ISGN iSign Solutions Inc (CE)

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2020.

Overview

The Company is a leading supplier of digital transaction management (DTM) software enabling the paperless, secure and cost-effective management of document-based transactions. iSign’s solutions encompass a wide array of functionality and services, including electronic signatures, biometric authentication and simple-to-complex workflow management. These solutions are available across virtually all enterprise, desktop and mobile environments as a seamlessly integrated platform for both ad-hoc and fully automated transactions. iSign’s software platform can be deployed both on-premise and as a cloud-based service, with the ability to easily transition between deployment models.

The Company was incorporated in Delaware in October 1986. Except for the year ended December 31, 2004, in each year since its inception the Company has incurred losses. For the two-year period ended December 31, 2020, net losses aggregated $1,614, and, at September 30, 2021, the Company’s accumulated deficit was $135,564.

In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China and has since spread to a number of other countries, including the U.S. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. Since March 11, 2020 states in the U.S., including California, where the Company is headquartered, have begun to open up as the result of the development of vaccines to thwart the spread of the virus. New variants of COVID-19 have surfaced around the world, including the United States which may cause additional closures of economies depending on how virulent the new strains are. New COVID-19 variant outbreaks may further disrupted supply chains and affected production and sales across a wide range of industries. The extent of the impact of new COVID-19 outbreaks on our operational and financial performance will depend on certain developments, including the duration and further spread of the outbreak, continued impact on our customers, employees and vendors all of which are uncertain and cannot be predicted.

For the three months ended September 30, 2021, total revenue was $282, an increase of $40, or 17%, compared to total revenue of $242 in the prior year period. For the nine months ended September 30, 2021, total revenue was $810, an increase of $151, or 23%, compared to total revenue of $659 in the prior year period. The increases in revenue for the three and nine months ended September 30, 2021 are due primarily to increases in product revenue compared to the prior year periods.

For the three and nine months ended September 30, 2021, the Company recorded a net loss of $2 and $361, a decrease of $28 and $189, or 93% and 34%, respectfully, compared to a net loss of $30 and $550, respectively, in the prior year period. The reduction in the net loss was due to the increase in revenues, the decrease in operating costs offset by reduction in other income compared to the prior year periods.

Critical Accounting Policies and Estimates

Refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Form 10-K.

Effect of Recent Accounting Pronouncements

Accounting Standards Updates issued in 2021 are being evaluated by the Company, however, implementation is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

Results of Operations

Revenue

For the three months ended September 30, 2021, product revenue was $101, an increase of $57, or 130%, compared to product revenue of $44 in the prior year period. The increase was primarily due to the increase in engineering service and transactional revenue received in the quarter. For the three months ended September 30, 2021, maintenance revenue was $181, a decrease of $17, or 9%, compared to maintenance revenue of $198 in the prior year period. The decrease is due to the change in certain maintenance contract from an annual to a time and material bases and the timing of certain contract renewals.

For the nine months ended September 30, 2021, product revenue was $282, an increase of $148, or 110%, compared to product revenue of $134 in the prior year period. The increase in product revenue is primarily attributable to the factors discussed for the three-month period above. For the nine months ended September 30, 2021, maintenance revenue was $528, an increase of $3, or 1%, compared to maintenance revenue of $525 in the prior year period. The increase in maintenance revenue is primarily due to the timing of certain contract renewals.

Cost of Sales

For the three months ended September 30, 2021, cost of sales was $23, a decrease of $6, or 21%, compared to cost of sales of $29 in the prior year period. The decrease in cost of sales was primarily due to a decrease in direct labor costs associated with billable engineering revenue and a decrease in labor related to maintenance contracts during the three months ended September 30, 2021, compared to the prior year period.

For the nine months ended September 30, 2021, cost of sales was $83, a decrease of $3, or 3%, compared to cost of sales of $86 in the prior year period. The decrease in cost of sales was due to a decrease in direct labor related to maintenance contracts offset by an increase in direct labor associated with billable engineering revenue compared to the prior year period.

