IMAGEWARE SYSTEMS INC - Quarter Report: 2017 June (Form 10-Q)
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DRAFT
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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 June 30, 2017
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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,
smaller reporting company or emerging growth company. See
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and "emerging growth 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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Emerging
growth company
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[
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
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 August 14,
2017 was 93,141,118.
IMAGEWARE SYSTEMS, INC.
INDEX
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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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June 30,
2017
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December 31,
2016
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ASSETS
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(Unaudited)
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Current
Assets:
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Cash
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$104
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$1,586
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Accounts
receivable, net of allowance for doubtful accounts of $16 at June
30, 2017 and $1 at December 31, 2016.
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332
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287
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Inventory,
net
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53
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23
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Other
current assets
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148
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135
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Total
Current Assets
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637
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2,031
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Property
and equipment, net
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62
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93
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Other
assets
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35
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34
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Intangible
assets, net of accumulated amortization
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100
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106
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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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$4,250
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$5,680
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LIABILITIES AND SHAREHOLDERS’ DEFICIT
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Current
Liabilities:
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Accounts
payable
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$343
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$425
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Deferred
revenue
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608
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1,045
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Accrued
expenses
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1,237
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1,047
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Convertible
lines of credit to related parties, net of discount
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—
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2,528
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Total
Current Liabilities
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2,188
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5,045
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Convertible lines
of credit to related parties, net of discount
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5,687
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—
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Pension
obligation
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1,955
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1,895
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Total
Liabilities
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9,830
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6,940
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Shareholders’
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
shares outstanding at June 30, 2017 and December 31, 2016;
liquidation preference $607 at June 30, 2017 and December 31,
2016.
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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
June 30, 2017 and December 31, 2016; liquidation preference $12,000
at June 30, 2017 and December 31, 2016.
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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 shares issued and outstanding at
June 30, 2017 and December 31, 2016; liquidation preference $2,000
at June 30, 2017 and December 31, 2016.
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—
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—
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Series
G Convertible Redeemable Preferred Stock, $0.01 par value;
designated 6,120 shares, 6,021 shares issued and outstanding at
June 30, 2017 and December 31, 2016; liquidation preference $6,021
at June 30, 2017 and December 31, 2016.
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—
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—
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Common
Stock, $0.01 par value, 150,000,000 shares authorized; 93,147,822
and 91,853,499 shares issued at June 30, 2017 and December 31,
2016, respectively, 93,141,118 and 91,846,795 shares outstanding at
June 30, 2017 and December 31, 2016, respectively.
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930
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917
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Additional
paid-in capital
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158,236
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156,195
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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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(1,621)
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(1,543)
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Accumulated
deficit
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(163,063)
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(156,767)
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Total
Shareholders’ Deficit
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(5,580)
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(1,260)
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Total Liabilities and Shareholders’ Deficit
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$4,250
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$5,680
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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
June 30,
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Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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Revenue:
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Product
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$407
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$356
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$680
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$759
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Maintenance
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653
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640
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1,309
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1,280
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1,060
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996
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1,989
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2,039
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Cost of revenue:
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Product
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36
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56
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90
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130
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Maintenance
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214
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219
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423
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424
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Gross
profit
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810
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721
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1,476
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1,485
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Operating expense:
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General
and administrative
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1,042
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899
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2,087
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1,905
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Sales
and marketing
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702
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743
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1,463
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1,416
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Research
and development
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1,479
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1,318
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2,943
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2,631
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Depreciation
and amortization
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17
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35
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38
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70
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3,240
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2,995
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6,531
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6,022
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Loss
from operations
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(2,430)
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(2,274)
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(5,055)
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(4,537)
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Interest
expense, net
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164
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36
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264
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46
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Other
income, net
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(50)
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(200)
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(50)
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(200)
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Loss
before income taxes
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(2,544)
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(2,110)
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(5,269)
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(4,383)
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Income
tax expense
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3
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4
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7
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6
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Net
loss
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(2,547)
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(2,114)
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(5,276)
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(4,389)
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Preferred
dividends
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(514)
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(309)
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(1,021)
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(657)
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Net
loss available to common shareholders
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$(3,061)
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$(2,423)
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$(6,297)
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$(5,046)
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Basic and diluted loss per common share - see Note 3:
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Net
loss
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$(0.03)
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$(0.02)
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$(0.06)
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$(0.05)
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Preferred
dividends
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(0.00)
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(0.01)
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(0.01)
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(0.00)
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Basic
and diluted loss per share available to common
shareholders
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$(0.03)
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$(0.03)
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$(0.07)
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$(0.05)
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Basic
and diluted weighted-average shares outstanding
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92,539,230
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94,298,567
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92,203,567
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94,185,967
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS,
INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE LOSS
(In Thousands)
(Unaudited)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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Net
loss
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$(2,547)
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$(2,114)
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$(5,276)
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$(4,389)
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Other
comprehensive income (loss):
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Foreign
currency translation adjustment
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(61)
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23
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(78)
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(31)
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Comprehensive
loss
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$(2,608)
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$(2,091)
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$(5,354)
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$(4,420)
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In Thousands)
(Unaudited)
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Six Months Ended
June 30,
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2017
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2016
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Cash flows from operating activities
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Net
loss
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$(5,276)
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$(4,389)
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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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38
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70
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Amortization
of debt issuance costs and beneficial conversion
feature
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97
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37
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Reduction in
accrued expense from the expiration of statute of
limitations
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—
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(200)
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Provision
for losses on accounts receivable
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15
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—
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Stock-based
compensation
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550
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565
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Gain
from sale of trademark
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(50)
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—
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Change
in assets and liabilities
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Accounts receivable
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(60)
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75
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Inventory
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(30)
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(28)
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Other assets
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(21)
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(73)
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Accounts payable
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(82)
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—
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Deferred revenue
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(438)
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(434)
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Accrued expenses
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192
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(129)
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Pension obligation
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60
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81
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Total
adjustments
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271
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(36)
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Net
cash used in operating activities
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(5,005)
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(4,425)
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Cash flows from investing activities
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Purchase
of property and equipment
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(1)
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(44)
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Proceeds
received from sale of trademark
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50
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—
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Net
cash used in investing activities
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49
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(44)
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Cash flows from financing activities
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Proceeds
from exercised stock options
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227
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—
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Proceeds
from lines of credit, net
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3,350
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1,500
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Dividends
paid
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(25)
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(25)
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Net
cash provided by financing activities
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3,552
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1,475
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Effect
of exchange rate changes on cash
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(78)
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(31)
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Net
decrease in cash
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(1,482)
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(3,025)
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Cash
at beginning of period
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1,586
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3,352
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Cash
at end of period
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$104
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$327
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Supplemental
disclosure of cash flow information:
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Cash
paid for interest
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$—
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$1
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Cash
paid for income taxes
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$—
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$—
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Summary
of non-cash investing and financing activities:
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Beneficial
conversion feature on
convertible related party lines of credit
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$281
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$121
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Stock
dividend on Convertible Redeemable Preferred Stock
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$996
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$631
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND DESCRIPTION OF
BUSINESS
Overview
As used in this Quarterly Report,
“we,” “us,” “our,”
“ImageWare,” “ImageWare Systems,”
“Company” or “our Company” refers to
ImageWare Systems, Inc. and all of its subsidiaries. ImageWare
Systems, Inc. is incorporated in the state of Delaware. 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. The Company’s “flagship”
product is the patented IWS Biometric Engine®. The
Company’s products are used to manage and issue secure
credentials, including national IDs, passports, driver licenses and
access control credentials. The Company’s products also
provide law enforcement with integrated mug shot, fingerprint
LiveScan and investigative capabilities. The Company also provides
comprehensive authentication security software using biometrics to
secure physical and logical access to facilities or computer
networks or internet sites. Biometric technology is now an integral
part of all markets the Company addresses and all of the products
are integrated into the IWS Biometric
Engine.
Liquidity, Going Concern and Management’s
Plan
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, product development, 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. Management expects that, as our revenues grow, our
sales and marketing and research and development expenses will
continue to grow, albeit at a slower rate and, as a result, we will
need to generate significant net revenues to achieve and sustain
income from operations.
