 425,000 shares of
Common Stock at prices ranging from $0.50 to $1.10 were
outstanding. All warrants are exercisable as of September 30, 2016,
and expire at various dates through December 2017, with the
exception of an aggregate of 150,000 warrants, which become
exercisable only upon the attainment of specified events. During
the nine months ended September 30, 2016, there were 25,000
warrants exercised on a cashless basis resulting in the issuance of
2,403 shares the Company’s Common Stock. The intrinsic value
of warrants outstanding at September 30, 2016 was approximately
$233,000.
Stock-Based Compensation
As of September 30, 2016, the Company had
one active stock-based compensation plan for employees and
nonemployee directors, which authorizes the granting of various
equity-based incentives including stock options and restricted
stock. On July 1, 2014, the Company began soliciting written
consents from its shareholders to approve an amendment to the
Company’s 1999 Stock Option Plan to increase the number of
shares authorized for issuance thereunder from approximately 4.0
million to approximately 7.0 million (the
“Plan
Amendment”). As of July 21, 2014, the
Company had received written consents approving the Plan Amendment
from over 50% of the Company’s stockholders. As such, the
Plan Amendment was approved.
The Company estimates the fair value of its
stock options using a Black-Scholes option-valuation model,
consistent with the provisions of ASC No. 718, Compensation – Stock
Compensation. The fair value of
stock options granted is recognized to expense over the requisite
service period. Stock-based compensation expense is reported in
general and administrative, sales and marketing, engineering and
customer service expense based upon the departments to which
substantially all of the associated employees report and credited
to additional paid-in capital. Stock-based compensation
expense related to equity options was approximately $243,000 and
$718,000 for the three and nine months ended September 30, 2016,
respectively. Stock-based compensation expense related to equity
options was approximately $234,000 and $503,000 for the three and
nine months ended September 30, 2015,
respectively.
ASC
No. 718 requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the
Black-Scholes option-valuation model, which incorporates various
assumptions including volatility, expected life, and interest
rates. The Company is required to make various assumptions in the
application of the Black-Scholes option-valuation model. The
Company has determined that the best measure of expected volatility
is based on the historical weekly volatility of the Company’s
Common Stock. Historical volatility factors utilized in the
Company’s Black-Scholes computations for the nine months
ended September 30, 2016 and 2015 ranged from 65% to 118%. The
Company has elected to estimate the expected life of an award based
upon the SEC approved “simplified method” noted under
the provisions of Staff Accounting Bulletin No. 110. The expected
term used by the Company during the nine months ended September 30,
2016 and 2015 was 5.17 years. The difference between the actual
historical expected life and the simplified method was
immaterial. The interest rate used is the risk free
interest rate and is based upon U.S. Treasury rates appropriate for
the expected term. Interest rates used in the Company’s
Black-Scholes calculations for the nine months ended September 30,
2016 and 2015 was 2.6%. Dividend yield is zero, as the Company does
not expect to declare any dividends on the Company’s Common
Stock in the foreseeable future.
In
addition to the key assumptions used in the Black-Scholes model,
the estimated forfeiture rate at the time of valuation is a
critical assumption. The Company has estimated an
annualized forfeiture rate of approximately 0% for corporate
officers, 4.1% for members of the Board of Directors and 6.0% for
all other employees. The Company reviews the expected
forfeiture rate annually to determine if that percent is still
reasonable based on historical experience.
A
summary of the activity under the Company’s stock option
plans is as follows:
|
|
Options
|
Weighted-Average
Exercise Price
|
|
Balance
at December 31, 2015
|
5,376,969
|
$1.17
|
|
Granted
|
1,264,000
|
$1.34
|
|
Expired/Cancelled
|
(121,500)
|
$1.29
|
|
Exercised
|
(2,626)
|
$0.38
|
|
Balance
at September 30, 2016
|
6,516,843
|
$1.20
|
The
intrinsic value of options exercisable at September 30, 2016 was
approximately $1,230,000. The aggregate intrinsic value
for all options outstanding as of September 30, 2016 was
approximately $1,258,000. The weighted-average grant-date per share
fair value of options granted during the nine months ended
September 30, 2016 was $0.82. At September 30, 2016, the total
remaining unrecognized compensation cost related to unvested stock
options amounted to approximately $2,108,000 which will be
recognized over a weighted-average period of 2.0
years.
In
September 2015, the Company issued an aggregate of 144,000 options
to purchase shares of the Company’s Common Stock to certain
members of the Company’s Board of Directors in return for
their service from January 1, 2016 through December 31, 2016. Such
options will vest at the rate of 12,000 options per month on the
last day of each month during the 2016 year. The options have an
exercise price of $1.73 per share and a term of 10 years. Pursuant
to this issuance, the Company recorded compensation expense of
approximately $44,000 and $133,000 for the three and nine months
ended September 30, 2016, respectively, based on the grant-date
fair value of the options determined using the Black-Scholes
option-valuation model.
In
May 2015, the Company issued an aggregate of 16,000 options to
purchase shares of the Company’s Common Stock to a new member
of the Company’s Board of Directors in return for their
service from May, 2016 through December 31, 2016. Such options will
vest at the rate of 2,000 options per month on the last day of each
month during the 2016 year. The options have an exercise price of
$1.29 per share and a term of 10 years. Pursuant to this issuance,
the Company recorded compensation expense of approximately $5,000
and $8,000 for the three and nine months ended September 30, 2016,
respectively, based on the grant-date fair value of the options
determined using the Black-Scholes option-valuation
model.
In
September 2016, the Company issued an aggregate of 168,000 options
to purchase shares of the Company’s Common Stock to certain
members of the Company’s Board of Directors in return for
their service from January 1, 2017 through December 31, 2017. Such
options will vest at the rate of 12,000 options per month on the
last day of each month during the 2017 year. The options have an
exercise price of $1.37 per share and a term of 10 years. The
Company will begin recognition of compensation based on the
grant-date fair value ratably over the 2017 requisite service
period.
In
December 2014, the Company issued 94,116 shares of its Common Stock
to certain members of the Company’s Board of Directors as
compensation to be rendered through December 2015. Such shares are
forfeitable should the Board members’ services be terminated.
Pursuant to this issuance, the Company recorded approximately
$162,000 as compensation expense for the nine months ended
September 30, 2015.
Stock-based
compensation related to equity options and restricted stock grants
has been classified as follows in the accompanying condensed
consolidated statements of operations (in thousands):
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
|
2016
|
2015
|
2016
|
2015
|
|
Cost
of revenue
|
$5
|
$5
|
$14
|
$10
|
|
General
and administrative
|
180
|
180
|
529
|
433
|
|
Sales
and marketing
|
56
|
54
|
165
|
116
|
|
Research
and development
|
51
|
49
|
151
|
106
|
|
|
|
|
|
|
|
Total
|
$292
|
$288
|
$859
|
$665
|
NOTE 7. FAIR VALUE ACCOUNTING
The Company accounts for fair value
measurements in accordance with ASC 820, Fair Value Measurements and
Disclosures, which defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities.
