Biometric enrollment and identity proofing with Smart Card encoding of biometrics;. Flexible models of central or distributed issuance of credentials;. Customizable card life-cycle workflow managed by the CMS; and. Integration of the CMS data with other enterprise solutions, such as physical access control and logical access control i. This is an ID software solution for producing, issuing, and managing secure credentials and personal identification cards. Users can efficiently manage large amounts of data, images and card designs, as well as track and issue multiple cards per person, automatically populate multiple cards and eliminate redundant data entry.
We believe that this compatibility may be an appealing feature to corporations, government agencies, transportation departments, school boards, and other public institutions. It contains components which developers or systems integrators can use to support and produce secure credentials including national IDs, passports, International Civil Aviation Office ICAO -compliant travel documents, smart cards and driver licenses. IWS EPI Builder enables organizations to develop custom identification solutions or incorporate sophisticated identification capabilities into existing applications including the ability to capture images, biometric and demographic data; enable biometric identification and verification and 1:X as well as support numerous biometric hardware and software vendors.
It also enables users to add electronic identification functionality for other applications, including access control, tracking of time and attendance, point of sale transactions, human resource systems, school photography systems, asset management, inventory control, warehouse management, facilities management and card production systems. Production printing of tens of thousands of PIV cards requires a significant investment and a well-engineered system. PIV smart cards must be programmed with specific mandatory data, digital signatures and programs in order to maintain the interoperability as well as the security features specified for the cards.
The Encoder interacts with the Card Management System for data payload elements. It interacts with the Certificate Authority to encrypt or sign the PIV smart card data with trusted certificates. Finally, it acts as the application-level device driver to make the specific PIV smart card encoding system properly program the smart card, regardless if the system is a standalone encoding system or one integrated into a card printer.
Law Enforcement and Public Safety. We believe our integrated suite of software products significantly reduces the inefficiencies and expands the capabilities of traditional booking and mug shot systems. This database can be quickly searched using text queries, or biometric technology that can compare biometric characteristics of an unknown suspect with those in the database. Our investigative software products can be used to create, edit and distribute both mug photo and SMT photo lineups of any size.
In addition, electronic mug books display hundreds of images for a witness to review and from which electronic selections are made. The Witness View software component records the viewing of a lineup mug photo or SMT detailing the images provided for viewing along with the image or images selected. In addition to a printed report, the Witness View module provides a non-editable executable file. Our IWS Law Enforcement solution consists of software modules, which may also be purchased individually.
IWS Law Enforcement. IWS Law Enforcement is a digital booking, identification and investigative solution that enables users to digitally capture, store, search and retrieve images and demographic data including mug shots, fingerprints and scars, marks and tattoos SMTs. Additional features and functionality include real-time access to images and data, creating of photo lineups and electronic mug books, and production of identification cards and credentials. IWS Law Enforcement also uses off-the-shelf hardware and is designed to comply with open industry standards so that it can operate on an array of systems ranging from a stand-alone personal computer to a wide area network.
This software module allows users to capture and store a variety of images facial, SMT and others such as evidence photos as well as biographical text information. Each record includes images and text information in an easy-to-view format made up of fields designed and defined by the individual agency. Current customers of this module range from agencies that capture a few thousand mug shots per year to those that capture hundreds of thousands of mug shots each year. LiveScan allows users to capture single to ten prints and palm data, providing an integrated biometric management solution for both civil and law enforcement use.
By adding LiveScan capabilities, law enforcement organizations further enhance the investigative process by providing additional identifiers to identify suspects involved in a crime. In addition, officers no longer need to travel to multiple booking stations to capture fingerprints and mug shots. All booking information including images may be located at a central designation and from there routed to the State AFIS or FBI criminal history record repository. Officers can conduct text searches in many fields, including file number, name, alias, distinctive features, and other information such as gang membership and criminal history.
The Investigative module creates a catalogue of possible matches, allowing officers or witnesses to save time by looking only at mug shots that closely resemble the description of the suspect. This module can also be used to create a line-up of similar facial images from which a witness may identify the suspect. Facial Recognition. This software module uses biometric facial recognition and retrieval technology to help authorities identify possible suspects.
Images taken from surveillance videos or photographs can be searched against a digital database of facial images to retrieve any desired number of faces with similar characteristics. This module can also be used at the time of booking to identify persons using multiple aliases. Using biometrics-based technology, the application can search through thousands of facial images in a matter of seconds, reducing the time it would otherwise take a witness to flip through a paper book of facial images that may or may not be similar to the description of the suspect. The Facial Recognition module then creates a selection of possible matches ranked in order of similarity to the suspect, and a percentage confidence level is attributed to each possible match.
