Filed Pursuant to Rule
424(b)(3)
Registration No.
333-257125
PROSPECTUS
17,100,000 Shares of Common Stock
This prospectus
relates to the offer and sale of up to 17,100,000 shares of common stock,
par value $0.01 (the “Common
Stock”), of ImageWare Systems, Inc., a Delaware
corporation, by Lincoln Park Capital Fund, LLC (“Lincoln Park”) or the selling
stockholder.
The shares of
Common Stock being offered by the selling stockholder have been or
may be issued pursuant to a purchase agreement that we entered into
with Lincoln Park on May 17,
2021. See The Lincoln Park
Transaction for a description of that agreement and
“Selling
Stockholder” for additional information regarding
Lincoln Park. The prices at which Lincoln Park may sell the shares
will be determined by the prevailing market price for the shares or
in negotiated transactions.
We are not selling
any securities under this prospectus and will not receive any of
the proceeds from the sale of shares by the selling
stockholder.
The selling
stockholder may sell the shares of Common Stock described in this
prospectus in a number of different ways and at varying prices. See
“Plan of
Distribution” for more information about how the
selling stockholder may sell the shares of Common Stock being
registered pursuant to this prospectus. The selling stockholder is
an “underwriter” within the meaning of Section 2(a)(11)
of the Securities Act of 1933, as amended (the “Securities Act”) .
The selling
stockholder will pay all brokerage fees and commissions and similar
expenses. We will pay the expenses (except brokerage fees and
commissions and similar expenses) incurred in registering the
shares, including legal and accounting fees. See
“Plan of
Distribution”.
Our Common Stock is
currently listed on the OTCQB Marketplace under the symbol
“IWSY”. On July 12, 2021, the last reported sale price
of our Common Stock on the OTCQB Marketplace was $0.06
per share.
Investing in our Common Stock involves a high degree of risk. You
should review carefully the risks and uncertainties described under
“Risk Factors” beginning on page 9 of this prospectus,
and under similar headings in any amendments or supplements to this
prospectus.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The date of this
prospectus is July 23, 2021.
TABLE OF CONTENTS
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This summary highlights selected
information contained elsewhere in this prospectus. This summary
does not contain all of the information you should consider before
investing in our securities. You should read this entire prospectus
carefully, especially the risks of investing in our securities
discussed under “Risk Factors,” our financial
statements and the related notes included in this prospectus, and
the information set forth under the heading
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in this prospectus
before making an investment
decision.
Company Overview
ImageWare
Systems, Inc. (“ImageWare,” the
“Company,”
“we,”
“our”) provides
defense-grade biometric identification and authentication solutions
to safeguard your data, products, services or facilities. We are
experts in biometric authentication and considered
a preeminent patent holder of multimodal biometrics IP, having
many of the most-cited patents in the industry. Our patented IWS
Biometric Engine® is one
of the most accurate and fastest biometrics matching engines in the
industry, capable of our patented biometrics fusion. Part of our
heritage is in law enforcement, having built the first statewide
digital booking platform for United States local law enforcement in
the late 1990’s – and having more than three decades of
experience in the challenging government sector creating biometric
smart cards and logical access for millions of individuals. We
are a “biometrics first” company, leveraging unique
human characteristics to provide unparalleled accuracy for
identification while protecting your identity.
The
Company’s products also provide law enforcement and public
safety sector with integrated biographic, mugshot, SMT, and
fingerprint capture for booking, in addition to investigative
capabilities. The Company also provides comprehensive
authentication security software using biometrics to secure
physical and logical access to facilities, computer networks or
Internet sites. Biometric technology is now an integral part of all
markets that the Company addresses, and every product leverages our
patented IWS Biometric Engine®.
The IWS Biometric Engine® is a patented
biometric identity and authentication database built for
multi-biometric enrollment, management and authentication. It is
hardware agnostic and can utilize different types of biometric
algorithms. It allows different types of biometrics to be operated
at the same time on a seamlessly integrated platform. It is also
offered as a Software Development Kit (“SDK”), enabling developers and system
integrators to implement biometric solutions or integrate biometric
capabilities, into existing applications.
Our
secure credential solutions empower customers to design and create
smart digital identification wristbands and badges for access
control systems. We develop, sell and support software and design
systems that utilize digital imaging and biometrics for photo
identification cards, credentials and identification systems. Our
products in this market consist of IWS EPI Suite and IWS EPI
Builder. These products allow for production of digital
identification badges and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
and governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine®.
The Company is also a
developer of a biometric based multi-factor authentication
(“MFA”)
Cloud-based service. ImageWare Authenticate (formerly, GoVerify
ID®) brings together Cloud and mobile technologies to offer
biometric multi-factor authentication for the enterprise, and
across industries. ImageWare Authenticate consists of mobile and
desktop clients, and the backend system which is a Cloud-based
Software-as-a-Service (“SaaS”)
servicing Cloud-based biometric template matching requests.
ImageWare Authenticate comes in two offerings, Workforce and
Customer. ImageWare Authenticate Customer is leveraged by product
developers to enable biometric authentication for their consumers.
For the enterprise, ImageWare Authenticate Workforce provides
turnkey integration with Microsoft Windows, Microsoft Active
Directory, CA SSO, IBM Security Access Manager
(“ISAM”),
SAP Cloud Platform, Fujitsu's RunMyProcess, Palo Alto
Networks VPN and HPE’s Aruba ClearPass. These
integrations provide multi-modal biometric authentication to
replace or augment passwords for use with enterprise and consumer
class systems.
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Our law enforcement
solutions enable agencies to quickly capture, archive, search,
retrieve, and share digital images, fingerprints and other
biometrics, as well as criminal history records on a stand-alone,
networked, wireless or Web-based platform. We develop, sell and
support a suite of modular software products used by law
enforcement and public safety agencies to create and manage
criminal history records and to investigate crime. Our IWS Law
Enforcement solution consists of five software modules: Capture and
Investigative modules, which provide a criminal booking system with
related databases, as well as the ability to create and print mug
photo/scars, marks, and tattoos (SMT), as well as image lineups and
electronic mug-books; a Facial Recognition module, which uses
biometric facial recognition to identify suspects; a Web module,
which provides access to centrally stored records over the Internet
in a connected or wireless fashion; and a LiveScan module, which
incorporates LiveScan capabilities into IWS Law Enforcement
platform providing integrated fingerprint and palm print biometric
management for civil and law enforcement use. The IWS Biometric
Engine® is also available to our law enforcement clients and
allows them to capture and search using multiple
biometrics.