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other
than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
|
Fair Value at September 30, 2016
|
|||
|
($ in thousands)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,623
|
$1,623
|
$—
|
$—
|
|
Totals
|
$1,623
|
$1,623
|
$—
|
$—
|
|
|
Fair Value at December 31, 2015
|
|||
|
($ in thousands)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,557
|
$1,557
|
$—
|
$—
|
|
Totals
|
$1,557
|
$1,557
|
$—
|
$—
|
The
Company’s pension assets are classified within Level 1 of the
fair value hierarchy because they are valued using market
prices. The pension assets are primarily comprised of
the cash surrender value of insurance contracts. All plan assets
are managed in a policyholder pool in Germany by outside investment
managers. The investment objectives for the plan are the
preservation of capital, current income and long-term growth of
capital.
Certain
assets are measured at fair value on a non-recurring basis and are
subject to fair value adjustments only in certain circumstances.
Included in this category is goodwill written down to fair value
when determined to be impaired. The valuation methods for goodwill
involve assumptions based on management’s judgment using
internal and external data, and which are classified in Level 3 of
the valuation hierarchy.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company has certain Lines of Credit extended
by certain members of the Company’s Board of Directors. For a
more detailed discussion of the Company’s Lines of Credit,
see Note 5 - Lines of Credit. As of September 30, 2016,
the Company had borrowed $1,650,000
under the terms of the Goldman LOC and $500,000 under the terms of
the New Crocker LOC.
Each of Messrs. Goldman and Crocker are members of the Board of
Directors of the Company.
NOTE 9. CONTINGENT LIABILITIES
Employment Agreements
The
Company has employment agreements with its Chief Executive Officer,
Senior Vice President of Administration and Chief Financial Officer
and Chief Technical Officer. The Company may terminate the
agreements with or without cause. Subject to the conditions and
other limitations set forth in each respective employment
agreement, each executive will be entitled to the following
severance benefits if the Company terminates the executive’s
employment without cause or in the event of an involuntary
termination (as defined in the employment agreements) by
the Company or by the executive.
Under
the terms of the agreement, the Chief Executive Officer will be
entitled to the following severance benefits if we terminate his
employment without cause or in the event of an involuntary
termination: (i) a lump sum cash payment equal to twenty-four
months base salary; (ii) continuation of fringe benefits and
medical insurance for a period of three years; and (iii) immediate
vesting of 50% of outstanding stock options and restricted stock
awards. In the event that the Chief Executive Officer’s
employment is terminated within nine months prior to or thirteen
months following a change of control, the Chief Executive Officer
is entitled to the severance benefits described above, except that
100% of the Chief Executive Officer’s outstanding stock
options and restricted stock awards will immediately
vest.
Under
the terms of the employment agreements with our Senior Vice
President of Administration and Chief Financial Officer and Chief
Technical Officer, these executives will be entitled to the
following severance benefits if we terminate their employment
without cause or in the event of an involuntary termination: (i) a
lump sum cash payment equal to six months of base salary; (ii)
continuation of their medical and health benefits for a period of
six months; (iii) immediate vesting of 50% of their outstanding
stock options and restricted stock awards. In the event that their
employment is terminated within nine months prior to or thirteen
months following a change of control (defined below), they are
entitled to the severance benefits described above, except that
100% of their outstanding stock options and restricted stock awards
will immediately vest.
Leases
Our
corporate headquarters are located in San Diego, California where
we occupy 9,927 square feet of office space. This facility is
leased through October 2017 at a cost of approximately $18,000 per
month. In addition to our corporate headquarters, we also occupied
the following spaces at September 30, 2016:
●
1,508
square feet in Ottawa, Province of Ontario, Canada, at a cost of
approximately $3,000 per month until the expiration of the lease on
March 31, 2021. This lease was renewed in April 2016 for a
five-year period ending on March 31, 2021. Renewal terms were
substantially unchanged from the existing lease;
●
8,045
square feet in Portland, Oregon, at a cost of approximately $16,000
per month until the expiration of the lease on October 31, 2018;
and
●
425
square feet of office space in Mexico City, Mexico, at a cost of
approximately $3,000 per month until terminated by either
party.
At
September 30, 2016, future minimum lease payments are as
follows:
|
($ in thousands)
|
|
|
2016
(3 months)
|
$119
|
|
2017
|
$421
|
|
2018
|
$202
|
|
2019
|
$35
|
|
2020
and thereafter
|
$42
|
|
|
$819
|
Rental
expense incurred under operating leases for the three and nine
months ended September 30, 2016 was approximately $122,000 and
$364,000, respectively. Rental expense incurred under operating
leases for the three and nine months ended September 30, 2015 was
approximately $125,000 and $352,000, respectively.
NOTE 10. SUBSEQUENT EVENTS
On
November 14, 2016, the Company introduced GoVerifyID® Enterprise
Suite, a multi-model, multi-factor biometric authentication
solution for the enterprise market. See Note 1 to these condensed
consolidated financial statements for a more detailed discussion of
this key product introduction.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. All forward-looking statements included in
this report are based on information available to us as of the date
hereof and we assume no obligation to update any forward-looking
statements. Forward-looking statements involve known or unknown
risks, uncertainties and other factors, which may cause our actual
results, performance or achievements, or industry results to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such
differences include but are not limited to those items discussed
under “Risk Factors” in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2015,
and in Item 1A of Part II of this Quarterly Report on Form
10-Q.
The following discussion of the financial condition and
results of operations should be read in conjunction with the
condensed consolidated financial statements included elsewhere
within this Quarterly Report. Fluctuations in annual and quarterly
results may occur as a result of factors affecting demand for our
products such as the timing of new product introductions by us and
by our competitors and our customers’ political and budgetary
constraints. Due to such fluctuations, historical results and
percentage relationships are not necessarily indicative of the
operating results for any future period.
Overview
The
Company is a pioneer and leader in the emerging market for
biometrically enabled software-based identity management solutions.
Using those human characteristics that are unique to us all, the
Company creates software that provides a highly reliable indication
of a person’s identity, including the Company’s
“flagship” product – the patented IWS Biometric
Engine®. Our products are used to manage and issue secure
credentials including national IDs, passports, driver’s
licenses and access control credentials. Our products also provide
law enforcement with integrated mug shot, LiveScan fingerprint and
investigative capabilities. We also provide comprehensive
authentication security software using biometrics to secure
physical and logistical access to facilities, computer networks and
Internet sites. Biometric technology is now an integral
part of all markets we address, and all of our products are
integrated into the IWS Biometric Engine.
Recent Developments
Creation of Series F Convertible Redeemable Preferred Stock and
Series F Financing
On September 2, 2016, the Company filed the
Certificate of Designations, Preferences, and Rights of the Series
F Convertible Preferred Stock (“Certificate of
Designations”) with the
Delaware Division of Corporations, designating 2,000 shares of its
preferred stock as Series F Convertible Redeemable Preferred Stock
(“Series F
Preferred”). Shares of
Series F Preferred rank junior to the Company’s Series B
Convertible Redeemable Preferred Stock, Series E Convertible
Redeemable Preferred Stock and existing indebtedness, and accrue
dividends at a rate of 10% per annum, payable on a quarterly basis
in shares of the Company’s Common Stock. Each share of Series
F Preferred has a liquidation preference of $1,000 per share
(“Liquidation
Preference”), and is
convertible, at the option of the holder, into that number of
shares of the Company’s Common Stock equal to the Liquidation
Preference, divided by $1.50 (the “Series F Conversion
Shares”).