The application incorporates search engine technology, which we license from various facial recognition algorithm providers. LE Web. Designs can be created in minutes and quickly added to the IWS Law Enforcement system allowing all users with appropriate permissions immediate access to the newly added form.
Maintenance and Customer Support. We offer software and hardware support to our customers. As many of our government customers operate around the clock and perceive our systems as critical to their day-to-day operations, a very high percentage contract for technical support.
Software Customization and Fulfillment. We directly employ computer programmers and also retain independent programmers to develop our software and perform quality control. We provide customers with software that we specifically customize to operate on their existing computer system. We work directly with purchasers of our system to ensure that the system they purchase will meet their unique needs. We configure and test the system either at our facilities or on-site and conduct any customized programming necessary to connect the system with any legacy systems already in place.
We can also provide customers with a complete computer hardware system with our software already installed and configured. In either case, the customer is provided with a complete turnkey solution, which can be used immediately. When we provide our customers with a complete solution including hardware, we use off-the-shelf computers, cameras and other components purchased from other companies such as Dell or Hewlett Packard. Our Strategy. Key elements of our strategy for growth include the following:. The establishment of the Department of Homeland Security coupled with the movement by governments around the world to authenticate the identity of their citizens, employees and contractors has accelerated the adoption of biometric identification systems that can provide secure credentials and instant access to centrally maintained records for real-time verification of identity and access physical and logical privileges.
Using our products, an organization can create secure credentials that correspond to records including images and biographic data in a digital database. A border guard or customs agent can stop an individual to quickly and accurately verify his identity against a database of authorized persons, and either allow or deny access as required. Our technology is also standards based and applied to facilitate activities such as federal identification mandates while complying with personal identification verification standards HSPD , International Civil Aviation Organization ICAO standards, American Association of Motor Vehicle Administrators AAMVA driver licenses, voter registration, immigration control and welfare fraud identification.
We believe that these or very similar standards are applicable in markets throughout the world. With the identity management market growing at a rapid pace, biometric identifiers are becoming recognized and accepted as integral components to the identification process in the public and private sectors. As biometric technologies facial recognition, fingerprint, iris, etc. We have built our solutions to enable the incorporation of one or multiple biometrics, which can be associated with a record and stored both in a database and on a card for later retrieval and verification without regard to the specific hardware employed.
We believe the increasing demand for biometric technology will drive demand for our solutions. Our identity management products are built to accommodate the use of biometrics and meet the demanding requirements across the entire identity life cycle. Our recent addition of the LiveScan module and support for local AFIS to our IWS Law Enforcement will enhance its functionality and value to the law enforcement customer as well as increase the potential revenue the Company can generate from a system sale.
We primarily sell directly to the law enforcement community. Our sales strategy is to increase sales to new and existing customers including renewing supporting maintenance agreements. We have also established relationships with large systems integrators such as Sagem Morpho to OEM our law enforcement solution utilizing their worldwide sales force.
We will focus our sales efforts in the near term to establish IWS Law Enforcement as the integrated mug shot and LiveScan system adopted in as many countries, states, large counties and municipalities as possible. In addition, we plan to market our integrated investigative modules to the customer, including Facial Recognition, Web and WitnessView. As customer databases of digital mug shots grow, we expect that the perceived value of our investigative modules, and corresponding revenues from sales of those modules, will also grow. Due to the fragmented nature of the law enforcement and public safety market and the modular nature of our product suite, we face different degrees of competition with respect to each IWS Law Enforcement module.
We believe the principal bases on which we compete with respect to all of our products are:. Our law enforcement product line faces competition from other companies such as DataWorks Plus and Cogent Systems, Inc. Internationally, there are often a number of local companies offering solutions in most countries. Secure Credential Market. Due to the breadth of our software offering in the secure credential market space, we face differing degrees of competition in certain market segments. The strength of our competitive position is based upon:.
Our software faces competition from Datacard Corporation, a privately held manufacturer of hardware, software and consumables for the ID market as well as small, regionally based companies. Biometric Market. The market to provide biometric systems to the identity management market is evolving and we face competition from a number of sources. We believe that the strength of our competitive position is based on:. We had a total of 50 full-time employees as of February 10, Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage.
We believe that our relations with our employees are good. Environmental Regulation. Our business does not require us to comply with any particular environmental regulations. Our corporate headquarters are located in San Diego, California where we occupy approximately 5, square feet of office space.