Operating expenses

Research and Development Expenses

For the three months ended September 30, 2021, research and development expense was $156, an increase of $30, or 24%, compared to research and development expense of $126 in the prior year period. Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance items, and allocated facilities expenses. Research and development expenses increase is primarily due to an bonus and dues & subscriptions increase the current quarter. Total expenses, before allocations for the three months ended September 30, 2021, were $183, an increase of $11, or 6%, compared to $172 in the prior year period. The increase was primarily due to the factors discussed above.

For the nine months ended September 30, 2021, research and development expense was $436, a decrease of $10, or 2%, compared to research and development expense of $446 in the prior year period. The most significant factors in the decrease include a decrease in professional services expense and other overhead expense, including outside engineering offset by a reduction in allocated engineering expense to cost of sales. Total expenses, before allocations to cost of sales, for the nine months ended September 30, 2021, were $528, a decrease of $18, or 3%, compared to $545 in the prior year period. The decrease in total engineering expense is primarily due to the factors discussed for the three month period above.

Sales and Marketing Expense

For the three months ended September 30, 2021, sales and marketing expense was $15, an increase of $5, or 50%, compared to sales and marketing expense of $10 in the prior year period. For the nine months ended September 30, 2021, sales and marketing expense was $86, an increase of $24, or 39%, compared to sales and marketing expense of $62 in the prior year period. These increase was primarily attributable to an increase in commissions due to the increase in revenue compared to the prior year periods.

General and Administrative Expense

For the three months ended September 30, 2021, general and administrative expense was $130, a decrease of $268 or 67%, compared to general and administrative expense of $397 in the prior year period. The decrease was primarily due to $288 in stock based compensation expense recorded in the prior year partially offset by decreases in other general overhead expenses.

For the nine months ended September 30, 2021, general and administrative expense was $446, a decrease of $370, or 45%, compared to general and administrative expense of $816 in the prior year period. The decrease in total general and administrative expense is primarily due to the factors discussed for the three month period above.

Other Income and Expense, net

For the three and nine months ended September 30, 2021, other income was $125, respectively, a decrease of $248 and $300, respectively, compared to other income of $373 and $425 for the three and nine months ended September 30, 2020. The decrease in other income and expense is due primarily to the forgiveness of the $125 loan plus accrued interest in September 2021 related to the Paycheck Protection Program, compared to $373 and $425, respectively, of accounts payable forgiveness during the three and nine months ended September 30, 2020. Such accounts payable forgiveness during the three and nine months ended September 30, 2020 was generated in conjunction with cash payments of approximately $287. Other income for the three and nine months ended June 30 2019 also included the collection of $14 of accounts receivable written off in the prior year.

For the three months ended September 30, 2021, interest expense was $85, an increase of $3, or 4% compared to interest expense of $82 in the prior year period. For the nine months ended September 30, 2021, interest expense was $244, an increase of $23, or 10%, compared to interest expense of $221 in the prior year period. The increase in interest expense is primarily due to the increase in the amount of debt outstanding for the three and nine months ended September 30, 2021 compared to the prior year period.

Amortization of debt discount was $0 for the three and nine month periods ended September 30, 2021 compared to $1 and $1 in the same periods of the prior year, respectively. The debt discount was fully amortized by December 31, 2020.

Liquidity and Capital Resources

At September 30, 2021, cash and cash equivalents totaled $108, compared to cash and cash equivalents of $26 at December 31, 2020. Net cash provided by operating activities was $62. Cash of $23 was provided by financing activities, offset by $3 used in investing activities. At September 30, 2021, total current assets were $248, compared to total current assets of $136 at December 31, 2020. At September 30, 2021, the Company’s principal sources of funds included its aggregated cash and cash equivalents of $108. 

At September 30, 2021, accounts receivable, net was $128, an increase of $28, or 28%, compared to accounts receivable, net of $100 at December 31, 2020. The increase is due primarily to the timing of billings and collections during the nine months ended September 30, 2021.

At September 30, 2021, prepaid expenses and other current assets were $12, an increase of $2, or 20%, compared to prepaid expenses and other current assets of $10 at December 31, 2020. The increase is due primarily to an increase of prepaids associated with engineering activities during the period.