On September 7, 2016, the Company and Cap 1 LLC, a
family client of Summer Road LLC (the “Investor”) entered into a Securities Purchase
Agreement (the “Purchase Agreement”), wherein the Investor agreed to purchase
2,000 shares of Series F Preferred for $1,000 per share (the
“Series F
Financing”), resulting in
gross proceeds to the Company of $2,000,000 net of issuance costs
of approximately $21,000.
Key Product Introduction
On
November 14, 2016, the Company introduced GoVerifyID®
Enterprise Suite, a multi-modal, multi-factor biometric
authentication solution for the enterprise market. An
algorithm-agnostic solution, GoVerify ID Enterprise Suite is an
end-to-end biometric platform that seamlessly integrates with an
enterprise’s existing Microsoft infrastructure, offering
businesses a turnkey biometric solution for quick deployment.
The Company feels that this product has the potential to
dramatically accelerate adoption of its biometric solution due to
the worldwide prevalence of enterprise use of the Microsoft
infrastructure.
Working
across the entire enterprise ecosystem, GoVerifyID Enterprise Suite
offers a consistent user experience and centralized administration
with the highest level of security, flexibility, and usability.
Specific benefits include:
●
Mobile-workforce
friendly—With GoVerifyID
Enterprise Suite user authentication logins are possible for a
tablet or laptop even when disconnected from the corporate network.
Additionally, GoVerifyID Enterprise offers a consistent user
authentication experience across all login
environments.
●
Hybrid cloud—GoVerifyID Enterprise Suite is linked from
the cloud to an enterprise’s Microsoft infrastructure and is
backward compatible with Windows 7, 8 and 10. Additionally, because
the solution is SaaS-based it can easily scale to process hundreds
of millions of transactions and store just as many
biometrics.
●
Seamless
integration—GoVerifyID
Enterprise Suite is a snap-in to the Microsoft Management console
and can be centrally managed at the server. Additionally, the
solution allows for seamless movement as it integrates with Active
Directory using an organization’s existing Microsoft security
infrastructure.
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed
consolidated financial condition and results of operations are
based on our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”). The preparation of these condensed
consolidated financial statements in accordance with GAAP requires
us to utilize accounting policies and make certain estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingencies as of the date of the
condensed consolidated financial statements and the reported
amounts of revenue and expense during a fiscal period. The SEC
considers an accounting policy to be critical if it is important to
a company’s financial condition and results of operations,
and if it requires significant judgment and estimates on the part
of management in its application.
Significant
estimates include the allowance for doubtful accounts receivable,
inventory carrying values, deferred tax asset valuation allowances,
accounting for loss contingencies, recoverability of goodwill and
acquired intangible assets and amortization periods, assumptions
used in the Black-Scholes model to calculate the fair value of
share based payments, assumptions used in the application of fair
value methodologies to calculate the fair value of derivative
liabilities, revenue and cost of revenue recognized under the
percentage of completion method and assumptions used in the
application of fair value methodologies to calculate the fair value
of pension assets and obligations.
Critical
accounting policies are those that, in management’s view, are
most important in the portrayal of our financial condition and
results of operations. Management believes there have been no
material changes during the three months ended September 30, 2016
to the critical accounting policies discussed in the
Management’s Discussion and Analysis of Financial Condition
and Results of Operations section of our Annual Report on Form 10-K
for the year ended December 31, 2015.
Results of Operations
This
management’s discussion and analysis of financial condition
and results of operations should be read in conjunction with the
condensed consolidated financial statements and related notes
contained elsewhere in this Quarterly Report.
Comparison of the Three Months Ended September 30, 2016 to the
Three Months Ended September 30, 2015
Product Revenue
|
|
Three Months Ended
September 30,
|
|
|
|
|
Net Product Revenue
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$173
|
$436
|
$(263)
|
(60)%
|
|
Percentage
of total net product revenue
|
83%
|
79%
|
|
|
|
Hardware
and consumables
|
$—
|
$5
|
$(5)
|
(100)%
|
|
Percentage
of total net product revenue
|
—%
|
1%
|
|
|
|
Services
|
$36
|
$111
|
$(75)
|
(68)%
|
|
Percentage
of total net product revenue
|
17%
|
20%
|
|
|
|
Total
net product revenue
|
$209
|
$552
|
$(343)
|
(62)%
|
Software and royalty revenue decreased 60% or
approximately $263,000 during the three months ended September 30,
2016 as compared to the corresponding period in 2015. This decrease
is attributable to lower identification project related revenue of
approximately $159,000, lower sales of boxed identity management
software sold through our distribution channel of approximately
$43,000, lower sales of law enforcement project related revenue of
approximately $25,000 and lower royalty revenue of approximately
$36,000.
Revenue
from the sale of hardware and consumables decreased approximately
$5,000 during the three months ended September 30, 2016 as compared
to the corresponding period in 2015. This decrease resulted from
lower sales of hardware and consumables in project
solutions.
Services
revenue is comprised primarily of software integration services,
system installation services and customer training. Such revenue
decreased approximately $75,000 during the three months ended
September 30, 2016 as compared to the corresponding period in 2015,
due primarily to the completion of the service element in certain
identity management project solutions in the 2015
period.
We
believe that the period-to-period fluctuations of identity
management software revenue in project-oriented solutions are
largely due to the timing of government procurement with respect to
the various programs we are pursuing. Based on
management’s current visibility into the timing of potential
government procurements, we believe that we will see an increase in
government procurement and implementations with respect to identity
management initiatives; however, we cannot predict the timing of
such initiatives. During the quarter ended September 30, 2016, we
continued to accelerate our efforts to move the Biometric Engine
into cloud and mobile markets and expanding our end-user market
into non-government sectors including commercial, consumer and
healthcare applications. In November 2016 we introduced
our new GoVerifyID® Enterprise Suite for those
customers that want to add biometric identity verification to their
Microsoft infrastructure. GoVerifyID Enterprise Suite is
linked from the cloud to an enterprise’s Microsoft
infrastructure and is backward compatible with Windows 7, 8 and
10. We anticipate that we will see positive developments
from these efforts in 2017, which should help us to begin to smooth
out our period-to-period fluctuations in revenue and enable us to
provide better visibility into the timing of future
revenue.
Maintenance Revenue
|
|
Three Months Ended
September 30,
|
|
|
|
|
Maintenance Revenue
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance revenue
|
$639
|
$629
|
$10
|
2%
|
Maintenance
revenue was approximately $639,000 for the three months ended
September 30, 2016, as compared to approximately $629,000 for the
corresponding period in 2015. Identity management
maintenance revenue generated from identification software
solutions was approximately $295,000 for the three months ended
September 30, 2016 as compared to approximately $274,000 during the
comparable period in 2015. Law enforcement maintenance
revenue was approximately $344,000 for the three months ended
September 30, 2016 as compared to approximately $355,000 during the
comparable period in 2015. The increase of $21,000 in
identification software solutions for the three months ended
September 30, 2016 as compared to the corresponding period of 2015
reflects the expansion of our installed base. The
decrease of approximately $11,000 related to law enforcement
solutions results from the expiration of certain maintenance
contracts.
We
anticipate growth of our maintenance revenue through the retention
of existing customers combined with the expansion of our installed
base resulting from the completion of project-oriented work;
however, we cannot predict the timing of this anticipated
growth.