We occupy 6, square feet in Ottawa, Province of Ontario, Canada. We are periodically engaged in litigation in the ordinary course of business and do not believe that any of such litigation is material to our ongoing operations. Reports to Security Holders.
The Company is required to file annual, quarterly and other reports with the SEC and, accordingly, must furnish an annual report with audited financial statements to its stockholders. Market Information. There is no established public trading market for our common stock. The following table sets forth the high and low bid information for our common stock for the periods indicated, which reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:.
Fiscal Year Ended December 31, First Quarter. Second Quarter. Third Quarter. Fourth Quarter. As of February 10, , we had approximately holders of record of our common stock. A significant number of our shares were held in street name and, as such, we believe that the actual number of beneficial owners is significantly higher. We have never declared or paid cash dividends on our common stock.
We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
As of February 10, , 2,, shares of our common stock were issuable upon the exercise of options granted under our Equity Incentive Plan, of which 1,, are currently vested. The following selected financial data are derived from our consolidated financial statements. The selected consolidated balance sheet data as of December 31, and and the selected consolidated statement of operations data for the years ended December 31, and have been derived from our consolidated financial statements audited by Mayer Hoffman McCann P.
The selected consolidated balance sheet data as of September 30, and and the selected consolidated statement of operations data for the nine months ended September 30, and have been derived from our unaudited consolidated financial statements included herein. Historical results are not necessarily indicative of the results to be expected in the future. Year Ended. December 31,. Nine Months Ended. September 30,. Statement of Operations Data:.
Net sales. Cost of sales. Gross margin loss. Operating expenses:. General and administrative. Sales and marketing. Research and development. Depreciation and amortization. Total operating expenses. Loss from operations. Total other expense income. Income loss before income taxes. Income tax expense. Net loss income. Net loss income per share — basic. Net loss income per share — diluted. Weighted average number of shares of common stock outstanding — basic. Balance Sheet Data :. Cash and cash equivalents. Total current assets. Property and equipment, net.
Total assets. Current liabilities. Long-term obligations. Total liabilities. The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Registration Statement. Revenue Recognition. Our revenue recognition policy is significant because our revenue is a key component of our consolidated results of operations. We recognize revenue from the following major revenue sources:.
Accordingly, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured. We recognize revenue and profit as work progresses on long-term, fixed-price contracts involving significant amount of hardware and software customization using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Revenue from contracts for which we cannot reliably estimate total costs or there are not significant amounts of customization are recognized upon completion.
Determining when a contract should be accounted for using the percentage of completion method involves judgment. Critical items that are considered in this process are the degree of customization and related labor hours necessary to complete the required work as well as ongoing estimates of the future labor hours needed to complete the contract. We also generate non-recurring revenue from the licensing of our software. Software license revenue is recognized upon the execution of a license agreement, upon deliverance, fees are fixed and determinable, collectability is probable and when all other significant obligations have been fulfilled.
We also generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer. Our 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. Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including our product configuration mix, software having a higher gross margin, and our hardware products and IP licenses, which tend to have a lower gross margin.
Our support and service revenue also tends to have lower gross margins. Operating Expense. Operating expense consists of sales and marketing, research and development, general and administrative expenses and amortization of intangible assets. Personnel-related costs, which include stock-based compensation expense, are the most significant component of each of these expense categories. We had 50 full-time employees as of December 31, and December 31, We expect to continue to hire significant numbers of new employees in order to support our growth.
In any particular period, the timing of additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue. We anticipate that our operating expenses will significantly increase in absolute dollar amounts. Sales and Marketing. Sales and marketing expense consists primarily of the salaries, commissions, other incentive compensation, employee benefits and travel expenses of our sales force. We expect future sales and marketing costs to continue to increase as we pursue large project solution opportunities.
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Research and Development. Research and development expense consists primarily of salaries, employee benefits and outside contractors for new product development, product enhancements and custom integration work. 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 as well as continue to enhance existing products.
General and Administrative. General and administrative expense consists 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 expenses. We are continuing 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 gradually decrease our level of general and administrative expenses expressed as a percentage of total revenues.gdiretoutegfal.ga/1134.php
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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, or U.
The preparation of these consolidated financial statements in accordance with U. 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 revenue and expenses during a fiscal period.
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The following are our critical accounting policies because we believe they are both important to the portrayal of our financial condition and results of operations and require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. Long-term fixed-price contracts involving significant customization. Fixed-price contracts involving minimal customization;.