Recent
Developments
New Products
In July 2020, we
introduced BioIntellic™, our standalone, highly scalable
anti-spoofing detection feature (embedded in the IWS
Biometric Engine®) to
ensure secure onboarding. BioIntellic™ bolsters our
joint offering with our existing proofing partner in the African
market, Contactable, and also supports our existing MTN business as
well as drives new business in the African region and
beyond.
In October 2020, we
completed a new QuickCapture Mobile software product that resides
on the Laxton Chameleon 5 and 8 devices. QuickCapture Mobile will
be an inherent part of our newest generation law enforcement
platform, called LE 2.0. This powerful solution allows officers,
public safety and military personnel in the field to have dynamic
data on a perpetrator in the palm of their hands.
In December 2020,
we reached code completion of our GoVerifyID product, now renamed
to Imageware Authenticate, which introduced a new administration
portal for easier management and usability of the product along
with compatibility with many other 3rd party identity and Cloud
services, through the inclusion of identity protocols SAML and
OIDC.
Charter Amendment
Our Certificate of
Incorporation as of March 31, 2021 authorizes a total of 1.0
billion shares of Common Stock for issuance. Effective as of
January 28, 2021 and February
16, 2021, respectively, our Board of Directors and the
Majority Shareholders approved and authorized an amendment to our
Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 1.0 billion shares to 2.0 billion shares, resulting in a total
increase of 1.0 billion
authorized shares of Common Stock. The increase in the number
of authorized shares of Common Stock became effective upon filing
the Certificate of Amendment with the Delaware Division of
Corporations on April 21, 2021.
Coronavirus (COVID-19) Pandemic
On March 11, 2020,
the World Health Organization declared the novel strain of
coronavirus (“COVID-19”) a global pandemic and
recommended containment and mitigation measures worldwide. As of
July 2021, the global outbreak of COVID-19 continues
to rapidly evolve, and the extent to which COVID-19 may impact our
business and markets we serve will depend on future developments,
which are highly uncertain and cannot be predicted with confidence,
such as the duration of the outbreak, travel restrictions and
social distancing in the United States and other countries,
business closures or business disruptions, and the effectiveness of
actions taken both in the United States and other countries. We are
continuing to vigilantly monitor the situation with our primary
focus on health and safety of our employees and
clients.
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The Series D Financing
On November 12,
2020 and December 23, 2020, the Company consummated private
placements of 12,060 shares of its Series D Convertible Preferred
Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds include approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Purchase Agreement"), by and between
the Company and certain accredited investors (the "Purchasers"), for the sale of the
Series D Preferred at a purchase price of $1,000 per share of
Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of shares of Series D
Preferred.
On the fourth
anniversary of the Issuance Date (as defined in the Series D
Certificate), or in the event of the consummation of a Change of
Control (as defined in the Series D Certificate), if any shares of
Series D Preferred are outstanding, then each holder of Series D
Preferred shall have the right (the “Holder Redemption
Right”), at such holder’s option, to
require the Company to redeem all or any portion of such
holder’s shares of Series D Preferred at the Liquidation
Preference Amount per share of Series D Preferred plus an amount
equal to all accrued but unpaid dividends, if any, (such price, the
“Holder Redemption
Price”), which Holder Redemption Price
shall be paid in cash.
In connection with the sale of the Series D
Preferred, we granted certain registration rights to the Investors
with respect to the Conversion Shares and Dividend Shares, pursuant
to a Registration Rights Agreement by and among us and the
Investors. The registration statement registering the Conversion
Shares and Dividend Shares was declared effective by the United
States Securities and Exchange Commission (the
“SEC”) on February 12, 2021.
Company Information
ImageWare Systems, Inc., a Delaware corporation,
was founded in February 1987. Our principal executive offices are
located at 11440 West Bernardo Court, Suite 300, San Diego,
California 92127, and our telephone number is (858) 673-8600. Our
website address is www.iwsinc.com.
The information contained on our website is not part of this
prospectus. We have included our website address as a factual
reference and do not intend it to be an active link to our
website.
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Risks Associated with Our Business
Our business is subject to a number of risks
of which you should be aware before making an investment decision.
These risks are discussed more fully in the section titled
“Risk
Factors” included
elsewhere in this prospectus. These risks include the
following:
● We
have incurred significant operating losses since inception and
cannot assure you that we will ever achieve or sustain
profitability;
● We
depend upon a small number of large sales and we may fail to
achieve one or more large sales deals in the future;
● Our
lengthy sales cycle may cause us to expend significant resources
for as long as one year in anticipation of a sale to certain
customers, yet we still may fail to complete the sale;
● A
number of our customers and potential customers are government
agencies that are subject to unique political and budgetary
constraints and have special contracting requirements, which may
affect our ability to obtain new and retain current government
customers;
● If
the patents we own or license, or our other intellectual property
rights, do not adequately protect our products and technologies, we
may lose market share to our competitors and our business,
financial condition and results of operations would be adversely
affected;
● Nantahala Capital Management, LLC
("Nantahala"), controls, on an as-converted and fully diluted
basis, approximately 32.5% of
our Common Stock, and 36.7% of
the voting power of the voting securities. As such, Nantahala and
its principals can significantly influence all matters requiring
approval by our stockholders, including the election of directors
and significant corporate transactions;
and
● We
may need to raise additional funds in the future, and these funds
may not be available on acceptable terms or at all. A failure to
obtain this necessary capital when needed could force us to delay,
limit, scale back or cease some or all operations.
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Lincoln
Park Purchase Agreement
On May 17, 2021, we entered into a purchase
agreement (the “Purchase
Agreement”) and a
registration rights agreement (the “Registration Rights
Agreement”) with Lincoln
Park pursuant to which Lincoln Park committed to purchase up
to $15,100,000 of our Common
Stock.