Cost of Product Revenue
|
|
Three Months Ended
September 30,
|
|
|
|
|
Cost of Product Revenue:
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$13
|
$18
|
$(5)
|
(28%)
|
|
Percentage
of software and royalty product revenue
|
8%
|
4%
|
|
|
|
Hardware
and consumables
|
$—
|
$4
|
$(4)
|
(100%)
|
|
Percentage
of hardware and consumables product revenue
|
—%
|
80%
|
|
|
|
Services
|
$19
|
$102
|
$(83)
|
(81%)
|
|
Percentage
of services product revenue
|
53%
|
92%
|
|
|
|
Total
product cost of revenue
|
$32
|
$124
|
$(92)
|
(74%)
|
|
Percentage
of total product revenue
|
15%
|
22%
|
|
|
The
cost of software and royalty product revenue decreased
approximately $5,000 for the three months ended September 30, 2016
and 2015 despite lower software and royalty product revenue during
the three months ended September 30, 2015 of approximately $263,000
due to the 2015 period containing significant levels of software
licenses with no third-party software content resulting in
uncharacteristically low cost of software and royalty product
revenue for this component. In addition to changes in costs of
software and royalty product revenue caused by revenue level
fluctuations, costs of products can vary as a percentage of product
revenue from period to period depending upon level of software
customization and third party software license content included in
product sales during a given period.
The
cost of services revenue decreased approximately $83,000 during the
three months ended September 30, 2016 as compared to the
corresponding period in 2015 due to lower services revenue of
approximately $75,000 in the 2016 period. This decrease reflects
higher professional cost of service revenue for the three months
ended September 30, 2015 due to more costly engineering resources
utilized in the generation of non-recurring revenue from one
customer in the 2015 period as compared to the corresponding period
in 2016. In addition to changes in costs of services product
revenue caused by revenue level fluctuations, costs of services can
vary as a percentage of service revenue from period to period
depending upon both the level and complexity of professional
service resources utilized in the completion of the service
element.
Cost of Maintenance Revenue
|
|
Three Months Ended
September 30,
|
|
|
|
|
Maintenance cost of revenue
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance cost of revenue
|
$200
|
$197
|
$3
|
2%
|
|
Percentage
of total maintenance revenue
|
31%
|
31%
|
|
|
Cost
of maintenance revenue increased 2% or approximately $3,000 during
the three months ended September 30, 2016 as compared to the
corresponding period in 2015. This increase results from higher
departmental expense for the three months ended September 30, 2016
as compared to the corresponding period in 2015.
Product Gross Profit
|
|
Three Months Ended
September 30,
|
|
|
|
|
Product gross profit
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$160
|
$418
|
$(258)
|
(62%)
|
|
Percentage
of software and royalty product revenue
|
92%
|
96%
|
|
|
|
Hardware
and consumables
|
$—
|
$1
|
$(1)
|
(100%)
|
|
Percentage
of hardware and consumables product revenue
|
—%
|
20%
|
|
|
|
Services
|
$17
|
$9
|
$8
|
89%
|
|
Percentage
of services product revenue
|
47%
|
8%
|
|
|
|
Total
product gross profit
|
$177
|
$428
|
$(251)
|
(59%)
|
|
Percentage
of total product revenue
|
85%
|
78%
|
|
|
Software
and royalty gross profit decreased 62% or approximately $258,000
for the three months ended September 30, 2016 from the
corresponding period in 2015 due primarily to lower software and
royalty revenue of approximately $263,000. In addition to changes
in costs of software and royalty product revenue caused by revenue
level fluctuations, costs of products can vary as a percentage of
product revenue from period to period depending upon level of
software customization and third party software license content
included in product sales during a given period.
Services
gross profit increased approximately $8,000 for the three months
ended September 30, 2016 as compared to the corresponding period in
2015 due to lower service revenue of approximately $75,000 combined
with lower cost of service revenue of approximately $83,000 for the
three months ended September 30, 2016 as compared to the
corresponding period in 2015. The decrease in service revenue and
uncharacteristically high cost of service revenue in the 2015
period reflect the impact of non-recurring revenue received from
one customer combined with significant costs incurred from
implementation challenges.
Maintenance Gross Profit
|
|
Three Months Ended
September 30,
|
|
|
|
|
Maintenance gross profit
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total
maintenance gross profit
|
$439
|
$432
|
$7
|
2%
|
|
Percentage
of total maintenance revenue
|
69%
|
69%
|
|
|
Gross
profit related to maintenance revenue increased 2% or approximately
$7,000 for the three months ended September 30, 2016 as compared to
the same period ended September 30, 2015. This increase is due to
higher maintenance revenue of approximately $10,000 combined with
higher cost of maintenance revenue of approximately
$3,000.
Operating Expense
|
|
Three Months Ended
September 30,
|
|
|
|
|
Operating expense
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$904
|
$907
|
$(3)
|
0%
|
|
Percentage
of total net revenue
|
107%
|
77%
|
|
|
|
Sales
and marketing
|
$717
|
$663
|
$54
|
8%
|
|
Percentage
of total net revenue
|
85%
|
56%
|
|
|
|
Research and
development
|
$1,301
|
$1,203
|
$98
|
8%
|
|
Percentage
of total net revenue
|
153%
|
102%
|
|
|
|
Depreciation
and amortization
|
$33
|
$40
|
$(7)
|
(18%)
|
|
Percentage
of total net revenue
|
4%
|
3%
|
|
|
General and Administrative Expense
General
and administrative expense is comprised primarily of salaries and
other employee-related costs for executive, financial, and other
infrastructure personnel. General legal, accounting and consulting
services, insurance, occupancy and communication costs are also
included with general and administrative expense. The
dollar decrease of approximately $3,000 during the three months
ended September 30, 2016 as compared to the corresponding period in
2015 is comprised of the following major components:
●
Increase
in personnel related expense of approximately $85,000 due to
increased salaries from headcount increases of approximately
$88,000, higher 401(k) plan employer contributions of approximately
$8,000 offset by lower pension expense of our foreign sales office
of approximately $11,000.
●
Increase
in stock-based compensation expense of approximately
$5,000.
●
Decreases
in professional services of approximately $83,000 which includes
lower Board of Director fees of approximately $5,000, lower
contractor fees and contract services of approximately $6,000,
lower patent-related expense of approximately $83,000, lower
auditing fees of approximately $10,000, offset by higher investor
relations fees of approximately $8,000, higher legal fees of
approximately $8,000 and higher corporate expense of approximately
$5,000.
●
Decrease
in travel, insurances, licenses, dues, rent, and office related
costs of approximately $10,000.
We
continue to focus our efforts on achieving additional future
operating efficiencies by reviewing and improving upon existing
business processes and evaluating our cost structure. We believe
these efforts will allow us to continue to gradually decrease our
level of general and administrative expense expressed as a
percentage of total revenue.
Sales and Marketing
Sales
and marketing expense consists primarily of the salaries,
commissions, other incentive compensation, employee benefits and
travel expense of our sales, marketing, and business development
functions. The dollar increase of approximately $54,000 during the
three months ended September 30, 2016 as compared to the
corresponding period in 2015 is primarily comprised of the
following major components:
●
Increase
in personnel related expense of approximately $9,000 due to the
re-tooling of our sales department with personnel resources having
mobile software technical proficiencies.
●
Increase
in contractor and contract services of approximately $73,000
resulting from increased utilization of certain sales consultants
and increased marketing dues and subscription
expenses.
