A. RESULTS OF OPERATING ACTIVITIES
For the three and nine month periods ended September 30, 1997, the Company
incurred net losses of $1,775,000 and $5,548,000, respectively, resulting in
losses per common share of $(0.08) and $(0.20), respectively after preferred
stock dividends. This compares to net losses of $1,890,000 and $6,397,000 for
the three and nine month periods ended September 30, 1996, respectively, or
$(0.07) and $(0.25) per common share, respectively after preferred stock
dividends. The decrease of $115,000 in net loss for the three month period ended
September 30, 1997 was due primarily to an increase in gross profit of $168,000
that was partially offset by an increase in operating expenses of $37,000 and a
decrease in other income of $16,000. The increase in gross profit for the three
month period was primarily due to the increase in revenue and an increase in the
gross margin percentage compared to the same period in 1996. Approximately
$164,000 and $465,000, respectively, of the net losses in the three and nine
month periods ended September 30, 1997, and $174,000 and $478,000, respectively,
of the net losses in the three and nine month periods ended September 30, 1996,
were attributable to non-cash items, including depreciation and compensation
related to certain stock options.
REVENUE AND GROSS PROFIT
For the three and nine month periods ended September 30, 1997, the Company
reported operating revenues of $516,000 and $1,184,000, respectively. This
compares to operating revenues of $384,000 and $1,827,000, respectively, for the
three and nine month periods ended September 30, 1996, or an increase of
$132,000 and a decrease of $643,000 for such periods, respectively. The increase
for the three month period was primarily due to increased sales of
NRIdentity(TM) software and hardware products, while the decrease for the nine
month period was primarily due to start-up revenue of $860,000 related to the
Connecticut State project that was recognized in the first quarter of 1996.
Revenues for the three month period ended September 30, 1997 reflect increases
of approximately $234,000 and $130,000 compared to the first and second quarters
of 1997, respectively. Revenues for the three month period ended September 30,
1997 consisted primarily of sales of NRIdentity(TM) software and scanners to
various commercial users (approximately $390,000) and ongoing revenues from
contracts with the States of New Jersey and Connecticut (approximately
$126,000). The Company's ongoing contracts with these agencies are expected to
generate approximately $114,000 in revenue in the fourth quarter of 1997 and the
first and second quarters of 1998, respectively. The New Jersey contract will
expire in June 1998 and the Connecticut contract will expire in December 1998
unless such contracts are renewed.
The Company's gross margin percentages before operating expenses for the
three and nine month periods ended September 30, 1997 were 55% and 65%,
respectively, compared to 30% and 40%, respectively, for the same periods in
1996. The increases from 1996 to 1997 were primarily due to a shift from the
sale of services during 1996 to the sale of software and hardware during 1997.
OPERATING EXPENSES
Total operating expenses for the three and nine month periods ended
September 30, 1997 increased over the same periods in 1996 by $37,000 and
$600,000, respectively. This represents changes of 2% and 10%, respectively. The
following table provides a breakdown of the changes in operating expenses for
the three month and nine month periods ended September 30, 1997 as compared to
the same periods in 1996:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT %) (IN THOUSANDS, EXCEPT %)
$ Change % Change $ Change % Change
--------- --------- --------- ---------
Selling and marketing $ 14 2% $ 30 2%
Royalty fee 2 2 20 5
Product development (153) (22) 410 24
General and administrative 174 30 140 7
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$ 37 2% $ 600 10%
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