Going Concern
At
June 30, 2017, we had a working capital deficit of approximately
$1,551,000. Our principal sources of liquidity at June 30, 2017
consisted of approximately $104,000 of cash and $332,000 of trade
accounts receivable.
Considering our
projected cash requirements, our available cash will be
insufficient to satisfy our cash requirements for the next twelve
months from the date of this filing. These factors raise
substantial doubt about our ability to continue as a going concern.
To address our working capital requirements, management will
continue to seek additional equity and/or debt financing through
the issuance of additional debt and/or equity securities prior to
the end of the quarter ended September 30, 2017. There are
currently no formal committed financing arrangements to support our
projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, and no assurances can be
given that we will be successful in raising additional debt and/or
equity securities.
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 be able to
obtain additional capital, operate at a profit or generate positive
cash flows in the future.
These
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, 2016, 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, 2016, which
are included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2016 that was filed with the SEC on
March 30, 2017.
Operating
results for the three and six months ended June 30, 2017 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2017, or any other future
periods.
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The Company’s
wholly-owned subsidiaries are XImage Corporation, a California
Corporation, ImageWare Systems ID Group, Inc. a Delaware
corporation (formerly Imaging Technology Corporation), I.W. Systems
Canada Company, a Nova Scotia unlimited liability company,
ImageWare Digital Photography Systems, Inc., LLC a Nevada limited
liability company (formerly Castleworks LLC), Digital Imaging
International GmbH, a company formed under German laws and Image
Ware Mexico S de RL de CV, a company formed under Mexican laws. All
significant intercompany transactions and balances have been
eliminated.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America
(“U.S.
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 consolidated
financial statements, and the reported amounts of revenue and
expense during the reporting period. Significant estimates include
the evaluation of our ability to continue as a going concern, 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, revenue and cost of revenues 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. Actual results could differ from
estimates.
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. Accounts receivable are considered
delinquent when the due date on the invoice has passed. The Company
records its allowance for doubtful accounts based upon its
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 expenses, deferred revenues and lines of credit 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 June 30, 2017, one customer accounted for
approximately 17% or $184,000 of our total revenue and had trade
receivables at June 30, 2017of $0. For the six months
ended June 30, 2017, one customer accounted for approximately 19%
or $368,000 of our total revenue and had trade receivables at June
30, 2017of $0.
For the
three months ended June 30, 2016, two customers accounted for
approximately 31% or $313,000 of our total revenue and had trade
receivables at June 30, 2016 of $0. For the six months
ended June 30, 2016, two customers accounted for approximately 32%
or $644,000 of our total revenue and had trade receivables at June
30, 2016 of $53,000.
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. Unless
otherwise discussed, the Company’s management believes the
impact of recently issued standards not yet effective will not have
a material impact on the Company’s consolidated financial
statements upon adoption.
FASB ASU No.
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
currently anticipate adopting the standard using the cumulative
effect transition method during the first fiscal quarter in
2018.
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 and anticipates commencement of
adoption planning in the first fiscal quarter of
2019.
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.
2016-10. 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 No. 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.
FASB ASU No.
2017-04. In January 2017,
the FASB issued ASU No. 2017-04, Intangibles – Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The amendments of this
ASU eliminate step 2 from the goodwill impairment test. The annual,
or interim test is performed by comparing the fair value of a
reporting unit with its carrying amount. The amendments of this ASU
also eliminate the requirements for any reporting unit with a zero
or negative carrying amount to perform a qualitative assessment and
if it fails that qualitative test, to perform step 2 of the
goodwill impairment test. ASU No. 2017-04 is effective for fiscal
years beginning after December 15, 2019. The Company is currently evaluating the
potential impact of adoption of this standard on its consolidated
financial statements.
FASB ASU No. 2017-09.
In May
2017, the FASB issued ASU
No. 2017-09, “Scope
of Modification Accounting”, to reduce
diversity in practice and provide clarity regarding existing
guidance in ASC 718, “Stock
Compensation”. The amendments
in this updated guidance clarify that an entity should apply
modification accounting in response to a change in the terms and
conditions of an entity’s share-based payment awards unless
three newly specified criteria are met. This guidance is effective
for fiscal years beginning after December 15, 2017, including
interim periods within that reporting
period. Early adoption is permitted. The Company is
currently evaluating the potential impact of this updated guidance
on its consolidated financial statements.
FASB ASU No. 2017-11.
In July 2017, the FASB issued
ASU No 2017-11, “Earnings Per Share (Topic
260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral”. The ASU applies to issuers of financial
instruments with down-round features. It amends (1) the
classification of such instruments as liabilities or equity by
revising the guidance in ASC 815 on the evaluation of whether
instruments or embedded features with down-round provisions must be
accounted for as derivative instruments and (2) the guidance on
recognition and measurement of the value transferred upon the
trigger of a down-round feature for equity-classified instruments
by revising ASC 260. The ASU is effective for public business
entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. For all other
organizations, the amendments are effective for fiscal years
beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is
permitted. The Company is
currently evaluating the potential impact of this updated guidance
on its consolidated financial statements.
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 related party lines of
credit, 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
June 30,
|
Six Months Ended
June 30,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
Numerator
for basic and diluted loss per share:
|
|
|
|
|
|
Net
loss
|
$(2,547)
|
$(2,114)
|
$(5,276)
|
$(4,389)
|
|
Preferred
dividends
|
(514)
|
(309)
|
(1,021)
|
(657)
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
$(3,061)
|
$(2,423)
|
$(6,297)
|
$(5,046)
|
|
|
|
|
|
|
|
Denominator
for basic and dilutive loss per share – weighted-average
shares outstanding
|
92,539,230
|
94,298,567
|
92,203,567
|
94,185,967
|
|
|
|
|
|
|
|
Net
loss
|
$(0.03)
|
$(0.02)
|
$(0.06)
|
$(0.05)
|
|
Preferred
dividends
|
(0.00)
|
(0.01)
|
(0.01)
|
(0.00)
|
|
|
|
|
|
|
|
Basic
and diluted loss per share available to common
shareholders
|
$(0.03)
|
$(0.03)
|
$(0.07)
|
$(0.05)
|
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
|
Three and
Six Months Ended
June
30,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Related party lines
of credit
|
5,016,236
|
1,209,635
|
|
Convertible
redeemable preferred stock
|
11,709,151
|
6,361,818
|
|
Stock
options
|
6,171,555
|
5,582,136
|
|
Warrants
|
175,000
|
450,000
|
|
Total potential
dilutive securities
|
23,071,942
|
13,603,589
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $53,000 as of June 30, 2017 were comprised of work
in process of $47,000 representing direct labor costs on in-process
projects and finished goods of $6,000 net of reserves for obsolete
and slow-moving items of $3,000.
Inventories of $23,000 as of December 31, 2016 were comprised of
work in process of $19,000 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
carrying amounts of the Company’s patent intangible assets
were $100,000 and $106,000 as of June 30, 2017 and December 31,
2016, respectively, which includes accumulated amortization of
$560,000 and $554,000 as of June 30, 2017 and December 31, 2016,
respectively. Amortization expense for patent intangible
assets was $3,000 and $6,000 for the three and six months ended
June 30, 2017 and 2016, respectively. Patent intangible assets are
being amortized on a straight-line basis over their remaining life
of approximately 9.0 years.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
|
Fiscal Year Ended December 31,
|
Estimated Amortization
Expense
($ in
thousands)
|
|
2017
(six months)
|
$6
|
|
2018
|
12
|
|
2019
|
12
|
|
2020
|
12
|
|
2021
|
12
|
|
Thereafter
|
46
|
|
Totals
|
$100
|
Goodwill
The
Company annually, or more frequently if events or circumstances
indicate a need, tests the carrying amount of goodwill for
impairment. A two-step impairment test is used to first
identify potential goodwill impairment and then measure the amount
of goodwill impairment loss, if any. The first step was conducted
by determining and comparing the fair value, employing the market
approach, of the Company’s reporting unit to the carrying
value of the reporting unit. The Company continues to have only one
reporting unit, Identity Management. Based on the results of this
impairment test, the Company determined that its goodwill was not
impaired as of June 30, 2017 and December 31, 2016.