Under the terms and subject to the conditions of
the Purchase Agreement, we have
the right, but not the obligation, to sell to Lincoln Park, and
Lincoln Park is obligated to purchase up to $15,100,000 of shares
of our Common Stock. On May 17, 2021, we sold 1.0 million shares of
Common Stock to Lincoln Park under the Purchase Agreement for an
aggregate purchase price of $100,000 (the
“Initial Purchase
Shares”). Future sales of
Common Stock under the Purchase Agreement, if any, will be subject
to certain limitations, and may occur from time to time, at our
sole discretion, over the 24-month period commencing on the date
that a registration statement of which this prospectus forms a
part, which we agreed to file with the Securities and Exchange
Commission (the “SEC”) pursuant to the Registration Rights
Agreement, is declared effective by the SEC and a final prospectus
in connection therewith is filed and the other conditions set forth
in the Purchase Agreement are satisfied (such date on which all of
such conditions are satisfied, the “Commencement
Date”).
After the Commencement Date, on any business day
over the term of the Purchase Agreement, we have the right, in our
sole discretion, to direct Lincoln Park to purchase up to 250,000
shares on such business day (the “Regular
Purchase”), subject to
increases under certain circumstances as provided in the Purchase
Agreement. The purchase price per share for each such Regular
Purchase will be based on prevailing market prices of the
Company’s Common Stock immediately preceding the time of sale
as computed under the Purchase Agreement. In each case, Lincoln
Park’s maximum commitment in any single Regular Purchase may
not exceed $500,000; however, the Company and Lincoln Park may
mutually agree to increase the Regular Purchase share amount to up
to Two Million (2,000,000) Purchase Shares. In addition to Regular
Purchases, provided that we present Lincoln Park with a purchase
notice for the full amount allowed for a Regular Purchase, we may
also direct Lincoln Park to make accelerated purchases and additional accelerated
purchases as described in the Purchase Agreement.
Pursuant to the
terms of the Purchase Agreement, in no event may we issue or sell
to Lincoln Park under the shares of our Common Stock under the
Purchase Agreement which, when aggregated with all other
shares of Common Stock then beneficially owned by the Lincoln Park
and its affiliates (as calculated pursuant to Section 13(d) of the
Exchange Act and Rule 13d-3 promulgated thereunder), would result
in the beneficial ownership by Lincoln Park and its
affiliates of more than 4.99% of the then issued and
outstanding shares of Common Stock (the “Beneficial Ownership
Limitation”).
The
Purchase Agreement and the Registration Rights Agreement contain
customary representations, warranties, agreements and conditions
and indemnification obligations of the parties. We have the right
to terminate the Purchase Agreement at any time, at no cost or
penalty. We issued to Lincoln Park 1.0 million shares of
Common Stock in consideration for entering into the Purchase
Agreement.
Issuances of our
Common Stock in this offering will not affect the rights or
privileges of our existing stockholders, except that the economic
and voting interests of each of our existing stockholders will be
diluted as a result of any such issuance. Although the number of
shares of Common Stock that our existing stockholders own will not
decrease, the shares owned by our existing stockholders will
represent a smaller percentage of our total outstanding shares
after any such issuance to Lincoln Park.
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The
Offering
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Shares
of Common Stock offered by the selling stockholders
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17,100,000 shares consisting of: (i)
1.0 million shares sold to
Lincoln Park at a price of $0.10 per share on the Execution Date (the
“Initial Purchase
Shares”); (ii) 15,100,000 shares we may sell to Lincoln
Park under the Purchase Agreement from time to time after the date
of this prospectus; and (iii) 1.0
million commitment shares issued to Lincoln Park on the
Execution Date (the “Commitment
Shares”).
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Shares
of Common Stock outstanding before this offering
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331,392,419
shares of Common Stock.
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Shares
of Common Stock to be outstanding after giving effect to the
issuance of 17,100,000 shares
under the Purchase Agreement registered hereunder
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348,492,419 shares of Common Stock.
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Use
of proceeds
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We will receive no
proceeds from the sale of shares of Common Stock by Lincoln Park in
this offering. We may receive up to $15.0 million in aggregate gross proceeds
under the Purchase Agreement from any additional sales we make to
Lincoln Park pursuant to the Purchase Agreement after the date of
this prospectus.
Any proceeds that
we receive from sales to Lincoln Park under the Purchase Agreement
will be used for working capital and general corporate purposes.
See Use of
Proceeds.
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Terms
of this offering
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The selling
stockholder, including its transferees, donees, pledgees, assignees
and successors-in-interest, may sell, transfer or otherwise dispose
of any or all of the shares of Common Stock offered by this
prospectus from time to time on The OTCQB or any other stock
exchange, market or trading facility on which the shares are traded
or in private transactions. The shares of Common Stock may be sold
at fixed prices, at market prices prevailing at the time of sale,
at prices related to prevailing market price or at negotiated
prices.
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OTCQB Marketplace symbol
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“IWSY”
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Risk
Factors
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Investing in our securities involves significant
risks. Please read the information contained in or incorporated by
reference under the heading “Risk
Factors” beginning on
page 9 of this prospectus, and
under similar headings in other documents filed after the date
hereof.
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The number of
shares of Common Stock to be outstanding immediately after this
offering is based on 331,392,419 shares of our Common Stock
outstanding as of July 9, 2021. Unless
we specifically state otherwise, the share information in this
prospectus excludes:
●
59,215,500 shares
of Common Stock issuable upon the exercise of stock options at a
weighted average exercise price of $0.07 per
share;
●
200,266
shares of Common Stock issuable upon vesting of outstanding
restricted stock grants;
●
792,138 shares of
Common Stock issuable upon exercise of outstanding warrants, with a
weighted average exercise price of $0.05 per
share;
●
5,552,972 shares of
Common Stock issuable upon conversion of the Company’s Series
A Convertible Preferred Stock (“Series A Preferred
”);
●
5,325,748 shares of
Common Stock issuable upon conversion of the Company’s Series
A-1 Convertible Preferred Stock (“Series A-1 Preferred
”);
●
46,124 shares of
Common Stock issuable upon conversion of the Company’s Series
B Convertible Redeemable Preferred Stock (“Series B Preferred
”);
●
394,189,679 shares
of Common Stock issuable upon conversion of the Company’s
Series D Preferred; and
●
89,297,377 shares
of Common Stock reserved for future issuance under the
Company’s 2020 Omnibus Equity Incentive Plan (the
“Plan ”), which
plan was approved by the Company’s stockholders on June 5,
2020, as amended on April 20, 2021.