Software licensing;. Sales of computer hardware and identification media; and. Post contract customer support PCS. Allowance for Doubtful Accounts. We determine the amount of allowance by analyzing historical losses, customer concentrations, customer creditworthiness, current economic trends, the age of the accounts receivable balances, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In accordance with ASC , intangible assets with a definite life are analyzed for impairment under ASC and intangible assets with an indefinite life are analyzed for impairment under ASC A reporting unit is the operating segment, or a business one level below that operating segment referred to as a component if discrete financial information is prepared and regularly reviewed by management at the component level.
The Company uses fair value methodologies to establish fair values. We assess impairment of goodwill and identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:.
Significant underperformance relative to historical or expected future operating results;. Significant changes in the manner of our use of the acquired assets or the strategy of our overall business; and. Significant negative industry or economic trends. The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment.
The Company performs its annual impairment test in the fourth quarter of each year. A two-step impairment test is used to first identify potential goodwill impairment and then measure the amount of goodwill impairment loss, if any. In , the Company determined that its only reporting unit is Identity Management. Based on the results of these impairment tests, the Company determined that its goodwill assets were not impaired as of December 31, and , and there have been no indications of impairment during the nine months ended September 30, The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable.
When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
Either of these could result in future impairment of long-lived assets. There are many management assumptions and estimates underlying the determination of an impairment loss, and estimates using different, but reasonable, assumptions could produce significantly different results. Significant assumptions include estimates of future levels of revenues and operating expenses.
Therefore, the timing and recognition of impairment losses by us in the future, if any, may be highly dependent upon our estimates and assumptions. There can be no assurance that goodwill impairment will not occur in the future. Stock-Based Compensation. The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC No.
The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in selling, general and expenses based upon the departments to which substantially all of the associated employees report and credited to additional paid-in-capital.
The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The expected term used by the Company as computed by this method range from 5. 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. Treasury rates appropriate for the expected term. 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 reviews the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.
Income Taxes. Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities. ASC requires a company to first determine whether it is more-likely-than-not defined as a likelihood of more than fifty percent that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information.
A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. We recognize and measure uncertain tax positions in accordance with U. GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Any tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.
GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved.
While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our analysis of income tax reserves reflects the most likely outcome. We adjust these reserves, if any, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Management evaluated those proposed adjustments and in July filed a formal notice of appeal. The Company adjusts these items in light of changing facts and circumstances.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. Fair-Value Measurements. ASC 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 FAS 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. 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. Assessing the significance of a particular input to the fair value measurement requires judgment, considering factors specific to the asset or liability.
Determining whether a fair value measurement is based on Level 1, Level 2, or Level 3 inputs is important because certain disclosures are applicable only to those fair value measurements that use Level 3 inputs. The use of Level 3 inputs may include information derived through extrapolation or interpolation which involves management assumptions.
Derivative Financial Instruments. The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company reviews the terms of the common and preferred stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments.
In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense.
When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method. Results of Operations. Product Revenue. Software and royalties. Percentage of total net product revenue. Hardware and consumables. Total net product revenue. The increase reflects higher levels of hardware and consumables generated from project solutions. Services revenue is comprised primarily of software integration services, system installation services and customer training.
We expect service revenue to continue to be a significant component of our revenues through our implementation of large-scale high-end installations. 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. Maintenance Revenue. Net Maintenance Revenue. Maintenance Revenues. The increase in maintenance revenue from our Identification products is due to our expanding installed base of this product suite.
The decrease in maintenance revenue from our law enforcement products reflects the expiration of certain maintenance contracts. While no assurances can be given, we expect maintenance revenue to increase in due to the expansion of our installed base resulting from the completion of significant project-oriented work during the fiscal year.
We anticipate the growth of our maintenance revenue through the retention of existing customers combined with the expansion of installed base combined resulting from the completion of project-oriented work, however, we cannot predict the timing of this anticipated growth. Cost of Product Revenue. Percentage of software and royalty product revenue. Percentage of hardware and consumables product revenue. Percentage of services product revenue.
Total cost of product revenues. Percentage of total product revenue.
Costs of products can vary as a percentage of product revenue from period to period depending upon the level of software customization and third party software license content included in product sales during a given period. This decrease is due primarily to the year ended December 31, containing integration costs of our identity management products into project solutions in excess of revenues generated on certain contracts.
Cost of Maintenance Revenue. Years Ended. Total maintenance cost of revenue. Percentage of total maintenance revenue.
This increase is due primarily to higher identification labor costs incurred to perform maintenance requirements on completed large-scale identity management projects. Product Gross Profit. Total product gross profit. Costs of software products can vary as a percentage of product revenue from quarter to quarter depending upon product mix and third party software licenses included in software solutions. Maintenance Gross Profit. Total maintenance gross profit. This increase in costs is due primarily to higher labor costs incurred to perform maintenance requirements on completed large-scale identity management projects.