NOTE 5. LINES OF CREDIT WITH RELATED
PARTIES
Outstanding
lines of credit consist of the following:
|
($ in thousands)
|
June
30,
2017
|
December 31,
2016
|
|
Lines
of Credit
|
|
|
|
8%
convertible lines of credit. Face value of advances under lines of
credit $6,000 and $2,650 at June 30, 2017 and December 31, 2016,
respectively. Discount on advances under lines of credit is $313 at
June 30, 2017 and $122 at December 31, 2016. Maturity date is
December 31, 2018.
|
$5,687
|
$2,528
|
|
|
|
|
|
Total
lines of credit to related parties
|
5,687
|
2,528
|
|
Less
current portion
|
(—)
|
(2,528)
|
|
Long-term
lines of credit to related parties
|
$5,687
|
$—
|
Lines of Credit
In March 2013, the Company and Neal Goldman, a
member of the Company’s Board of Directors
(“Goldman”), entered into a line of credit (the
“Goldman Line of
Credit”) with available
borrowings of up to $2.5 million. In March 2014, the Goldman Line
of Credit’s borrowing was 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 Line of Credit 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 Line of
Credit, the Company issued a warrant to Goldman, exercisable for
1,052,632 shares of the Company’s Common Stock (the
"Line of
Credit Warrant"). The Goldman
Line of Credit 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
to Goldman a second warrant, 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 Line of Credit 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 Line of Credit Warrant as a deferred
financing fee of approximately $580,000 to be amortized over the
life of the Goldman Line of Credit. 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
Line of Credit.
During
the three and six months ended June 30, 2017, the Company recorded
an aggregate of approximately $2,000 and $7,000, respectively in
deferred financing fee amortization expense. During the three and
six months ended June 30, 2016, the Company recorded an aggregate
of approximately $12,000 and $24,000, respectively in deferred
financing fee amortization expense. Such expense 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 Line of Credit 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 Charles Crocker, a member of the
Company’s Board of Directors (“Crocker”), with available borrowings of up to
$500,000 (the “Crocker LOC”), 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 the
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 Line of Credit to increase
the available borrowing to $5.0 million and extend the maturity
date of the Goldman Line of Credit 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 outstanding principal, plus any accrued but unpaid
interest (“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, the Company
issued 1,978 shares of Series E Preferred to Goldman to satisfy
$1,950,000 in principal borrowings under the Goldman Line of Credit
plus approximately $28,000 in accrued interest. As a result of the
Series E Financing, the Company’s borrowing capacity under
the Goldman Line of Credit was reduced to $3,050,000 with the
maturity date unchanged and the Crocker LOC was terminated in
accordance with its terms.
In March 2016, the Company and Goldman entered
into a fourth amendment to the Goldman Line of Credit (the
“Fourth
Amendment”) solely to (i)
increase available borrowings to $5.0 million; (ii) extend the
maturity date to June 30, 2017, and (iii) provide for the
conversion of the outstanding balance due under the terms of the
Goldman Line of Credit into that number of fully paid and
non-assessable shares of the Company’s Common Stock as is
equal to the quotient obtained by dividing the outstanding balance
by $1.25.
Contemporaneous with the execution of the Fourth
Amendment, the Company entered into a new $500K Line of Credit (the
“New
Crocker LOC”) with
available borrowings of up to $500,000 with Crocker, which replaced
the original Crocker LOC that terminated as a result of the
consummation of the Series E Financing. Similar to the
Fourth Amendment, the New Crocker LOC with Crocker originally
matured on June 30, 2017, and provides for the conversion of
the outstanding balance due under the terms of the New Crocker LOC
into that number of fully paid and non-assessable shares of the
Company’s Common Stock as is equal to the quotient obtained
by dividing the outstanding balance by $1.25.
On December 27, 2016, in connection with the
consummation of the Series G Financing, the Company and Holder
agreed to enter into the Fifth
Amendment (the “Line
of Credit Amendment”) to the Goldman
Line of Credit to provide the Company with the ability to borrow up
to $5.5 million under the terms of the Goldman Line of Credit. In
addition, the Maturity Date, as defined in the Goldman Line of
Credit was amended to be December 31, 2017. The Line of Credit
Amendment was executed on January 23, 2017.
In addition, on January 23, 2017, the Company and Crocker amended
the New Crocker LOC to extend the maturity date thereof to December
31, 2017. No other amendments were made to the New Crocker
LOC.
On May 10, 2017, Goldman and Crocker agreed to further extend the
maturity dates of Lines of Credit to December 31,
2018.
As the aforementioned amendments to the Lines of Credit resulted in
an increase to the borrowing capacity of the Lines of Credit, the
Company adjusted the amortization period of any remaining
unamortized deferred costs and note discounts to the term of the
new arrangement.
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. The Company incurred borrowings of $2,650,000
during the year ended December 31, 2016 and incurred borrowings of
$3,350,000 during the six months ended June 30, 2017. As a result
of these borrowings under the Lines of Credit, the Company recorded
approximately $220,000 in debt discount attributable to the
beneficial conversion feature during the year ended December 31,
2016 and recorded approximately $281,000 in debt discount
attributable to beneficial conversion feature during the six months
ended June 30, 2017. During the three and
six months ended June 30, 2017, the Company accreted approximately
$55,000 and $90,000, respectively, of debt discount. During the
three and six months ended June 30, 2016, the Company accreted
approximately $12,000 of the note discount. Such expense is recorded as a component of
interest expense in the Company’s condensed consolidated
statements of operations.
NOTE 6. EQUITY
The
Company’s Articles of Incorporation, as amended, authorize
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 Stock (“Series B
Preferred”) outstanding
as of June 30, 2017 and December 31, 2016. At June 30, 2017 and
December 31, 2016, the Company had cumulative undeclared dividends
of approximately $8,000. There were no conversions of Series B
Preferred into Common Stock during the six months ended June 30,
2017 and 2016.
Series E Convertible Redeemable Preferred Stock
On
January 29, 2015, the Company filed the Certificate of Designations
of the Series E Preferred Stock 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 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 $1.90.
The Series E Preferred shall be subordinate to and rank junior to
the Company's Series B Preferred and all indebtedness of the
Company. 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 day's prior written notice (the
“Company's Redemption
Notice”) 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. Also, simultaneous with the occurrence of a
change of control transaction, 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.
On December 29, 2016, the Company filed Amendment
No. 1 to the Certificate of Designations, Preferences and Rights of
the Series E Convertible Preferred Stock (the
“Series E
Amendment”) with the
Delaware Division of Corporations. The Series E Amendment made the
following changes to the Certificate of Designations, Preferences
and Rights of the Series E Convertible Preferred Stock: (i) the
Company may only make dividend payments in cash received from
positive cash flow from operations; (ii) beginning on July 1, 2017,
in the event the Company pays accrued dividend payments in shares
of Common Stock for more than four consecutive quarterly periods,
holders of shares of Series E Preferred will have the right to
immediately appoint two designees to the Company’s Board of
Directors (the “ Director Appointment
Provision ”); (iii)
dividend payments incurred on December 31, 2016 and March 31, 2017
may be paid in shares of Common Stock, without triggering the
Director Appointment Provision; and (iv) the term Permitted
Indebtedness (as defined in the Series E Certificate of
Designations) was revised to cover permitted borrowings of up to
$6.0 million.
The Company had 12,000 shares of Series E
Preferred outstanding as of June 30, 2017 and December 31, 2016,
respectively. At June 30, 2017 and December 31, 2016,
the Company had cumulative undeclared dividends of
$0. There were no conversions of Series E Preferred into
Common Stock during the six months ended June 30, 2017 and
2016. The Company issued the
holders of Series E Preferred 301,720 shares of Common Stock on
June 30, 2017 as payment of dividends due on that
date. For the six months
ended June 30, 2017, the Company has issued the holders of Series E
Preferred 584,437 shares of Common Stock as payment of dividends
due. With the payment of the quarterly dividends due June 30, 2017
to the holders of Series E Preferred in shares of Common Stock, the
Director Appointment Provision became effective as of that
date.