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CAUTIONARY NOTES
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements contained in
this prospectus other than statements of historical facts,
including statements regarding our strategy, future operations,
future financial position, future revenue, projected costs,
prospects, plans, objectives of management and expected market
growth, are forward-looking statements. These statements involve
known and unknown risks, uncertainties and other important factors
that may cause our actual results, performance or achievements to
be materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements.
The
words “anticipate,” “believe,”
“estimate,” “expect,” “intend,”
“may,” “plan,” “predict,”
“project,” “target,”
“potential,” “will,” “would,”
“could,” “should,” “continue,”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements include,
among other things, statements about:
●
the
availability of capital to satisfy our working capital
requirements;
●
the
impact of COVID-19 on the Company's results of
operations;
●
the
accuracy of our estimates regarding expenses, future revenues and
capital requirements;
●
anticipated
trends and challenges in our business and the markets in which we
operate;
●
our
ability to anticipate market needs or develop new or enhanced
products to meet those needs;
●
our
expectations regarding market acceptance of our
products;
●
the
success of competing products by others that are or become
available in the market in which we sell our products;
●
our
ability to protect our confidential information and intellectual
property rights;
●
our
ability to manage expansion into international
markets;
●
our
ability to maintain or broaden our business relationships and
develop new relationships with strategic alliances, suppliers,
customers, distributors or otherwise;
●
developments
in the U.S. and foreign countries; and
●
other risks and uncertainties, including those
described under the section
titled “Risk
Factors” in this
prospectus.
These
forward-looking statements are only predictions and we may not
actually achieve the plans, intentions or expectations disclosed in
our forward-looking statements, so you should not place undue
reliance on our forward-looking statements. Actual results or
events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make.
We have based these forward-looking statements largely on our
current expectations and projections about future events and trends
that we believe may affect our business, financial condition and
operating results. We have included important factors in the
cautionary statements included in this prospectus, as well as
certain information incorporated by reference into this prospectus,
that could cause actual future results or events to differ
materially from the forward-looking statements that we make. Our
forward-looking statements do not reflect the potential impact of
any future acquisitions, mergers, dispositions, joint ventures or
investments we may make.
You
should read this prospectus with the understanding that our actual
future results may be materially different from what we expect. We
do not assume any obligation to update any forward-looking
statements whether as a result of new information, future events or
otherwise, except as required by applicable law.
Our
business is subject to significant risks. You should carefully
consider the risks described below and the other information in
this prospectus, including our financial statements and related
notes, before you decide to invest in our Common Stock. If any of
the following risks or uncertainties actually occur, our business,
results of operations or financial condition could be materially
harmed, the trading price of our Common Stock could decline, and
you could lose all or part of your investment. The risks and
uncertainties described below are those that we currently believe
may materially affect us; however, they may not be the only ones
that we face. Additional risks and uncertainties of which we are
unaware or currently deem immaterial may also become important
factors that may harm our business. Except as required by law, we
undertake no obligations to update any risk factors.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Available cash resources will be insufficient to provide for our
working capital needs for the next twelve months. As a result,
we will need to raise additional capital to continue as a going
concern.
At March 31, 2021 and December 31, 2020, we had
negative working capital of $20,887,000 and $19,349,000,
respectively. Our principal source of liquidity at March 31, 2021
and December 31, 2020 consisted of cash and cash equivalents of
$5,056,000 and $8,345,000, respectively. Considering the financings
consummated in 2021 and in 2020, as well as our projected cash
requirements, and assuming we are unable to generate incremental
revenue, 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 intends to seek additional equity
and/or debt financing through the issuance of additional debt
and/or equity securities and may seek strategic or other
transactions intended to increase shareholder value. There are
currently no formal committed financing arrangements to support our
projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, or other agreements, and
no assurances can be given that we will be successful in raising
additional capital through the issuance of debt and/or equity
securities, or entering into any other transaction that addresses
our ability to continue as a going concern.
We have a history of significant
recurring losses totaling approximately $215.3 million at March 31,
2021 and $213.2 million at
December 31, 2020, and these losses may continue in the
future.
As of March 31, 2021 and December 31, 2020, we had
an accumulated deficit of approximately $215.3 million and
$213.2 million, respectively,
and these losses may continue in the future. We expect to continue
to incur significant sales and marketing, research and development,
and general and administrative expense. As a result, we will need
to generate significant revenue to achieve profitability, and we
may never achieve profitability.
Our loan under the Paycheck Protection Program may not be forgiven
or may subject us to challenges and investigations regarding
qualification for the loan.
We have received loan proceeds in the amount of
approximately $1.57 million under the Payroll Protection Program
(“PPP
Loan”), which was
established under the CARES Act and is administered by the SBA
(“PPP”). Under the terms of the CARES Act, PPP
Loan recipients can apply for loan forgiveness. The potential loan
forgiveness for all or a portion of PPP Loan is determined, subject
to limitations, based on the use of loan proceeds over the 24 weeks
after the loan proceeds are disbursed for payment of payroll costs
and any payments of mortgage interest, rent, and utilities. The
amount of loan forgiveness will be reduced if PPP Loan recipients
terminate employees or reduce salaries during the covered period.
The unforgiven portion of our PPP Loan, if any, is payable over two
years at an interest rate of 1%, with a deferral of payments for
the first six months. We have utilized all the proceeds from the
PPP Loan for purposes consistent with the PPP. While we currently
believe that our use of the loan proceeds will meet the conditions
for forgiveness of the PPP Loan, the Series D Financing may affect
the Company's ability to have the PPP Loan forgiven under the PPP
and there can be no assurance that forgiveness for any portion of
the PPP Loan will be obtained.