●
Decrease
in travel, trade show expense and office related expense of
approximately $30,000.
●
Increase
in stock-based compensation expense of approximately
$2,000.
Research and Development
Research
and development expense consists primarily of salaries, employee
benefits and outside contractors for new product development,
product enhancements, custom integration work and related facility
costs. Such expense increased approximately $98,000 for the three
months ended September 30, 2016 as compared to the corresponding
period in 2015 due primarily to the following major
components:
●
Increase
in personnel related expense of approximately $145,000 due to
headcount increases needed for the accelerated development of the
Company’s mobile identity management solutions.
●
Decrease
in contractor fees and contract services of approximately
$10,000.
●
Increase
in stock-based compensation of approximately $2,000.
●
Decrease
in office related expense and travel of approximately
$39,000.
Our
level of expenditures in research and development reflects our
belief that to maintain our competitive position in markets
characterized by rapid rates of technological advancement, we must
continue to invest significant resources in new systems and
software development as well as continue to enhance existing
products.
Depreciation and Amortization
During
the three months ended September 30, 2016 and 2015, depreciation
and amortization expense was approximately $33,000 and $40,000,
respectively. The relatively small amount of depreciation and
amortization is a reflection of the relatively small property and
equipment carrying value.
Interest Expense, Net
For
the three months ended September 30, 2016, we recognized interest
expense of approximately $90,000 and interest income of
approximately $1,000. For the three months ended September 30,
2015, we recognized interest expense of approximately $3,000 and
interest income of approximately $2,000. Interest expense for the
three months ended September 30, 2016 is comprised of approximately
$12,000 of amortization expense of deferred financing fees related
to the Goldman LOC, interest expense of approximately $39,000 of
coupon interest on debt outstanding under the Lines of Credit, and
approximately $39,000 related to the recognition of beneficial
conversion feature related to the Lines of Credit.
Other Income
For
the three months ended September 30, 2016, we recognized no
components of other income. For the three months ended
September 30, 2015, we recognized other income of approximately
$99,000 resulting from the recovery of a previously written-off
accounts receivable.
Comparison
of the Nine Months Ended September 30, 2016 to the Nine Months
Ended September 30, 2015
Product Revenue
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Net Product Revenue
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$675
|
$1,409
|
$(734)
|
(52)%
|
|
Percentage
of total net product revenue
|
70%
|
72%
|
|
|
|
Hardware
and consumables
|
$54
|
$28
|
$26
|
93%
|
|
Percentage
of total net product revenue
|
5%
|
1%
|
|
|
|
Services
|
$239
|
$515
|
$(276)
|
(54)%
|
|
Percentage
of total net product revenue
|
25%
|
26%
|
|
|
|
Total
net product revenue
|
$968
|
$1,952
|
$(984)
|
(50)%
|
Software and royalty revenue decreased 52% or
approximately $734,000 during the nine months ended September 30,
2016 as compared to the corresponding period in 2015. This decrease
is attributable to lower identification project related revenue of
approximately $593,000, lower sales of boxed identity management
software sold through our distribution channel of approximately
$83,000, lower sales of law enforcement project related revenue of
approximately $27,000 and lower royalty revenue of approximately
$31,000.
Revenue
from the sale of hardware and consumables increased approximately
$26,000 during the nine months ended September 30, 2016 as compared
to the corresponding period in 2015. This increase resulted from
higher sales of hardware and consumables in project
solutions.
Services
revenue is comprised primarily of software integration services,
system installation services and customer training. Such revenue
decreased approximately $276,000 during the nine months ended
September 30, 2016 as compared to the corresponding period in 2015,
due primarily to the completion of the service element in certain
identity management project solutions in the 2015
period.
We
believe that the period-to-period fluctuations of identity
management software revenue in project-oriented solutions are
largely due to the timing of government procurement with respect to
the various programs we are pursuing. Based on
management’s current visibility into the timing of potential
government procurements, we believe that we will see an increase in
government procurement and implementations with respect to identity
management initiatives; however, we cannot predict the timing of
such initiatives. During the quarter ended September 30, 2016, we
continued to accelerate our efforts to move the Biometric Engine
into cloud and mobile markets and expanding our end-user market
into non-government sectors including commercial, consumer and
healthcare applications. In November 2016 we introduced
our new GoVerifyID® Enterprise Suite for those
customers that want to add biometric identity verification to their
Microsoft infrastructure. GoVerifyID Enterprise Suite is
linked from the cloud to an enterprise’s Microsoft
infrastructure and is backward compatible with Windows 7, 8 and
10. We anticipate that we will see positive developments
from these efforts in 2017, which should help us to begin to smooth
out our period-to-period fluctuations in revenue and enable us to
provide better visibility into the timing of future
revenue.
Maintenance Revenue
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Maintenance Revenue
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance revenue
|
$1,919
|
$1,916
|
$3
|
0%
|
Maintenance
revenue was approximately $1,919,000 for the nine months ended
September 30, 2016, as compared to approximately $1,916,000 for the
corresponding period in 2015. Identity management
maintenance revenue generated from identification software
solutions was approximately $878,000 for the nine months ended
September 30, 2016 as compared to approximately $819,000 during the
comparable period in 2015. Law enforcement maintenance
revenue was approximately $1,041,000 for the nine months ended
September 30, 2016 as compared to approximately $1,097,000 during
the comparable period in 2015. The increase of $59,000 in
identification software solutions reflects the completion of
certain projects and an increase to our installed
base. The decrease of approximately $56,000 related to
law enforcement solutions results from the expiration of certain
maintenance contracts.
We
anticipate growth of our maintenance revenue through the retention
of existing customers combined with the expansion of our installed
base resulting from the completion of project-oriented work;
however, we cannot predict the timing of this anticipated
growth.
Cost of Product Revenue
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Cost of Product Revenue:
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$62
|
$65
|
$(3)
|
(5%)
|
|
Percentage
of software and royalty product revenue
|
9%
|
5%
|
|
|
|
Hardware
and consumables
|
$31
|
$19
|
$12
|
63%
|
|
Percentage
of hardware and consumables product revenue
|
57%
|
68%
|
|
|
|
Services
|
$69
|
$702
|
$(633)
|
(90%)
|
|
Percentage
of services product revenue
|
29%
|
136%
|
|
|
|
Total
product cost of revenue
|
$162
|
$786
|
$(624)
|
(79%)
|
|
Percentage
of total product revenue
|
17%
|
40%
|
|
|
The
cost of software and royalty product revenue decreased 5% or
approximately $3,000 for the nine months ended September 30, 2016
and 2015 despite lower software and royalty product revenue during
the nine months ended September 30, 2015 of approximately $734,000
due to the 2015 period containing significant levels of software
licenses with no third-party software content resulting in
uncharacteristically low cost of software and royalty product
revenue for this component. In addition to changes in costs of
software and royalty product revenue caused by revenue level
fluctuations, costs of products can vary as a percentage of product
revenue from period to period depending upon level of software
customization and third party software license content included in
product sales during a given period.
The
increase in the cost of product revenue for our hardware and
consumable sales of approximately $12,000 for the nine months ended
September 30, 2016 as compared to the corresponding period in 2015
reflects higher hardware and consumables product revenue of
approximately $26,000 for the nine months ended September 30, 2016
as compared to the corresponding period in 2015.