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 June 30, 2017 and
December 31, 2016. At June 30, 2017 and December 31,
2016, the Company had cumulative undeclared dividends of $0. There
were no conversions of Series F Preferred into Common Stock during
the six months ended June 30, 2017 and 2016. The Company issued the
holders of Series F Preferred 49,749 shares of Common Stock on June
30, 2017 as payment of dividends due on that date. For the six
months ended June 30, 2017, the Company has issued the holders of
Series F Preferred 96,716 shares of Common Stock as payment of
dividends due.
Series G Convertible Redeemable Preferred Stock
In December 27, 2016, the Company filed the
Certificate of Designations, Preferences, and Rights of the Series
G Convertible Preferred Stock with the Delaware Division of
Corporations, designating 6,120 shares of the Company’s
preferred stock, par value $0.01 per share, as Series G Convertible
Preferred Stock (“Series G
Preferred”). Shares of
Series G Preferred rank junior to the Company’s Series B
Preferred, Series E Preferred, Series F Preferred as well as the
Company’s 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, par value $0.01 per share. Each
share of Series G Preferred has a liquidation preference of $1,000
per share (“Series G 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 G
Liquidation Preference, divided by $1.50.
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 G Preferred outstanding upon thirty (30)
calendar days prior written notice in cash at a price per share of
Series G Preferred equal to 110% of the Series G 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 G Preferred in cash at a price per share of
Series G Preferred equal to 110% of the Liquidation Preference
Amount plus all accrued and unpaid dividends.
On December 29, 2016, the Company accepted
subscription forms from certain accredited investors to purchase a
total of 1,625 shares of Series G Preferred for $1,000 per share
(the “Series G
Financing”), resulting in
gross proceeds to the Company of $1,625,000, net of issuance cost
of approximately $11,000. In addition, the Company also received
executed exchange agreements from the Investors pursuant to which
the Company exchanged an aggregate total of 3,383,830 shares of
common stock held by the Investors for an aggregate total of 4,396
shares of Series G Preferred.
The
Company had 6,021 shares of Series G Preferred outstanding as of
June 30, 2017 and December 31, 2016. At June 30, 2017
and December 31, 2016, the Company had cumulative undeclared
dividends of $0. There were no conversions of Series G
Preferred into Common Stock during the six months ended June 30,
2017 and 2016. The Company issued the holders of Series G Preferred
149,773 shares of Common Stock on June 30, 2017 as payment of
dividends due on that date. For the six months ended June 30, 2017,
the Company has issued the holders of Series G Preferred 291,170
shares of Common Stock as payment of dividends due.
Common Stock
The
following table summarizes Common Stock activity for the six months
ended June 30, 2017:
|
|
Common Stock
|
|
Shares
outstanding at December 31, 2016
|
91,846,795
|
|
Shares
issued as payment of stock dividend on Series E
Preferred
|
584,437
|
|
Shares
issued as payment of stock dividend on Series F
Preferred
|
96,716
|
|
Shares
issued as payment of stock dividend on Series G
Preferred
|
291,170
|
|
Shares
issued pursuant to option exercises
|
322,000
|
|
Shares
outstanding at June 30, 2017
|
93,141,118
|
Warrants
The
following table summarizes warrant activity for the following
periods:
|
|
Warrants
|
Weighted- Average
Exercise Price
|
|
Balance
at December 31, 2016
|
175,000
|
$0.84
|
|
Granted
|
—
|
—
|
|
Expired
/ Canceled
|
—
|
—
|
|
Exercised
|
—
|
|
|
Balance
at June 30, 2017
|
175,000
|
$0.84
|
As
of June 30, 2017, warrants to purchase 175,000 shares of Common
Stock at prices ranging from $0.80 to $1.10 were outstanding. There
were 25,000 warrants exercisable as of June 30, 2017 which expire
on September 1, 2017. There are 150,000 warrants which will become
exercisable only upon the attainment of specified events. The
intrinsic value of warrants outstanding at June 30, 2017 was
approximately $30,000.
Stock-Based Compensation
The 1999 Plan was adopted by the Company’s
Board of Directors on December 17, 1999. Under the terms of the
1999 Plan, the Company could, originally, issue up to 350,000
non-qualified or incentive stock options to purchase Common Stock
of the Company. During the year ended December 31, 2014, the
Company subsequently amended and restated the 1999 Plan whereby it
increased the share reserve for issuance to approximately 7.0
million shares of the Company’s Common Stock. The
1999 Plan prohibits the grant of stock option or stock appreciation
right awards with an exercise price less than fair market value of
Common Stock on the date of grant. The 1999 Plan also generally
prohibits the “re-pricing” of stock options or stock
appreciation rights, although awards may be bought-out for a
payment in cash or the Company’s stock. The 1999 Plan permits
the grant of stock based awards other than stock options, including
the grant of “full value” awards such as restricted
stock, stock units and performance shares. The 1999 Plan permits
the qualification of awards under the plan (payable in either stock
or cash) as “performance-based compensation” within the
meaning of Section 162(m) of the Internal Revenue Code. The number
of options issued and outstanding and the number of options
remaining available for future issuance are shown in the table
below. 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
“Amendment”). As
of July 21, 2014, the Company had received written consents
approving the Amendment from over 50% of the Company’s
stockholders. As such, the Amendment was approved. The number of
authorized shares available under the plan for issuance at June 30,
2017 was 6,240,781. The number of available shares under the plan
for issuance at June 30, 2017 was 69,226.
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 $240,000 and $480,000
for the three and six months ended June 30, 2017, respectively.
Stock-based compensation expense related to equity options was
approximately $233,000 and $475,000 for the three and six months
ended June 30, 2016, respectively. Stock-based compensation expense
related to options to purchase shares of the Company’s Common
Stock issued to certain members of the Company’s Board of
Directors in return for their service (disclosed more fully below)
was approximately $35,000 and $70,000 for the three and six months
ended June 30, 2017, respectively. Stock-based compensation expense
related to options to purchase shares of the Company’s Common
Stock issued to certain members of the Company’s Board of
Directors in return for their service was approximately $46,000 and
$90,000 for the three and six months ended June 30, 2016,
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 six months ended June 30, 2017 and 2016 ranged
from 58% to 121%. 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
six months ended June 30, 2017 and 2016 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 six months
ended June 30, 2017 and 2016 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, 2016
|
6,506,843
|
$1.21
|
|
Granted
|
35,000
|
$1.05
|
|
Expired/Cancelled
|
(48,288)
|
$2.01
|
|
Exercised
|
(322,000)
|
$0.71
|
|
Balance
at June 30, 2017
|
6,171,555
|
$1.22
|
The
intrinsic value of options exercisable at June 30, 2017 was
approximately $568,000. The aggregate intrinsic value
for all options outstanding as of June 30, 2017 was approximately
$568,000. The weighted-average grant-date per share fair value of
options granted during the six months ended June 30, 2017 was
$0.53. At June 30, 2017, the total remaining unrecognized
compensation cost related to unvested stock options amounted to
approximately $1,328,000 which will be recognized over a
weighted-average period of 1.9 years.
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 14,000 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 began recognition of compensation based on the grant-date
fair value ratably over the 2017 requisite service
period.
In
May 2016, 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 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 based on the grant-date fair
value ratably over the 2016 requisite service period.
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 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 based
on the grant-date fair value ratably over the 2016 requisite
service period.