Additionally,
the Company is evaluating whether the Series D Financing will
prevent the Company from qualifying for loan forgiveness. In the
event the SBA determines that the Series D Financing disqualifies
the Company for loan forgiveness under the PPP, the Company will be
required to repay all $1.57 million of the PPP Loan by May 4, 2022,
with interest accruing at 1%.
Our operating results have fluctuated in the past and are likely to
fluctuate in the future.
Our
operating results have fluctuated in the past. These
fluctuations in operating results are the consequence of the
following, amongst other things:
●
varying
demand for and market acceptance of our technology and
products;
●
changes
in our product or customer mix;
●
the
gain or loss of one or more key customers or their key customers,
or significant changes in the financial condition of one or more of
our key customers or their key customers;
●
our
ability to introduce, certify and deliver new products and
technologies on a timely basis;
●
the
announcement or introduction of products and technologies by our
competitors;
●
competitive
pressures on selling prices;
●
costs
associated with acquisitions and the integration of acquired
companies, products and technologies;
●
our
ability to successfully integrate acquired companies, products and
technologies;
●
our
accounting and legal expense; and
●
general
economic conditions.
These
factors, some of which are not within our control, will likely
continue in the future. To respond to these and other factors, we
may need to make business decisions that could result in failure to
meet financial expectations. If our quarterly operating results
fail to meet or exceed the expectations of securities analysts or
investors, our stock price could drop suddenly and significantly.
Most of our expense, such as employee compensation
and inventory, is relatively fixed in the short term.
Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if our
revenue for a particular period was below our expectations, we may
not be able to proportionately reduce our operating expense for
that period. Any revenue shortfall would have a disproportionately
negative effect on our operating results for the
period.
We depend upon a small number of large system sales ranging from
$100,000 to in excess of several million dollars and we may fail to
achieve one or more large system sales in the
future.
Historically,
we have derived a substantial portion of our revenue from a small
number of sales of large, relatively expensive systems, typically
ranging in price from $100,000 to $2,000,000. If we fail to receive
orders for these large systems in a given sales cycle on a
consistent basis, our business could be significantly harmed.
Further, our quarterly results are difficult to predict because we
cannot predict in which quarter, if any, large system sales will
occur in a given year. As a result, we believe that
quarter-to-quarter comparisons of our results of operations are not
a good indication of our future performance. In some future
quarters, our operating results may be below the expectations of
securities analysts and investors, in which case the market price
of our Common Stock may decrease significantly.
Our lengthy sales cycle may cause us to expend significant
resources for one year or more in anticipation of a sale to certain
customers, yet we still may fail to complete the
sale.
When
considering the purchase of a large identity management product,
potential customers may take as long as eighteen months to evaluate
different solutions and obtain approval for the purchase. Under
these circumstances, if we fail to complete a sale, we will have
expended significant resources and received no revenue in return.
Generally, customers consider a wide range of issues before
committing to purchase our products, including product benefits,
ability to operate with their current systems, product reliability
and their own budgetary constraints. While potential customers are
evaluating our products, we may incur substantial selling costs and
expend significant management resources in an effort to accomplish
potential sales that may never occur. In times of economic
recession, our potential customers may be unwilling or unable to
commit resources to the purchase of new and costly
systems.
A number of our customers and potential customers are local, state,
and federal government agencies that are subject to unique
political and budgetary constraints and have special contracting
requirements, which may affect our ability to obtain new and retain
current government customers.
A
significant number of our customers are government agencies. These
agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend from
quarter-to-quarter or year-to-year. In addition, these agencies
experience political pressure that may dictate the manner in which
they spend money. Due to political and budgetary processes and
other scheduling delays that may frequently occur relating to the
contract or bidding process, some government agency orders may be
canceled or substantially delayed, and the receipt of revenue or
payments from these agencies may be substantially delayed. In
addition, future sales to government agencies will depend on our
ability to meet government contracting requirements, certain of
which may be onerous or impossible to meet, resulting in our
inability to obtain a particular contract. Common requirements in
government contracts include bonding requirements, provisions
permitting the purchasing agency to modify or terminate at will the
contract without penalty, and provisions permitting the agency to
perform investigations or audits of our business practices, any of
which may limit our ability to enter into new contracts or maintain
our current contracts.
Two customers accounted for approximately 45% of our total revenue
during the three months ended March 31, 2021, and two customers
accounted for approximately 61% of our total revenue during the
year ended December 31, 2020. In the event of any material decrease
in revenue from these customers, or if we are unable to replace the
revenue through the sale of our products to additional customers,
our financial condition and results from operations could be
materially and adversely affected.
During the three
months ended March 31, 2021, two customers accounted for
approximately 45% or $333,000 of our total revenue. During the year
ended December 31, 2020, two
customers accounted for approximately 61% or $2,921,000 of our total revenue. If these customers were to significantly reduce
their relationship with the Company, or in the event that we are
unable to replace the revenue through the sale of our products to
additional customers, our financial condition and results from
operations could be negatively impacted, and such impact would be
material.
We face
competition from companies with greater financial, technical,
sales, marketing and other resources, and, if we are unable to
compete effectively with these competitors, our market share may
decline and our business could be harmed.
We
face competition from other established companies. A number of our
competitors have longer operating histories, larger customer bases,
significantly greater financial, technological, sales, marketing
and other resources than we do. As a result, our competitors
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or client requirements, more
quickly develop new products or devote greater resources to the
promotion and sale of their products and services than we
can. Likewise, their greater capabilities in these areas may
enable them to better withstand periodic downturns in the identity
management solutions industry and compete more effectively on the
basis of price and production. In addition, new companies may
enter the markets in which we compete, further increasing
competition in the identity management solutions
industry.
We
believe that our ability to compete successfully depends on a
number of factors, including the type and quality of our products
and the strength of our brand names, as well as many factors beyond
our control. We may not be able to compete successfully against
current or future competitors, and increased competition may result
in price reductions, reduced profit margins, loss of market share
and an inability to generate cash flows that are sufficient to
maintain or expand the development and marketing of new products,
any of which would adversely impact our results of operations and
financial condition.