Percentage of total net revenue. 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.
Sales and Marketing Expense. Major components of this change are:. Research and Development Expense. Depreciation and Amortization. This decrease reflects the limitations placed on acquiring new equipment in and Interest Expense, Net. Financing Expense. The warrants were originally issued in various previous private placement financings.
We recorded the issuance of the additional warrants as a financing expense equal to the fair value of the warrants issued using the Black-Scholes option-pricing model. We recorded the repricing of the warrants as a modification equal to the difference in fair value immediately before and after the modification using the Black Scholes option-pricing model.
Change in Fair Value of Derivative Liabilities. The Derivative Liabilities were revalued using available market information and commonly accepted fair value methodologies. Change in Fair Value of Financing Obligation. The variable component of the financing obligation was revalued using available market information and commonly accepted valuation methodologies. Other Expense Income , Net. Income Tax Expense. Management has determined that it is more likely than not that a tax benefit from such losses will not be realized. Accordingly, we did not record a benefit for income taxes for these periods.
The decrease reflects lower revenue from project solutions containing hardware and consumable components. Maintenance revenue. Law enforcement maintenance revenue did not change significantly year over year. 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. Total cost of product revenue. This decrease relates to an uncharacteristically large percentage of software revenue for the nine months ended September 30, being generated from software only project solutions not requiring significant amounts of customization, integration or installation as compared to the corresponding period in That decrease is not significant as a percentage of total maintenance revenues.
The reduction in maintenance cost of revenue decrease is reflective of lower personnel costs and contract services expenditures incurred during the nine months ended September 30, period as compared to the corresponding period of Sales and marketing expense consists primarily of the salaries, commissions, other incentive compensation, employee benefits and travel expenses of our sales, marketing, business development and product management functions. The increase is comprised of the following major components:.
Interest Expense Income , Net. Interest expense for the nine months September 30, contains the following components:. As that financing obligation was settled in fiscal there is no corresponding impact for the nine months ended September 30, The Derivative Liabilities were revalued using available market information and commonly accepted valuation methodologies. That adjustment related to an examination conducted by the Canadian Revenue Agency for the tax years to The adjustment recorded in reflects the cumulative impact, including estimated interest and penalties.
Liquidity and Capital Resources. Operating Activities. Investing Activities. The level of equipment purchases resulted primarily from continued growth of the business and replacement of older equipment. There was relatively no activity in our cash flows from investing activities at September 30, Financing Activities. Subsequent advances are subject to the discretion of the Lender. The note bears interest at 5. In conjunction with the issuance of the Note, we issued a warrant to purchase 4,, shares of our common stock. Additionally, we entered into a Registration Rights Agreement requiring us to provide certain registration rights to the Lender relative to the 4,, shares of our common stock issuable pursuant to the warrant.
We recorded the Note and Additional Financing Obligation net of a discount equal to the fair values allocated to the various financial instruments issued to the Lender. The warrants issued in conjunction with the Note contained anti-dilution provisions, which require derivative liability classification. The Note is secured by all our assets.
Such warrants may be exercised at any time from June 9, until June 9, We recorded the new debt instruments net of a discount equal to the fair values allocated to the various financial instruments issued to the Lender. We are accreting the note discount and the Additional Financing Obligation discount using the effective interest rate method over the life of the Note. Such warrants may be exercised at any time from June 22, until June 22, We recorded Amendment No. The amendment calls for us to repay the lender in full the amount of any and all Third Amendment Advances, together with all accrued and unpaid interest thereon, on or before January 31, Such warrants may be exercised at any time from October 5, until October 5, As additional consideration, we assigned certain patents related to discontinued product lines to the Lender with the condition that we would participate in future proceeds generated from efforts by the Lender to monetize the patents.
We recorded the Amendment No. The warrants issued in conjunction with the Third Amendment Advance contained anti-dilution provisions, which require derivative liability classification. As consideration for the advance, we will pay the Lender additional interest on the maturity date or such earlier date as may be required under the terms of the Note in an amount equal to , multiplied by the average of the closing prices of our common stock for the ten trading day period immediately preceding the date of the payment of such interest payment.
As additional consideration for making the advance, we assigned to the Lender its rights, title and interest in and to fifty percent of certain after-cost proceeds that may be received in connection with our prosecution of certain commercial tort claims including, but not limited to, claims related to the infringement of our intellectual property. In conjunction with Amendment No. Also in conjunction with Amendment No.
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