Stock-based
compensation related to equity options, including options granted
to certain members of the Company’s Board of Directors, has
been classified as follows in the accompanying condensed
consolidated statements of operations (in thousands):
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
Cost
of revenue
|
$5
|
$5
|
$10
|
$10
|
|
General
and administrative
|
165
|
172
|
329
|
346
|
|
Sales
and marketing
|
55
|
54
|
110
|
109
|
|
Research
and development
|
50
|
49
|
101
|
100
|
|
|
|
|
|
|
|
Total
|
$275
|
$280
|
$550
|
$565
|
NOTE 7. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “Fair Value Measurements and
Disclosures,” which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). The three levels of the fair value
hierarchy under ASC 820 are described below:
Level 1
Unadjusted
quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
Level 2
Applies
to assets or liabilities for which there are inputs other than
quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level 3
Prices
or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
|
Fair Value at June 30, 2017
|
|||
|
($ in thousands)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,789
|
$1,789
|
$—
|
$—
|
|
Totals
|
$1,789
|
$1,789
|
$—
|
$—
|
|
|
Fair
Value at December 31, 2016
|
|||
|
($ in thousands)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,645
|
$1,645
|
$—
|
$—
|
|
Totals
|
$1,645
|
$1,645
|
$—
|
$—
|
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 June 30, 2017, the
Company had borrowed $5,500,000
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,
its Senior Vice President of Administration and Chief Financial
Officer, and its 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 six months prior to or thirteen
months following a change of control (as defined in the employment
agreements), 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, this
executive 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 fringe benefits
and medical insurance for a period of six months; and (iii)
immediate vesting of 50% of their outstanding stock options and
restricted stock awards. In the event that their employment is
terminated within six months prior to or thirteen months following
a change of control (as defined in the employment agreements), they
are entitled to the severance benefits described above, except that
100% of their outstanding stock options and restricted stock awards
will immediately vest.
Under
the terms of the employment agreement with our Chief Technical
Officer, this executive 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 six months of base salary; and (ii) continuation of their
fringe benefits and medical insurance for a period of six months.
In the event that his employment is terminated within six months
prior to or thirteen months following a change of control (as
defined in the employment agreements), he is entitled to the
severance benefits described above, except that 100% of his
outstanding stock options and restricted stock awards will
immediately vest.
Effective
October 20, 2016, the employment agreements for the Company's Chief
Executive Officer, Chief Financial Officer and Chief Technical
Officer were amended to extend the term of each executive officer's
employment agreement until December 31, 2017.
Litigation
There
is no action, suit, proceeding, inquiry or investigation before or
by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the executive
officers of the Company or any of our subsidiaries, threatened
against or affecting the Company, our Common Stock, any of our
subsidiaries or of the Company’s or our subsidiaries’
officers or directors in their capacities as such, in which an
adverse decision could have a material adverse effect.
Leases
The
Company’s 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 June 30, 2017:
●
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
●
304 square feet of office space in Mexico City, Mexico, at a cost
of approximately $3,000 per month until November 30,
2017.
At
June 30, 2017, future minimum lease payments are as
follows:
|
($ in thousands)
|
|
|
2017
(six months)
|
$208
|
|
2018
|
203
|
|
2019
|
35
|
|
2020
|
35
|
|
2021
|
9
|
|
Total
|
$490
|
Rental
expense incurred under operating leases for the six months ended
June 30, 2017 and 2016 was approximately $256,000 and $242,000,
respectively.
NOTE 10. SUBSEQUENT EVENTS
Subsequent to June
30, 2017, the Company received an aggregate of $875,000 from
Goldman and S. James Miller, the Company’s Chief Executive
Officer, to provide for the Company’s short-term working
capital requirements.
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, 2016,
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, we create software that provides a highly
reliable indication of a person’s identity. Our
“flagship” product is our patented IWS Biometric
Engine®. Scalable for small city business or worldwide
deployment, our IWS Biometric Engine is a multi-biometric software
platform that is hardware and algorithm independent, enabling the
enrollment and management of unlimited population sizes. It allows
a user to utilize one or more biometrics on a seamlessly integrated
platform. Our products are used to manage and issue secure
credentials, including national IDs, passports, driver 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 logical access to facilities or computer networks or
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.
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated
financial condition and results of operations are based on our
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 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 consolidated
financial statements and the reported amounts of revenues and
expenses during a fiscal period. The Securities and Exchange
Commission (“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 evaluation of our ability to continue as a
going concern, 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 revenues 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 six months ended June 30, 2017 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, 2016.
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 June 30, 2017 to the Three
Months Ended June 30, 2016
Product Revenue
|
|
Three Months Ended
June 30,
|
|
|
|
|
Net Product Revenue
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$319
|
$284
|
$35
|
12%
|
|
Percentage
of total net product revenue
|
78%
|
80%
|
|
|
|
Hardware
and consumables
|
$39
|
$23
|
$16
|
70%
|
|
Percentage
of total net product revenue
|
10%
|
6%
|
|
|
|
Services
|
$49
|
$49
|
$—
|
0%
|
|
Percentage
of total net product revenue
|
12%
|
14%
|
|
|
|
Total
net product revenue
|
$407
|
$356
|
$51
|
14%
|
Software and royalty revenue increased 12% or
approximately $35,000 during the three months ended June 30, 2017
as compared to the corresponding period in 2016. This increase is
attributable to higher sales of law enforcement project related
revenue of approximately $15,000 and higher royalty revenue of
approximately $47,000 offset by lower sales of boxed identity
management software sold through our distribution channel of
approximately $22,000 and lower identification project related
revenue of approximately $5,000.
Revenue
from the sale of hardware and consumables increased approximately
$16,000 during the three months ended June 30, 2017 as compared to
the corresponding period in 2016. 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
was approximately $49,000 during the three months ended June 30,
2017 and 2016.
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. Although no
assurances can be given, based on management’s current
visibility into the timing of potential government procurements and
potential partnerships and current pilot programs, we believe that
we will see an increase in government procurement and
implementations with respect to identity management initiatives
during 2017; however, government procurement initiatives,
implementations and pilots are frequently delayed and extended, as
was the case in the year ended December 31, 2016, and we cannot
predict the timing of such initiatives.
During
the quarter ended June 30, 2017, we continued to accelerate our
efforts to move the Biometric Engine into cloud and mobile markets,
and expanded 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 customers that want to add
biometric identity verification to their Microsoft infrastructure.
While we anticipated results from these initiatives during the 2016
fiscal year, many of those initiatives were delayed to
2017. As a result, we anticipate that we will see
positive developments from these efforts beginning in the second
half of 2017, which management believes 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
revenues.
Maintenance Revenue
|
Maintenance Revenue
|
Three Months Ended
June 30,
|
|
|
|
|
(dollars in thousands)
|
2017
|
2016
|
% Change
|
% Change
|
|
Total
maintenance revenue
|
$653
|
$640
|
$13
|
2%
|
Maintenance
revenue was approximately $653,000 for the three months ended June
30, 2017, as compared to approximately $640,000 for the
corresponding period in 2016. Identity management
maintenance revenue generated from identification software
solutions was approximately $308,000 for the three months ended
June 30, 2017 as compared to approximately $294,000 during the
comparable period in 2016. Law enforcement maintenance
revenue was approximately $345,000 and $346,000 for the three
months ended June 30, 2017 and 2016, respectively. The increase of
$14,000 in identification software solutions for the three months
ended June 30, 2017 as compared to the corresponding period of 2016
reflects the expansion of our installed base.
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
June 30,
|
|
|
|
|
Cost of Product Revenue:
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$6
|
$26
|
$(20)
|
(77)%
|
|
Percentage
of software and royalty product revenue
|
2%
|
9%
|
|
|
|
Hardware
and consumables
|
$18
|
$22
|
$(4)
|
(18)%
|
|
Percentage
of hardware and consumables product revenue
|
46%
|
96%
|
|
|
|
Services
|
$12
|
$8
|
$4
|
50%
|
|
Percentage
of services product revenue
|
24%
|
16%
|
|
|
|
Total
product cost of revenue
|
$36
|
$56
|
$(20)
|
(36)%
|
|
Percentage
of total product revenue
|
9%
|
16%
|
|
|
The
cost of software and royalty product revenue decreased
approximately $20,000 for the three months ended June 30, 2017 as
compared to the corresponding period in 2016. This decrease results
primarily from lower personnel expenses allocated to software
project implementation. 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 hardware and consumable product revenue decreased
approximately $4,000 for the three months ended June 30,
2017 as compared to the corresponding period in 2016 despite
higher hardware and consumable revenue due primarily to certain
hardware costs being previously expensed due to recoverability
concerns.