RISKS RELATED TO OUR TECHNOLOGY
We occasionally rely on systems integrators to manage our large
projects, and if these companies do not perform adequately, we may
lose business.
We
occasionally act as a subcontractor to systems integrators who
manage large projects that incorporate our systems. We cannot
control these companies, and they may decide not to promote our
products or may price their services in such a way as to make it
unprofitable for us to continue our relationship with them.
Further, they may fail to perform under agreements with their
customers, in which case we might lose sales to these customers. If
we lose our relationships with these companies, our business,
financial condition and results of operations may
suffer.
Some third parties integrate our software into their platforms or
solutions. Any delay in the integration of our software or the
launch of third-party products may materially affect our results
from operations and financial condition.
We sell some of our
software through larger product partners and/or resellers that will
either resell our product alongside theirs, OEM a white label
version of our products, or sell our products fully integrated into
their offerings. In these cases, we are dependent upon the
successful rollout of our products by our distribution partners.
Any delays negatively affect our results from operations and
financial condition.
If our security measures or those of our third-party data center
hosting facilities, Cloud computing platform providers, or
third-party service partners, are breached, and unauthorized access
is obtained to a customer’s data, our data or our IT systems,
or authorized access is blocked or disabled, our services may be
perceived as not being secure, customers may curtail or stop using
our services, and we may incur significant legal and financial
exposure and liabilities.
Our
services involve the storage and transmission of our
customers’ and our customers’ customers’
proprietary and other sensitive data, including financial
information and other personally identifiable information. While we
have security measures in place, they may be breached as a result
of efforts by individuals or groups of hackers and sophisticated
organizations, including state-sponsored organizations or
nation-states. Our security measures could also be compromised by
employee error or malfeasance, which could result in someone
obtaining unauthorized access to, or denying authorized access to
our IT systems, our customers’ data or our data, including
our intellectual property and other confidential business
information. Additionally, third parties may attempt to
fraudulently induce employees or customers into disclosing
sensitive information such as usernames, passwords or other
information to gain access to our customers’ data, our data
or our IT systems.
We
take extraordinary measures to ensure identity authentication of
users who access critical IT infrastructure, including but not
limited to, two-factor, multi-factor and biometric identity
verification. This substantially reduces the threat of unauthorized
access by bad actors using compromised user
credentials.
Because
the techniques used to breach, obtain unauthorized access to, or
sabotage IT systems change frequently, grow more complex over time,
and generally are not recognized until launched against a target,
we may be unable to anticipate or implement adequate measures to
prevent against such techniques.
Our
services operate in conjunction with and are dependent on products
and components across a broad ecosystem and, if there are security
vulnerabilities in one of these components, a security breach could
occur. In addition, our internal IT systems continue to evolve, and
we are often early adapters of new technologies and new ways of
sharing data and communicating internally and with partners and
customers, which increases the complexity of our IT systems. These
risks are mitigated by our ability to maintain and improve business
and data governance policies and processes and internal security
controls, including our ability to escalate and respond to known
and potential risks.
In
addition, our customers may authorize third-party technology
providers to access their customer data, and some of our customers
may not have adequate security measures in place to protect their
data that is stored on our servers. Because we do not control our
customers or third-party technology providers, or the processing of
such data by third-party technology providers, we cannot ensure the
integrity or security of such transmissions or processing.
Malicious third parties may also conduct attacks designed to
temporarily deny customers access to our services.
A
security breach could expose us to a risk of loss or inappropriate
use of proprietary and sensitive data, or the denial of access to
this data. A security breach could also result in a loss of
confidence in the security of our services, damage our reputation,
negatively impact our future sales, disrupt our business and lead
to legal liability. Finally, the detection, prevention and
remediation of known or potential security vulnerabilities,
including those arising from third-party hardware or software may
result in additional direct and indirect costs, for example
additional infrastructure capacity to mitigate any system
degradation that could result from remediation
efforts.
RISKS RELATED TO INTELLECTUAL PROPERTY
If the patents we own or license, or our other intellectual
property rights, do not adequately protect our products and
technologies, we may lose market share to our competitors and our
business, financial condition and results of operations would be
adversely affected.
Our success depends significantly on our ability
to protect our rights to the technologies used in our products. We
rely on patent protection, trade secrets, as well as a combination
of copyright and trademark laws and nondisclosure, confidentiality
and other contractual arrangements to protect our technology.
However, these legal means afford only limited protection and may
not adequately protect our rights or permit us to gain or keep any
competitive advantage. In addition, we cannot be assured that any
of our current and future pending patent applications will result
in the issuance of a patent to us. The U.S. Patent and Trademark
Office (“PTO”) may deny or require significant narrowing
of claims in our pending patent applications, and patents issued as
a result of the pending patent applications, if any, may not
provide us with significant commercial protection or may not be
issued in a form that is advantageous to us. We could also incur
substantial costs in proceedings before the PTO. These proceedings
could result in adverse decisions as to the claims included in our
patents.
Our
issued and licensed patents and those that may be issued or
licensed in the future may be challenged, invalidated or
circumvented, which could limit our ability to stop competitors
from marketing related products. Additionally, upon expiration of
our issued or licensed patents, we may lose some of our rights to
exclude others from making, using, selling or importing products
using the technology based on the expired patents. We also must
rely on contractual rights with the third parties that license
technology to us to protect our rights in the technology licensed
to us. Although we have taken steps to protect our intellectual
property and technology, there is no assurance that competitors
will not be able to design around our patents. We also rely on
unpatented proprietary technology. We cannot assure you that we can
meaningfully protect all our rights in our unpatented proprietary
technology or that others will not independently develop
substantially equivalent proprietary products or processes or
otherwise gain access to our unpatented proprietary technology. We
seek to protect our know-how and other unpatented proprietary
technology with confidentiality agreements and intellectual
property assignment agreements with our employees. However, such
agreements may not provide meaningful protection for our
proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements or in the event that
our competitors discover or independently develop similar or
identical designs or other proprietary information. In addition, we
rely on the use of registered and common law trademarks with
respect to the brand names of some of our products. Our common law
trademarks provide less protection than our registered trademarks.