The
cost of services revenue decreased approximately $633,000 during
the nine months ended September 30, 2016 as compared to the
corresponding period in 2015 due to lower services revenue of
approximately $276,000 in the 2016 period. This decrease reflects
higher professional cost of service revenue for the nine months
ended September 30, 2015 due to significantly more costly
engineering resources utilized in the generation of non-recurring
revenue from one customer in the 2015 period as compared to the
corresponding period in 2016. In addition to changes in costs of
services product revenue caused by revenue level fluctuations,
costs of services can vary as a percentage of service revenue from
period to period depending upon both the level and complexity of
professional service resources utilized in the completion of the
service element.
Cost of Maintenance Revenue
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Maintenance cost of revenue
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance cost of revenue
|
$624
|
$618
|
$6
|
1%
|
|
Percentage
of total maintenance revenue
|
32%
|
32%
|
|
|
Cost
of maintenance revenue increased 1% or approximately $6,000 during
the nine months ended September 30, 2016 as compared to the
corresponding period in 2015. This increase results from higher
departmental expense for the nine months ended September 30, 2016
as compared to the corresponding period in 2015.
Product Gross Profit
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Product gross profit
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$613
|
$1,344
|
$(731)
|
(54%)
|
|
Percentage
of software and royalty product revenue
|
91%
|
95%
|
|
|
|
Hardware
and consumables
|
$23
|
$9
|
$14
|
156%
|
|
Percentage
of hardware and consumables product revenue
|
42%
|
32%
|
|
|
|
Services
|
$170
|
$(187)
|
$357
|
191%
|
|
Percentage
of services product revenue
|
71%
|
(36)%
|
|
|
|
Total
product gross profit
|
$806
|
$1,166
|
$(360)
|
(31%)
|
|
Percentage
of total product revenue
|
83%
|
60%
|
|
|
Software
and royalty gross profit decreased 54% or approximately $731,000
for the nine months ended September 30, 2016 from the corresponding
period in 2015 due primarily to lower software and royalty revenue
of approximately $734,000. In addition to changes in costs of
software and royalty product revenue caused by revenue level
fluctuations, costs of products can vary as a percentage of product
revenue from period to period depending upon level of software
customization and third party software license content included in
product sales during a given period.
Services
gross profit increased approximately $357,000 for the nine months
ended September 30, 2016 as compared to the corresponding period in
2015 due to lower service revenue of approximately $276,000
combined with lower cost of service revenue of approximately
$633,000 for the nine months ended September 30, 2016 as compared
to the corresponding period in 2015. The decrease in service
revenue and uncharacteristically high cost of service revenue in
the 2015 period reflect the impact of non-recurring revenue
received from one customer combined with significant costs incurred
from implementation challenges. The Company’s contract with
this same customer in the 2015 period also included software
product revenue of approximately $440,000, offset by minimal
costs.
Maintenance Gross Profit
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Maintenance gross profit
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total
maintenance gross profit
|
$1,295
|
$1,298 $
|
(3)
|
(0%)
|
|
Percentage
of total maintenance revenue
|
68%
|
68%
|
|
|
Gross
profit related to maintenance revenue decreased approximately
$3,000 for the nine months ended September 30, 2016 as compared to
the same period ended September 30, 2015. This decrease is due to
higher maintenance revenue of approximately $3,000 combined with
higher cost of maintenance revenue of approximately
$6,000.
Operating Expense
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Operating expense
|
2016
|
2015
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$2,810
|
$2,611
|
$199
|
8%
|
|
Percentage
of total net revenue
|
97%
|
68%
|
|
|
|
Sales
and marketing
|
$2,133
|
$2,030
|
$103
|
5%
|
|
Percentage
of total net revenue
|
74%
|
52%
|
|
|
|
Research and
development
|
$3,932
|
$3,350
|
$582
|
17%
|
|
Percentage
of total net revenue
|
136%
|
87%
|
|
|
|
Depreciation
and amortization
|
$103
|
$123
|
$(20)
|
(16%)
|
|
Percentage
of total net revenue
|
4%
|
3%
|
|
|
General and Administrative Expense
General
and administrative expense is comprised primarily of salaries and
other employee-related costs for executive, financial, and other
infrastructure personnel. General legal, accounting and consulting
services, insurance, occupancy and communication costs are also
included with general and administrative expense. The
dollar increase of approximately $199,000 during nine months ended
September 30, 2016 as compared to the corresponding period in 2015
is comprised of the following major components:
|
●
|
Increase
in personnel
related expense of approximately $242,000 due to increased salaries
from headcount increases of approximately $194,000, higher 401(k)
plan employer contributions of approximately $28,000 and higher
pension expense of our foreign sales office of approximately
$20,000.
|
|
●
|
Increase
in stock-based compensation expense of approximately
$116,000.
|
|
●
|
Decreases
in professional services of approximately $146,000 which includes
decreases in Board of Director fees of approximately $22,000, lower
contractor fees of approximately $42,000, lower corporate-related
expense of approximately $4,000, lower legal and patent-related
expense of approximately $112,000 offset by higher auditing fees of
approximately $10,000 and higher investor relations fees of
approximately $24,000.
|
|
●
|
Decrease
in travel, insurances, licenses, dues, rent, and office related
costs of approximately $13,000.
|
We
continue to focus our efforts on achieving additional future
operating efficiencies by reviewing and improving upon existing
business processes and evaluating our cost structure. We believe
these efforts will allow us to continue to gradually decrease our
level of general and administrative expense expressed as a
percentage of total revenue.
Sales and Marketing
Sales
and marketing expense consists primarily of the salaries,
commissions, other incentive compensation, employee benefits and
travel expense of our sales, marketing, and business development
functions. The dollar increase of approximately $103,000 during the
nine months ended September 30, 2016 as compared to the
corresponding period in 2015 is primarily comprised of the
following major components:
|
●
|
Increase
in personnel related expense of approximately $40,000 due to
headcount increases.
|
|
●
|
Increase
in professional services of approximately $54,000 resulting from
higher utilization of certain consultants.
|
|
●
|
Decrease
in contract services, travel and trade show expense and office
related expense of approximately $41,000.
|
|
●
|
Increase
in stock-based compensation expense of approximately
$50,000.
|
Research
and Development
Research
and development expense consists primarily of salaries, employee
benefits and outside contractors for new product development,
product enhancements, custom integration work and related facility
costs. Such expense increased approximately $582,000 for the nine
months ended September 30, 2016 as compared to the corresponding
period in 2015 due primarily to the following major
components:
|
●
|
Increase
in personnel related expense of approximately $636,000 due to
headcount increases needed for the accelerated development of the
Company’s mobile identity management solutions.
|
|
|
|
|
●
|
Decrease
in contractor fees and contract services of approximately
$41,000.
|
|
|
|
|
●
|
Increase
in stock-based compensation of approximately $45,000.
|
|
●
|
Decrease
in office related expense and travel of approximately
$58,000.
|
Our
level of expenditures in research and development reflects our
belief that to maintain our competitive position in markets
characterized by rapid rates of technological advancement, we must
continue to invest significant resources in new systems and
software development as well as continue to enhance existing
products.
Depreciation and Amortization
During
the nine months ended September 30, 2016 and 2015, depreciation and
amortization expense was approximately $103,000 and $123,000,
respectively. The relatively small amount of depreciation and
amortization is a reflection of the relatively small property and
equipment carrying value.