The
cost of services revenue increased approximately $4,000 during the
three months ended June 30, 2017 as compared to the corresponding
period in 2016 due to the composition of labor resources utilized
in the completion of the service element. 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
|
Maintenance cost of revenue
|
Three Months Ended
June 30,
|
|
|
|
|
(dollars in thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
|
Total
maintenance cost of revenue
|
$214
|
$219
|
(5)
|
(2)%
|
|
Percentage
of total maintenance revenue
|
33%
|
34%
|
|
|
Cost
of maintenance revenue decreased approximately $5,000 during the
three months ended June 30, 2017 as compared to the corresponding
period in 2016. This decrease, despite maintenance revenues
increasing approximately $13,000 during the same period is due
primarily to the composition of engineering resources used in the
provision of maintenance services.
Product Gross Profit
|
|
Three
Months Ended
June
30,
|
|
|
|
|
Product
gross profit
|
2017
|
2016
|
$
Change
|
%
Change
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$313
|
$258
|
$55
|
21%
|
|
Percentage of
software and royalty product revenue
|
98%
|
91%
|
|
|
|
Hardware and
consumables
|
$21
|
$1
|
$20
|
2000%
|
|
Percentage of
hardware and consumables product revenue
|
54%
|
4%
|
|
|
|
Services
|
$37
|
$41
|
$(4)
|
(10)%
|
|
Percentage of
services product revenue
|
76%
|
84%
|
|
|
|
Total product gross
profit
|
$371
|
$300
|
$71
|
24%
|
|
Percentage of total
product revenue
|
91%
|
84%
|
|
|
Software
and royalty gross profit increased 21% or approximately $55,000 for
the three months ended June 30, 2017 from the corresponding period
in 2016 due primarily to higher software and royalty revenue of
approximately $35,000 combined with lower software and royalty cost
of revenues of $20,000 for the same period. 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.
Hardware
and consumables gross profit increased approximately $20,000 for
the three months ended June 30, 2017 as compared to the
corresponding period in 2016 due to higher hardware and consumable
revenue of approximately $16,000 combined with lower cost of
hardware and consumables product revenue of approximately $4,000
for the three months ended June 30, 2017 as compared to the
corresponding period in 2016.
Services
gross profit decreased approximately $4,000 for the three months
ended June 30, 2017 as compared to the corresponding period in 2016
due to higher costs of service revenue of approximately $4,000 for
the three months ended June 30, 2017 as compared to the
corresponding period in 2016.
Maintenance Gross Profit
|
Maintenance gross profit
|
Three
Months Ended
June
30,
|
|
|
|
|
(dollars in thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
|
|
|
|
|
|
|
Total
maintenance gross profit
|
$439
|
$421
|
$18
|
4%
|
|
Percentage
of total maintenance revenue
|
67%
|
66%
|
|
|
Gross
profit related to maintenance revenue increased 4% or approximately
$18,000 for the three months ended June 30, 2017 as compared to the
corresponding period in 2016. This increase is due to higher
maintenance revenue of approximately $13,000 combined with lower
cost of maintenance revenue of approximately $5,000.
Operating Expense
|
|
Three
Months Ended
June
30,
|
|
|
|
|
Operating expense
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$1,042
|
$899
|
$143
|
16%
|
|
Percentage
of total net revenue
|
98%
|
90%
|
|
|
|
Sales
and marketing
|
$702
|
$743
|
$(41)
|
(6)%
|
|
Percentage
of total net revenue
|
66%
|
75%
|
|
|
|
Research and
development
|
$1,479
|
$1,318
|
$161
|
12%
|
|
Percentage
of total net revenue
|
140%
|
132%
|
|
|
|
Depreciation
and amortization
|
$17
|
$35
|
$(18)
|
(51)%
|
|
Percentage
of total net revenue
|
2%
|
4%
|
|
|
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 $143,000 during the three months
ended June 30, 2017 as compared to the corresponding period in 2016
is comprised of the following major components:
●
Increase in personnel related expense of approximately $21,000 due
to increased salaries from headcount increases of approximately
$6,000 and higher health insurances and 401(k) plan employer
contributions of approximately $15,000.
●
Decreases in professional services of approximately $35,000 which
includes lower Board of Director fees of approximately $11,000,
lower auditing fees of approximately $18,000, lower patent-related
expense of approximately $9,000 offset by higher legal fees of
approximately $3,000.
●
Increase in travel, insurances, licenses,
dues, rent, and office related costs of approximately
$26,000.
●
Increase in investment banking fees and financing expenses of
approximately $131,000.
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 decrease of approximately $41,000 during the
three months ended June 30, 2017 as compared to the corresponding
period in 2016 is primarily comprised of the following major
components:
●
Increase in personnel related expense of approximately $2,000
driven primarily by higher employee medical
insurances.
●
Decrease in contractor and contract services of approximately
$40,000 resulting from decreased utilization of certain sales
consultants offset by increased marketing dues and subscription
expenses.
●
Increase in travel, trade show expense and office related expense
of approximately $20,000.
●
Decrease in our Mexico sales office expenses and other of
approximately $23,000.
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 $161,000 for the three
months ended June 30, 2017 as compared to the corresponding period
in 2016 due primarily to the following major
components:
●
Decrease in personnel related expense of approximately
$13,000.
●
Increase in contractor fees and contract services of approximately
$144,000 for services related to the accelerated development of
mobile identity management applications.
●
Increase in office related expense and engineering tools and
supplies of approximately $30,000.
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 June 30, 2017 and 2016, depreciation and
amortization expense was approximately $17,000 and $35,000,
respectively. The relatively small amount of depreciation and
amortization reflects the relatively small property and equipment
carrying value.
Interest Expense, Net
For
the three months ended June 30, 2017, we recognized interest
expense of approximately $165,000 and interest income of
approximately $1,000. For the three months ended June 30, 2016, we
recognized interest expense of approximately $36,000 and interest
income of approximately $0. Interest expense for the three months
ended June 30, 2017 is comprised of approximately $3,000 of
amortization expense of deferred financing fees related to the
Goldman LOC, interest expense of approximately $107,000 of coupon
interest on debt outstanding under the Lines of Credit, and
approximately $55,000 related to the amortization of beneficial
conversion feature related to the Lines of Credit.
Other Income
For
the three months ended June 30, 2017, we recognized $50,000 of
other income from the sale of one of the Company’s
non-utilized trademarks. Other income for the three
months ended June 30, 2016 is comprised of approximately $200,000
from the write off of certain accrued expense due to the expiration
of the legal statute of limitations on such
liabilities.
Comparison
of the Six Months Ended June 30, 2017 to the Six Months Ended June
30, 2016
Product Revenue
|
|
Six Months Ended
June 30,
|
|
|
|
|
Net Product Revenue
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$508
|
$502
|
$6
|
1%
|
|
Percentage
of total net product revenue
|
74%
|
66%
|
|
|
|
Hardware
and consumables
|
$86
|
$54
|
$32
|
59%
|
|
Percentage
of total net product revenue
|
13%
|
7%
|
|
|
|
Services
|
$86
|
$203
|
$(117)
|
(58)%
|
|
Percentage
of total net product revenue
|
13%
|
27%
|
|
|
|
Total
net product revenue
|
$680
|
$759
|
$(79)
|
(10)%
|
Software and royalty revenue increased 1% or
approximately $6,000 during the six months ended June 30, 2017 as
compared to the corresponding period in 2016. This increase is
attributable to higher sales of boxed identity management software
sold through our distribution channel of approximately $8,000,
higher sales of law enforcement project related revenue of
approximately $7,000 offset by lower identification project related
revenue of approximately $4,000 and lower royalty revenue of
approximately $5,000.
Revenue
from the sale of hardware and consumables increased approximately
$32,000 during the six months ended June 30, 2017 as compared to
the corresponding period in 2016. 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 $117,000 during the six months ended June
30, 2017 as compared to the corresponding period in 2016, due
primarily to the completion of the service element in certain
identity management project solutions in the 2016
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. Although no
assurances can be given, based on management’s current
visibility into the timing of potential government procurements and
potential partnerships and current pilot programs, we believe that
we will see an increase in government procurement and
implementations with respect to identity management initiatives
during 2017; however, government procurement initiatives,
implementations and pilots are frequently delayed and extended, as
was the case in the year ended December 31, 2016, and we cannot
predict the timing of such initiatives.