Loss of rights in our trademarks could adversely affect our
business, financial condition and results of
operations.
Furthermore,
the laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States. If we fail to apply for intellectual property protection or
if we cannot adequately protect our intellectual property rights in
these foreign countries, our competitors may be able to compete
more effectively against us, which could adversely affect our
competitive position, as well as our business, financial condition
and results of operations.
If third parties claim that we infringe their intellectual property
rights, we may incur liabilities and costs and may have to redesign
or discontinue selling certain products.
Whether a product infringes a patent involves
complex legal and factual issues, the determination of which is
often uncertain. We face the risk of claims that we have infringed
on third parties’ intellectual property rights. Searching for
existing intellectual property rights may not reveal important
intellectual property and our competitors may also have filed for
patent protection, which is not yet a matter of public knowledge,
or claimed trademark rights that have not been revealed through our
availability searches. Our efforts to identify and avoid infringing
on third parties’ intellectual property rights may not always
be successful. Any claims of patent or other intellectual property
infringement, even those without merit,
could:
●
increase
the cost of our products;
●
be
expensive and time consuming to defend;
●
result
in us being required to pay significant damages to third
parties;
●
force
us to cease making or selling products that incorporate the
challenged intellectual property;
●
require
us to redesign, reengineer or rebrand our products;
●
require
us to enter into royalty or licensing agreements in order to obtain
the right to use a third party’s intellectual property, the
terms of which may not be acceptable to us;
●
require
us to indemnify third parties pursuant to contracts in which we
have agreed to provide indemnification to such parties for
intellectual property infringement claims;
●
divert
the attention of our management; and
●
result
in our customers or potential customers deferring or limiting their
purchase or use of the affected products until the litigation is
resolved.
In
addition, new patents obtained by our competitors could threaten a
product’s continued life in the market even after it has
already been introduced.
REGULATORY AND LEGAL RISK FACTORS
Failure to comply with federal, state and international laws
and regulations and our contractual obligations relating
to privacy, data protection and consumer protection, or
the expansion of current or the enactment of new laws
or regulations relating to privacy, data protection and
consumer protection, could adversely affect our business and
our financial condition.
We collect and
maintain significant amounts of personal data and other data
relating to our customers and employees. A variety of federal,
state and international laws and regulations, and certain
industry standards, govern or apply to our collection,
use, retention, sharing and security of consumer data. We are
subject to certain laws, regulations, contractual obligations
and industry standards (including, for example, the Payment
Card Industry Data Security Standard, or PCI-DSS)
relating to privacy, data protection, information security and
consumer protection, which are evolving and subject
to potentially differing interpretations. These requirements
may be interpreted and applied in a manner that
is inconsistent from one jurisdiction to another or may
conflict with other rules or our practices. As a result, our
practices may not comply or may not comply in the future with all
such laws, regulations, requirements and obligations.
Any failure, or perceived failure, by us to comply with
our privacy policies or with any federal, state
or international laws, regulations, industry
self-regulatory principles, industry standards or codes of
conduct, regulatory guidance, orders to which we may
be subject or other legal or contractual obligations relating
to privacy, data protection, information security
or consumer protection could adversely affect our
reputation, brand and business, and may result in claims,
proceedings or actions against us by governmental entities or
others or other liabilities or require us to change our
operations and/or cease or modify our use of certain data
sets. Any such claim, proceeding or action could hurt our
reputation, brand and business, force us to incur
significant expenses in defense of such proceedings, distract
our management, increase our costs of
doing business, result in a loss of customers and
suppliers or an inability to process credit card payments and
may result in the imposition of monetary penalties. We
may also be contractually required to indemnify and hold
harmless third parties from the costs or consequences of
non-compliance with any laws, regulations or other legal
obligations relating to privacy or consumer protection or
any inadvertent or unauthorized use or disclosure of data that
we store or handle as part of operating our
business.
Foreign laws and
regulations relating to privacy, data protection, information
security and consumer protection often are more restrictive
than those in the United States. The European Union, for
example, traditionally has imposed stricter obligations
under its laws and regulations relating to privacy, data
protection and consumer protection than the United States. In
May 2018 the European Union's new regulation governing data
practices and privacy called the General Data Protection
Regulation, or GDPR, became effective and substantially
replaced the data protection laws of the
individual European Union member states. The law
requires companies to meet more stringent
requirements regarding the handling of personal data of
individuals in the EU than were required under predecessor EU
requirements. In the United Kingdom, a Data Protection
Bill that substantially implements the GDPR also became law in
May 2018. The law also increases the penalties for
non-compliance, which may result in monetary penalties of up
to €20.0 million or 4% of a company's worldwide
turnover, whichever is higher. The GDPR and other similar
regulations require companies to give specific types of
notice and in some cases seek consent from consumers and other
data subjects before collecting or using their data
for certain purposes, including some marketing activities.
Outside of the European Union, many countries have
laws, regulations, or other requirements relating to
privacy, data protection, information security, and
consumer protection, and new countries are adopting such
legislation or other obligations with increasing frequency.
Many of these laws may require consent from consumers for
the use of data for various purposes, including
marketing, which may reduce our ability to market our
products. There is no harmonized approach to these laws and
regulations globally. Consequently, we increase
our risk of non-compliance with applicable foreign data
protection laws by operating internationally. We may need to
change and limit the way we use personal information in
operating our business and may have difficulty maintaining a
single operating model that is compliant. In addition,
various federal, state and foreign legislative and regulatory
bodies, or self-regulatory organizations, may expand current
laws or regulations, enact new laws or regulations or issue
revised rules or guidance regarding privacy, data
protection, information security and consumer protection. For
example, California recently adopted the California
Consumer Privacy Act of 2018 (“CCPA”), which provides new
data privacy rights for consumers and new
operational requirements for businesses. The CCPA includes a
statutory damages framework and private rights of
action against businesses that fail to comply
with certain CCPA terms or implement reasonable security
procedures and practices to prevent data breaches. The CCPA
went into effect in January 2020. The effects of the CCPA
potentially are significant, however, and may require us to
modify our data processing practices and policies and to incur
substantial costs and expenses in an effort to comply. As
a general matter, compliance with laws, regulations, and any
applicable rules or guidance from self-regulatory
organizations relating to privacy, data protection,
information security and consumer protection, may result
in substantial costs and may necessitate changes to
our business practices, which may compromise our growth
strategy, adversely affect our ability to acquire
customers, and otherwise adversely affect our
business, financial condition and operating
results.