Interest Expense, Net
For
the nine months ended September 30, 2016, we recognized interest
expense of approximately $138,000 and interest income of
approximately $3,000. For the nine months ended September 30, 2015,
we recognized interest expense of approximately $441,000 and
interest income of approximately $5,000. Interest expense for the
nine months ended September 30, 2016 is comprised of approximately
$33,000 of amortization expense of deferred financing fees related
to the Lines of Credit, interest expense of approximately $50,000
of coupon interest on debt outstanding under the Lines of Credit,
and approximately $52,000 related to the recognition of beneficial
conversion feature related to the Lines of
Credit. Interest expense for the nine months ended
September 30, 2015 is comprised of approximately $12,000 of coupon
interest on debt outstanding under our Line of Credit,
approximately $52,000 in deferred financing fee amortization
related to our Line of Credit and approximately $374,000
related to the recognition of beneficial conversion feature related
to our Line of Credit.
Other Income
For
the nine months ended September 30, 2016, we recognized other
income of approximately $200,000. For the nine months
ended September 30, 2015, we recognized other income of
approximately $145,000. Other income for the nine
months ended September 30, 2016 is comprised of approximately
$200,000 related to the write-off of certain accrued liabilities
due to the expiration of the legal statute of limitations on such
liabilities. Other income for the nine months ended September 30,
2015 was comprised of approximately $45,000 from the settlement of
certain patent infringement matters in favor of the Company and
approximately $99,000 from the recovery of a previously written-off
accounts receivable and approximately $1,000 in miscellaneous
receipts.
LIQUIDITY AND CAPITAL RESOURCES AND GOING CONCERN
Historically, our principal sources of cash have
included customer payments from the sale of our products, proceeds
from the issuance of common and preferred stock and proceeds from
the issuance of debt, including our Lines of Credit. Our principal
uses of cash have included cash used in operations, payments
relating to purchases of property and equipment and repayments of
borrowings. We expect that our principal uses of cash in the future
will be for product development including customization of identity
management products for enterprise and consumer applications,
further development of intellectual property, development of
Software-as-a-Service (“SaaS”) capabilities for existing products as
well as general working capital and capital expenditure
requirements. We expect that, as our revenue grows, our sales and
marketing and research and development expense will continue to
grow, albeit at a slower rate and, as a result, we will need to
generate significant net revenue to achieve and sustain income from
operations.
At
September 30, 2016, our principal sources of liquidity consisted of
cash and cash equivalents of $1,685,000, accounts receivable, net
of $199,000, and available borrowings under the Lines of Credit of
$3,350,000. As of September 30, 2016, we had negative
working capital of $2,241,000. We have a history of recurring
losses, and as of September 30, 2016, we have incurred a cumulative
net loss of approximately $153,673,000.
Lines of Credit
On March 9, 2016, the
Company and Neal Goldman, a director of the Company
(“Goldman”),
entered into the fourth amendment (the "Fourth
Amendment") to the convertible
promissory note and line of credit previously issued by the Company
to Goldman on March 27, 2013 (the "Goldman
LOC"). The Fourth
Amendment (i) provides the Company with the ability to borrow up to
$5.0 million under the terms of the Goldman LOC; (ii) permits
Goldman to convert the outstanding principal, plus any accrued but
unpaid interest due under the Goldman LOC (the "Outstanding
Balance"), into shares of the
Company's Common Stock for $1.25 per share; and (iii) extends the
maturity date of the Goldman LOC to June 30,
2017.
In addition, on March
9, 2016, the Company and Charles Crocker, also a director of the
Company (“Crocker”),
entered into a new line of credit and promissory note (the
"New
Crocker LOC"), in the principal
amount of $500,000. The New Crocker LOC accrues interest at a rate
of 8% per annum, and matures on the earlier to occur of June 30,
2017 or such date that the Company consummates a debt and/or equity
financing resulting in net proceeds to the Company of at least $3.5
million. All outstanding amounts due under the terms of the New
Crocker LOC are convertible into shares of the Company's Common
Stock at $1.25 per share.
During
the three and nine months ended September 30, 2016, we incurred
borrowings under our existing Lines of Credit of approximately
$650,000 and $2,150,000, respectively. Such amounts are due and
payable on June 30, 2017. We anticipate needing to increase our
borrowings under the Lines of Credit to continue to fund our
working capital needs, thereby increasing the aggregate
indebtedness due and payable on or before June 30,
2017.
We
currently do not anticipate generating sufficient revenue and
profit to repay these borrowings in full when due. Therefore,
unless the holders of the notes issued under the Lines of Credit
convert any outstanding balance into shares of Common Stock, we
will need to seek an extension of the maturity date of the Lines of
Credit on or before June 30, 2017. If remaining available
borrowings under our Lines of Credit are insufficient or we are
unable to extend the maturity date of the Lines of Credit, we will
be required to raise additional capital through debt and/or equity
financing to continue operations. No assurances can be given that
any such financing will be available to us on favorable terms, if
at all. At this time, we do not have any commitments for
alternative financing or for an extension of the maturity date of
the Lines of Credit.
Going Concern
As
reflected in the accompanying consolidated financial statements,
the Company has continuing losses, negative working capital and
negative cash flows from operations. Available borrowings under our
existing Lines of Credit may be insufficient to provide for our
working capital needs for the next twelve months. As a result, we
may need to raise additional capital through debt and/or equity
financing to execute our business plan. In addition, in the event
we are unable to raise additional capital, we may be required to
sell certain of the Company’s assets or license the
Company’s technologies to others. These uncertainties raise
substantial doubt about the Company’s ability to continue as
a going concern.
In
view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts
shown in the accompanying consolidated balance sheet is dependent
upon continued operations of the Company, which, in turn, is
dependent upon the Company’s ability to continue to raise
capital and generate positive cash flows from operations. However,
the Company operates in markets that are emerging and highly
competitive. There is no assurance that the Company will operate at
a profit or generate positive cash flows in the
future.
The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts and classifications of liabilities that might be necessary
should the Company be unable to continue as a going
concern.
Operating Activities
We
used net cash of $5,679,000 in operating activities for the nine
months ended September 30, 2016 as compared to net cash used of
$5,622,000 during the comparable period in 2015. During the nine
months ended September 30, 2016, net cash used in operating
activities consisted of net loss of $6,822,000 and an increase in
working capital and other assets and liabilities of $296,000. Those
amounts were offset by $847,000 of non-cash costs including
$859,000 in stock based compensation, $85,000 in debt issuance cost
amortization and beneficial conversion feature amortization,
$103,000 in depreciation and amortization, offset by $200,000 from
the write off of accrued expense due to the expiration of the legal
statute of limitations on such liabilities. During the nine months
ended September 30, 2016, we used cash of $19,000 to fund increases
in current assets and generated cash of $316,000 through increases
in current liabilities and deferred revenue, excluding
debt.
We
used net cash of $5,622,000 in operating activities for the nine
months ended September 30, 2015. During the nine months ended
September 30, 2015, net cash used in operating activities consisted
of net loss of $5,952,000 and a increase in working capital and
other assets and liabilities of $964,000. Those amounts were offset
by $1,294,000 of non-cash costs including $665,000 in stock based
compensation, $426,000 in debt issuance cost and beneficial
conversion feature amortization, $80,000 in warrant compensation
expense and $123,000 in depreciation and amortization. During the
nine months ended September 30, 2015, we generated cash of $291,000
through increases in current assets and used cash of $673,000
through reductions in current liabilities and deferred revenue,
excluding debt.