During
the six months ended June 30, 2017, we continued to accelerate our
efforts to move the Biometric Engine into cloud and mobile markets,
and expanded 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 customers that want to add
biometric identity verification to their Microsoft infrastructure.
While we anticipated results from these initiatives during the 2016
fiscal year, many of those initiatives were delayed to
2017. As a result, we anticipate that we will see
positive developments from these efforts beginning in the second
half of 2017, which management believes 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
revenues.
Maintenance Revenue
|
Maintenance Revenue
|
Six Months Ended
June 30,
|
|
|
|
|
(dollars in thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
|
Total
maintenance revenue
|
$1,309
|
$1,280
|
$29
|
2%
|
Maintenance
revenue was approximately $1,309,000 for the six months ended June
30, 2017, as compared to approximately $1,280,000 for the
corresponding period in 2016. Identity management
maintenance revenue generated from identification software
solutions was approximately $613,000 for the six months ended June
30, 2017 as compared to approximately $583,000 during the
comparable period in 2016. Law enforcement maintenance
revenue was approximately $696,000 for the six months ended June
30, 2017 as compared to approximately $697,000 during the
comparable period in 2016. The increase of $30,000 in
identification software solutions reflects the completion of
certain projects and an increase to our installed
base.
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
|
|
Six Months Ended
June 30,
|
|
|
|
|
Cost of Product Revenue:
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$17
|
$51
|
$(34)
|
(67)%
|
|
Percentage
of software and royalty product revenue
|
3%
|
10%
|
|
|
|
Hardware
and consumables
|
$55
|
$29
|
$26
|
90%
|
|
Percentage
of hardware and consumables product revenue
|
64%
|
54%
|
|
|
|
Services
|
$18
|
$50
|
$(32)
|
(64)%
|
|
Percentage
of services product revenue
|
21%
|
25%
|
|
|
|
Total
product cost of revenue
|
$90
|
$130
|
$(40)
|
(31)%
|
|
Percentage
of total product revenue
|
13%
|
17%
|
|
|
The
cost of software and royalty product revenue decreased
approximately $34,000 for the six months ended June 30, 2017 and
2016. This decrease results primarily from lower personnel expenses
allocated to software project implementation. 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 $26,000 for the six months ended
June 30, 2017 as compared to the corresponding period in 2016
reflects higher hardware and consumables product revenue of
approximately $32,000 for the six months ended June 30, 2017 as
compared to the corresponding period in 2016.
The
cost of services revenue decreased approximately $32,000 during the
six months ended June 30, 2017 as compared to the corresponding
period in 2016 due to lower services revenue of approximately
$117,000 in the 2017 period. 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
|
|
Six Months Ended
June 30,
|
|
|
|
|
Maintenance cost of revenue
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance cost of revenue
|
$423
|
$424 $
|
$(1)
|
0%
|
|
Percentage
of total maintenance revenue
|
32%
|
33%
|
|
|
Cost
of maintenance revenue decreased approximately $1,000 during the
six months ended June 30, 2017 as compared to the corresponding
period in 2016. This decrease, despite maintenance revenues
increasing approximately $29,000 during the same period is due
primarily to the composition of engineering resources used in the
provision of maintenance services.
Product Gross Profit
|
|
Six Months Ended
June 30,
|
|
|
|
|
Product gross profit
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software
and royalties
|
$491
|
$451
|
$40
|
9%
|
|
Percentage
of software and royalty product revenue
|
97%
|
90%
|
|
|
|
Hardware
and consumables
|
$30
|
$25
|
$5
|
20%
|
|
Percentage
of hardware and consumables product revenue
|
35%
|
46%
|
|
|
|
Services
|
$68
|
$153
|
$(85)
|
(56)%
|
|
Percentage
of services product revenue
|
79%
|
75%
|
|
|
|
Total
product gross profit
|
$589
|
$629
|
$(40)
|
(6)%
|
|
Percentage
of total product revenue
|
87%
|
83%
|
|
|
Software
and royalty gross profit increased 9% or approximately $40,000 for
the six months ended June 30, 2017 from the corresponding period in
2016 due primarily to higher software and royalty revenue of
approximately $6,000 combined with lower cost of software and
royalty revenue of approximately $34,000. 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 decreased approximately $85,000 for the six months
ended June 30, 2017 as compared to the corresponding period in 2016
due to lower service revenue of approximately $117,000 combined
with lower cost of service revenue of approximately $32,000 for the
six months ended June 30, 2017 as compared to the corresponding
period in 2016.
Maintenance Gross Profit
|
|
Six Months Ended
June 30,
|
|
|
|
|
Maintenance gross profit
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total
maintenance gross profit
|
$886
|
$856
|
$30
|
4%
|
|
Percentage
of total maintenance revenue
|
68%
|
67%
|
|
|
Gross
profit related to maintenance revenue increased 4% or approximately
$30,000 for the six months ended June 30, 2017 as compared to the
same period ended June 30, 2016. This increase is due to higher
maintenance revenue of approximately $29,000 combined with lower
cost of maintenance revenue of approximately $1,000.
Operating Expense
|
|
Six Months Ended
June 30,
|
|
|
|
|
Operating expense
|
2017
|
2016
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$2,087
|
$1,905
|
$182
|
10%
|
|
Percentage
of total net revenue
|
105%
|
93%
|
|
|
|
Sales
and marketing
|
$1,463
|
$1,416
|
$47
|
3%
|
|
Percentage
of total net revenue
|
74%
|
69%
|
|
|
|
Research and
development
|
$2,943
|
$2,631
|
$312
|
12%
|
|
Percentage
of total net revenue
|
148%
|
129%
|
|
|
|
Depreciation
and amortization
|
$38
|
$70
|
$(32)
|
(46)%
|
|
Percentage
of total net revenue
|
2%
|
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 $182,000 during six months ended
June 30, 2017 as compared to the corresponding period in 2016 is
comprised of the following major components:
●
Increase
in personnel related expense of approximately $51,000 due to
increased salaries from headcount increases of approximately
$95,000, higher 401(k) plan employer contributions of approximately
$5,000 offset by lower pension expense of our foreign sales office
of approximately $49,000.
●
Increase
in stock-based compensation expense of approximately
$3,000.
●
Increases
in professional services of approximately $63,000 which includes
decreases in Board of Director fees of approximately $20,000, lower
auditing fees of approximately $70,000, lower patent expenses of
approximately $1,000 offset by higher legal expense of
approximately $14,000, higher contractor fees of approximately
$9,000 and higher investor relations and financing fees of
approximately $131,000.
●
Increase
in travel, insurances, licenses, dues, rent, and office related
costs of approximately $65,000.
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 $47,000 during the
six months ended June 30, 2017 as compared to the corresponding
period in 2016 is primarily comprised of the following major
components:
●
Increase
in personnel related expense of approximately $25,000 driven
primarily by higher salaries and employee health
insurance.
●
Decrease
in professional services of approximately $34,000 resulting from
lower utilization of certain consultants.
●
Increase
in advertising, travel and trade show expense and office related
expense of approximately $79,000.
●
Increase
in due and subscription expense of approximately
$22,000.
●
Decrease in
foreign sales office expense and other of approximately
$45,000.
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 $312,000 for the six
months ended June 30, 2017 as compared to the corresponding period
in 2016 due primarily to the following major
components:
●
Increase
in personnel related expense of approximately $18,000.
●
Increase
in contractor fees and contract services of approximately $246,000
for services related to the accelerated development of mobile
identity applications.
●
Increase
in office related expense, engineering tools and supplies and
travel of approximately of approximately $48,000.
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 six months ended June 30, 2017 and 2016, depreciation and
amortization expense was approximately $38,000 and $70,000,
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 six months ended June 30, 2017, we recognized interest expense
of approximately $266,000 and interest income of approximately
$2,000. For the six months ended June 30, 2016, we recognized
interest expense of approximately $48,000 and interest income of
approximately $2,000. Interest expense for the six months ended
June 30, 2017 is comprised of approximately $8,000 of amortization
expense of deferred financing fees related to the Lines of Credit,
interest expense of approximately $168,000 of coupon interest on
debt outstanding under the Lines of Credit, and approximately
$90,000 related to the amortization of beneficial conversion
feature related to the Lines of Credit. Interest expense
for the six months ended June 30, 2016 is comprised of
approximately $12,000 of coupon interest on debt outstanding under
our Line of Credit, approximately $24,000 in deferred financing fee
amortization related to our Line of Credit and approximately
$12,000 related to the amortization of beneficial conversion
feature related to our Line of Credit.