At September 30, 2021, accounts payable was $402, an increase of $49, or 14%, compared to accounts payable of $353 at December 31, 2020. The increase is due primarily to an increase in outstating trade payables for professional services.

At September 30, 2021, accrued compensation was $77, a decrease of $5, or 6%, compared to accrued compensation of $82 at December 31, 2020. The decrease is due primarily to a decrease in accrued vacation expense. Other accrued liabilities were $1,381, an increase of $240, or 21%, from $1,141 at December 31, 2020 due primarily to the accrual of interest on the Company’s short –term debt and deferred professional services.

At September 30, 2021, deferred revenue was $339, an increase of $124, or 58%, compared to deferred revenue of $215 at December 31, 2020. Deferred revenue primarily reflects advance payments for maintenance fees from the Company’s licensees that are generally recognized as revenue by the Company when all obligations are met or over the term of the maintenance agreement, whichever is longer. Deferred revenue is recorded when the Company receives advance payment from its customers.

At September 30, 2021, total current liabilities were $5,358, an increase of $353, or 7%, compared to total current liabilities of $5,005 at December 31, 2020.

On February 28, 2021, the Company issued an aggregate of $75 in unsecured notes to affiliates and other investors. The Company received $60 in cash and $15 in exchange for advances received in the prior year. The unsecured notes are convertible by the holder into common stock at any time at a price per share of $0.50. Upon closing a new financing of at least $1,000 in aggregate proceeds, the Company can force conversion at a price equal to the lesser of $0.50 per share or the price per share of the new financing. The notes bear interest at the rate of 10% per annum and are due December 31, 2021.

In March 2021, the Company received, from related parties, advances aggregating $25 in cash against certain accounts receivable of the Company. Upon collection of an invoice, the Company agreed to repay the advance to the lenders on a pro rata basis together with a 5% advance fee. The Company accrued $1 in advance fees recorded as interest expense on the Statement of Operations.

In April 2021, the Company re-paid $49 of Accounts Receivable Advances and $6 in accrued but unpaid 5% advance fees to an affiliate. In addition the Company repaid to another affiliate $64 of Accounts Receivable Advances and $4 in accrued but unpaid 5% advance fees.

In June 2021, the Company paid the first installment in the amount of $40 plus accrued interest of $5 of a note entered into associated with a settlement agreement dated July 1, 2020 with one of its vendors. The reaming $90 plus interest at the rate of 4% per annum is due in two installments, June of 2022 and June of 2023.

Liquidity and Capital Resources (continued)

In July 2021, the Company received $10,000 in cash from an affiliate as an advance against certain accounts receivable. The company accrued a 5% advance fee and recorded $500 as interest expense during the three months ended September 30, 2021. Upon collection of the accounts receivable the Company will repay the advance plus the 5% fee.

In August and September 2021, the Company received $50,000 and $36,000, respectively in cash from an affiliate as advances against certain accounts receivable. The company accrued a 5% advance fees in August and September 2021, and recorded $4 as interest expense during the three months ended September 30, 2021. Upon collection of the accounts receivable the Company will repay the advances plus the 5% fee.

In September 2021 the Company received notification that the loan related to the Paycheck Protection Program had been forgiven in full. The Company record $125 of other income on the Statement of Operations related to the forgiveness of the debt plus accrued interest.

On September 30, 2021 the Company issued a note to an affiliate investor and received $75 in cash. The note bears interest at the rate of 20% per annum and is due upon demand.

The Company incurred $85 and $244, respectively, of interest expense for the three and nine months ended September 30, 2021, of which was $1 and $17, respectively, was paid in cash.

The Company had no material commitments as of June 30, 2021.

The Company has experienced recurring losses from operations that raise a substantial doubt about its ability to continue as a going concern. There can be no assurance that the Company will have adequate capital resources to fund planned operations or that any additional funds will be available to it when needed, or if available, will be available on favorable terms or in amounts required by it. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company’s business, results of operations and ability to operate as a going concern.