Investing Activities
Net
cash used in investing activities was $47,000 for the nine months
ended September 30, 2016 as compared to $73,000 used in the nine
months ended September 30, 2015. For the nine months ended
September 30, 2016, we used cash to fund capital expenditures of
computer equipment, software and furniture and fixtures of
approximately $47,000. This level of equipment purchases resulted
primarily from the replacement of older equipment. For the nine
months ended September 30, 2015, we used cash to fund capital
expenditures of computer equipment, software and furniture and
fixtures of approximately $73,000.
Financing Activities
During
the nine months ended September 30, 2016, the Company received
$2,150,000 in borrowings under the Lines of Credit and gross
proceeds of $2,000,000 from the Series F Financing offset by
$21,000 in offering costs. We also generated cash of approximately
$1,000 from the exercise of 2,626 options resulting in the issuance
of 2,626 shares of our Common Stock. We used cash of $25,000 for
the payment of dividends on our Series B Preferred. We generated
cash of $10,364,000 from financing activities for the nine months
ended September 30, 2015. During the nine months ended September
30, 2015, we generated cash of $10,022,000 from the Series E
Financing offset by $67,000 in offering costs, $34,000 from the
exercise of 38,039 Common Stock options and $750,000 from
borrowings under the Line of Credit offset by the repayment of
$350,000 under the Line of Credit. During the nine months ended
September 30, 2015, we also used cash of $25,000 for the payment of
dividends on our Series B Preferred.
Debt
At September 30, 2016, the Company
had
$2,200,000 outstanding under the terms of the Lines of Credit,
which amount included $50,000 in accrued but unpaid
interest.
Contractual Obligations
Total
contractual obligations and commercial commitments as of September
30, 2016 are summarized in the following table (in
thousands):
|
|
Payment Due by Year
|
||||
|
|
Total
|
Less than
1 Year
|
1-3 Years
|
3-5 Years
|
More than
5 Years
|
|
Operating
lease obligations
|
819
|
119
|
658
|
42
|
|
|
Notes
payable to related parties
|
2,150
|
2,150
|
—
|
—
|
—
|
|
Total
|
$2,969
|
2,269
|
658
|
42
|
—
|
Real Property Leases
Our
corporate headquarters are located in San Diego, California where
we occupy 9,927 square feet of office space. This facility is
leased through October 2017 at a cost of approximately $18,000 per
month. In addition to our corporate headquarters, we also occupied
the following spaces at September 30, 2016:
●
1,508
square feet in Ottawa, Province of Ontario, Canada, at a cost of
approximately $3,000 per month until the expiration of the lease on
March 31, 2021. This lease was renewed in April 2016 for a
five-year period ending on March 31, 2021. Renewal terms were
substantially unchanged from the existing lease;
●
8,045
square feet in Portland, Oregon, at a cost of approximately $16,000
per month until the expiration of the lease on October 31, 2018;
and
●
425
square feet of office space in Mexico City, Mexico, at a cost of
approximately $3,000 per month, on a month-to-month basis until
terminated by either party.
At September 30, 2016, future minimum lease payments are as
follows:
|
($ in thousands)
|
|
|
2016
(3 months)
|
$119
|
|
2017
|
$421
|
|
2018
|
$202
|
|
2019
|
$35
|
|
2020
and thereafter
|
$42
|
|
|
$819
|
Off-Balance Sheet Arrangements
At
September 30, 2016, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance, special purpose or
variable interest entities, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we did not
engage in trading activities involving non-exchange traded
contracts. As a result, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged
in such relationships. We do not have relationships and
transactions with persons or entities that derive benefits from
their non-independent relationship with us or our related parties
except as disclosed elsewhere in this Quarterly
Report.
Recently Issued Accounting Standards
Please
refer to the section “Recently Issued Accounting
Standards” in Note 2 of our Notes to the Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Each of our contracts requires payment in
U.S. dollars. We therefore do not engage in hedging
transactions to reduce our exposure to changes in currency exchange
rates, although in the event any future contracts are denominated
in a foreign currency, we may do so in the future. As a
result, our financial results are not affected by factors such as
changes in foreign currency exchange rates.
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the
design and operations of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of September 30, 2016. Based on this
evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed in the reports submitted under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms,
including to ensure that information required to be disclosed by
the Company is accumulated and communicated to management,
including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Controls Over Financial
Reporting
The
Company’s Chief Executive Officer and Chief Financial Officer
have determined that there have been no changes, in the
Company’s internal control over financial reporting during
the period covered by this report identified in connection with the
evaluation described in the above paragraph that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial
reporting.
PART II
ITEM 1. LEGAL
PROCEEDINGS
None.
ITEM 1A. RISK
FACTORS
We
have identified the following risk factor in addition to the risk
factors previously disclosed in Part I, Item 1A, "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31,
2015:
Available borrowings under our Lines of Credit may be insufficient
to provide for our working capital needs for the next twelve
months. In the event such Lines of Credit are
insufficient to provide for our working capital requirements, we
will need to raise additional capital to continue as a going
concern.
During
the nine months ended September 30, 2016, we incurred borrowings
under the Lines of Credit of approximately $2,150,000, due and
payable on June 30, 2017. As a result, available
borrowings under our Lines of Credit are $3,350,000. We anticipate
needing to increase our borrowings under the Line of Credits to
continue to fund our working capital needs, thereby increasing the
aggregate amount of indebtedness due and payable on or before June
30, 2017.
We
currently do not anticipate generating sufficient revenue and
profit to repay these borrowings in full when due. Therefore,
unless the holders of the notes issued under the Lines of Credit
convert any outstanding balance into shares of Common Stock, we
will need to seek an extension of the maturity date of the Lines of
Credit on or before June 30, 2017. If we are unable to extend the
maturity date of the Lines of Credit, we will be required to raise
additional capital through debt and/or equity financing to continue
as a going concern. No assurances can be given that any
such financing will be available to us on favorable terms, if at
all. At this time, we do not have any commitments for alternative
financing or for an extension of the maturity date of the Lines of
Credit. The inability to obtain debt or equity financing in a
timely manner and in amounts sufficient to fund our operations, if
necessary, would have an immediate and substantial adverse impact
on our business, financial condition or results of
operations.
None.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
|
(a)
|
|
EXHIBITS
|
|
|
|
|
|
3.1
|
|
Certificate of Designations, Preferences, and Rights of the Series
F Convertible Preferred Stock, dated September 2, 2016
|
|
10.1
|
|
Form of Series F Financing Securities Purchase
Agreement
|
|
31.1
|
|
Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a)
|
|
31.2
|
|
Certification of the Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) and 15d-14(a)
|
|
32.1
|
|
Certification by the Principal Executive Officer and Principal
Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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SIGNATURES
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Date: November 14, 2016
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IMAGEWARE SYTEMS, INC
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By: /s/ S. James
Miller
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S. James Miller
Chief Executive Officer, Chairman
and Director
(Principal Executive
Officer)
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Date: November 14, 2016
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By: /s/ Wayne
Wetherell
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Wayne Wetherell
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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