Other Income
For
the six months ended June 30, 2017, we recognized $50,000 of other
income from the sale of one of the Company’s non-utilized
trademarks. Other income for the six months ended June
30, 2016 is comprised of approximately $200,000 from the write off
of certain accrued expense due to the expiration of the legal
statute of limitations on such liabilities.
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
June 30, 2017, our principal sources of liquidity consisted of cash
of $104,000 and accounts receivable, net of $332,000. As
of June 30, 2017, we had negative working capital of $1,551,000. We
have a history of recurring losses, and as of June 30, 2017, we
have incurred a cumulative net loss of approximately
$163,063,000.
Subsequent to June
30, 2017, the Company received $875,000 from Goldman and S. James
Miller, the Company’s Chief Executive Officer, to provide for
the Company’s short-term working capital requirements. While
no assurances can be given, the Company is currently seeking
additional working capital from third parties to meet it’s
working capital requirements through December 31, 2017
(“Pending
Financing”), and such Pending Financing may result in
the issuance of debt or equity securities. Messrs. Goldman and
Miller currently intend to roll their respective investments into
the Pending Financing, on the same terms and conditions offered by
such third parties, and agreed to by independent members of our
Board of Directors. As of the date of this report, the Company has
not received any commitments from third parties regarding the
Pending Financing, and any such terms may result in dilution to the
Company’s stockholders, and such dilution may be
material.
Lines of Credit
On March 9, 2016, the
Company and 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.
On December 27, 2016, in connection with the
consummation of the Series G Financing, the Company and Holder
agreed to enter into the Fifth
Amendment (the “Line
of Credit Amendment”) to the Goldman
Line of Credit to provide the Company with the ability to borrow up
to $5.5 million under the terms of the Goldman Line of Credit. In
addition, the Maturity Date, as defined in the Goldman Line of
Credit was amended to be December 31, 2017. The Line of Credit
Amendment was executed on January 23, 2017.
In addition, on January 23, 2017, the Company and Crocker amended
the New Crocker LOC to extend the maturity date thereof to December
31, 2017. No other amendments were made to the New Crocker
LOC.
On May
10, 2017, Goldman and Crocker agreed to further extend the maturity
dates of the Lines of Credit to December 31, 2018.
As
of June 30, 2017, we have aggregate borrowings outstanding under
our Lines of Credit of $6,000,000 and related accrued unpaid
interest of approximately $270,000. These amounts are due on
December 31, 2018.
Going
Concern
At
June 30, 2017, we had a working capital deficit of approximately
$1,551,000. Our principal sources of liquidity at June 30, 2017
consisted of approximately $0.1 million of cash and $0.3 million of
trade accounts receivable.
Considering our
projected cash requirements, our available cash will be
insufficient to satisfy our cash requirements for the next twelve
months from the date of this filing. These factors raise
substantial doubt about our ability to continue as a going concern.
To address our working capital requirements, management will access
available borrowings under our existing Lines of Credit, and will
continue to seek additional equity and/or debt financing through
the issuance of additional debt and/or equity securities prior to
the end of the quarter ended June 30, 2017. There are currently no
formal committed financing arrangements to support our projected
cash shortfall, including commitments to purchase additional debt
and/or equity securities, and no assurances can be given that we
will be successful in raising additional debt and/or equity
securities.
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 be able to
obtain additional capital, operate at a profit or generate positive
cash flows in the future.
These
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.
Operating Activities
We used net cash of $5,005,000 in operating
activities for the six months ended June 30, 2017 as compared to
net cash used of $4,425,000
during the comparable period in 2016.
During the six months ended June 30, 2017, net cash used in
operating activities consisted of net loss of $5,276,000 and a
decrease in working capital and other assets and liabilities of
$379,000. Those amounts were offset by $650,000 of non-cash costs
including $550,000 in stock based compensation, $97,000 in debt
issuance cost amortization and beneficial conversion feature
amortization, $38,000 in depreciation and amortization, $15,000 in
provision for losses on accounts receivables offset by gains from
the sale of a trademark of $50,000. During the six months ended
June 30, 2017, we used cash of $111,000 to fund increases in
current assets and used cash of $268,000 through reductions in
current liabilities and deferred revenue, excluding
debt.
We
used net cash of $4,425,000 in operating activities for the six
months ended June 30, 2016 as compared to net cash used of
$4,136,000 during the comparable period in 2015. During the six
months ended June 30, 2016, net cash used in operating activities
consisted of net loss of $4,389,000 and a decrease in working
capital and other assets and liabilities of $508,000. Those amounts
were offset by $472,000 of non-cash costs including $565,000 in
stock based compensation, $37,000 in debt issuance cost
amortization and beneficial conversion feature amortization,
$70,000 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 six months
ended June 30, 2016, we used cash of $26,000 to fund increases in
current assets and used cash of $482,000 through reductions in
current liabilities and deferred revenue, excluding
debt.
Investing Activities
Net cash generated from investing activities was
$49,000 for the six months ended June 30, 2017 as compared to
$44,000 used in the six months ended June 30, 2016. For the six
months ended June 30, 2017, we generated cash of $50,000 from the
sale of one of our non-utilized trademarks and used cash to fund
capital expenditures of computer equipment, software and furniture
and fixtures of approximately $1,000. For the six months ended June
30, 2016, we used cash to fund capital expenditures of computer
equipment, software and furniture and fixtures of approximately
$44,000.
Financing Activities
During
the six months ended June 30, 2017 and 2016, the Company received
$3,350,000 and $1,500,000, respectively, from borrowings under the
Lines of Credit. Also during the six months ended June 30, 2017,
the Company received approximately $227,000 from the exercise of
322,000 options resulting in the issuance of 322,000 shares of
Common Stock.
Debt
At June 30, 2017, the Company had $6,000,000 in
outstanding debt under the terms of the Lines of Credit, and
$270,000 in accrued but unpaid interest, as compared to $1,500,000
in outstanding debt and $12,000 in related accrued but unpaid
interest at June 30, 2016.
Contractual Obligations
Total
contractual obligations and commercial commitments as of June 30,
2017 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
|
$490
|
208
|
273
|
9
|
—
|
|
Lines
of credit payable to related parties
|
$6,270
|
—
|
6,270
|
—
|
—
|
|
Total
|
$6,760
|
208
|
6,543
|
9
|
—
|
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 June 30, 2017:
●
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 $3,000 per month, on a month-to-month basis until
terminated by either party.
At
June 30, 2017, future minimum lease payments are as
follows:
|
($ in thousands)
|
|
|
2017
(nine months)
|
$208
|
|
2018
|
$203
|
|
2019
|
$35
|
|
2020
|
$35
|
|
2021
|
$9
|
|
Total
|
$490
|
Off-Balance Sheet Arrangements
At
June 30, 2017, 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 June 30, 2017. 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
Our
results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10K for our fiscal year ended December 31, 2016, filed on
March 31, 2017, including our need to raise additional capital to
continue as a going concern. You should carefully consider these
risk factors in conjunction with the other information contained in
this Quarterly Report. Should any of these risks materialize, our
business, financial condition and future prospects could be
negatively impacted. As of August 14, 2017, there have been no
material changes to the disclosures made in the above referenced
Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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
|
|
|
|
|
|
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
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
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.
|
Date: August 14, 2017
|
|
IMAGEWARE SYTEMS, INC
|
|
|
|
|
|
|
|
By: /s/ S. James
Miller
|
|
|
|
S. James Miller
Chief Executive Officer, Chairman
and Director
(Principal Executive
Officer)
|
|
|
|
|
|
Date: August 14, 2017
|
|
By: /s/ Wayne
Wetherell
|
|
|
|
Wayne Wetherell
Chief Financial Officer
(Principal Financial and Accounting
Officer)
|
-34-