We may have
additional tax assessments.
We are subject to income taxes in the United
States. Significant judgments are required in determining our
provisions for income taxes. In the course of preparing our tax
provisions and returns, we must make calculations where the
ultimate tax determination may be uncertain. Our tax returns are
subject to examination by the Internal Revenue Service
(“IRS”) and state tax authorities. There can be
no assurance as to the outcome of these examinations. If the
ultimate determination of taxes owed is for an amount in excess of
amounts previously accrued, our operating results, cash flows, and
financial condition could be adversely
affected.
We operate in foreign countries and are exposed to risks associated
with foreign political, economic and legal environments and with
foreign currency exchange rates.
We
have significant foreign operations. As a result, we are exposed to
risks, including among others, risks associated with foreign
political, economic and legal environments and with foreign
currency exchange rates. Our results may be adversely affected by,
among other things, changes in government policies with respect to
laws and regulations, anti-inflation measures, currency
conversions, collection of receivables abroad and rates and methods
of taxation.
GOVERNANCE RISKS AND RISKS RELATED TO OUR SECURITIES
Our Common Stock is subject to “penny stock”
rules.
Our
Common Stock is currently defined as a “penny stock”
under Rule 3a51-1 promulgated under the Exchange Act which are
subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose
additional sales practice requirements on broker-dealers that sell
penny stocks to persons other than established customers and
institutional accredited investors. Among other things, for
transactions covered by these rules, a broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction
prior to sale. Consequently, these rules may affect the ability of
broker-dealers to sell our Common Stock and affect the ability of
holders to sell their shares of our Common Stock in the secondary
market. To the extent our Common Stock is subject to the penny
stock regulations, the market liquidity for our shares will be
adversely affected.
Our stock price has been volatile, and your investment in our
Common Stock could suffer a decline in value.
There
has been significant volatility in the market price and trading
volume of equity securities, which is unrelated to the financial
performance of the companies issuing the securities. These broad
market fluctuations may negatively affect the market price of our
Common Stock. You may not be able to resell your shares at or above
the price you pay for those shares due to fluctuations in the
market price of our Common Stock caused by changes in our operating
performance or prospects and other factors.
Some
specific factors that may have a significant effect on our Common
Stock market price include:
●
actual
or anticipated fluctuations in our operating results or future
prospects;
●
our
announcements or our competitors’ announcements of new
products;
●
the
public’s reaction to our press releases, our other public
announcements and our filings with the SEC;
●
strategic
actions by us or our competitors, such as acquisitions or
restructurings;
●
new
laws or regulations or new interpretations of existing laws or
regulations applicable to our business;
●
changes
in accounting standards, policies, guidance, interpretations or
principles;
●
changes
in our growth rates or our competitors’ growth
rates;
●
developments
regarding our patents or proprietary rights or those of our
competitors;
●
our
inability to raise additional capital as needed;
●
substantial
sales of Common Stock underlying warrants and preferred
stock;
●
concern
as to the efficacy of our products;
●
changes
in financial markets or general economic conditions;
●
sales
of Common Stock by us or members of our management team;
and
●
changes
in stock market analyst recommendations or earnings estimates
regarding our Common Stock, other comparable companies or our
industry generally.
Our future sales of our Common Stock could adversely affect its
price and our future capital-raising activities could involve the
issuance of equity securities, which would dilute
shareholders’ investments and could result in a decline in
the trading price of our Common Stock.
We
may sell securities in the public or private equity markets if and
when conditions are favorable, even if we do not have an immediate
need for additional capital at that time. Sales of substantial
amounts of our Common Stock, or the perception that such sales
could occur, could adversely affect the prevailing market price of
our Common Stock and our ability to raise capital. We may issue
additional Common Stock in future financing transactions or as
incentive compensation for our executive management and other key
personnel, consultants and advisors. Issuing any equity securities
would be dilutive to the equity interests represented by our
then-outstanding shares of Common Stock. The market price for our
Common Stock could decrease as the market takes into account the
dilutive effect of any of these issuances. Furthermore, we may
enter into financing transactions at prices that represent a
substantial discount to the market price of our Common Stock. A
negative reaction by investors and securities analysts to any
discounted sale of our equity securities could result in a decline
in the trading price of our Common Stock.
The holders of our Preferred Stock (as defined below) have certain
rights and privileges that are senior to our Common Stock, and we
may issue additional shares of Preferred Stock without stockholder
approval that could have a material adverse effect on the market
value of the Common Stock.
Our Board of Directors has the authority to issue
a total of up to 5.0 million shares of preferred stock, par value
$0.01 per share (“Preferred
Stock”) and to fix the
rights, preferences, privileges, and restrictions, including voting
rights, of the Preferred Stock, which typically are senior to the
rights of the Common Stock, without any further vote or action by
the holders of our Common Stock. The rights of the holders of our
Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the Preferred Stock that have been
issued or might be issued in the future. Preferred Stock also could
have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. This could
delay, defer, or prevent a change in control. Furthermore, holders
of our Preferred Stock may have other rights, including economic
rights, senior to the Common Stock. As a result, their existence
and issuance could have a material adverse effect on the market
value of the Common Stock. We have in the past issued and may from
time to time in the future issue, Preferred Stock for financing or
other purposes with rights, preferences, or privileges senior to
the Common Stock. As of July 9, 2021, we had four series of
Preferred Stock outstanding, the Series A Preferred, Series A-1
Preferred, Series B Preferred, and Series D
Preferred.
The provisions of our Series A Preferred prohibit
the payment of dividends on our Common Stock unless the dividends
on our preferred shares are first paid. In addition, upon a
liquidation, dissolution or sale of our business, the holders of
our Series A Preferred will be entitled to receive, in preference
to any distribution to the holders of Common Stock, initial
distributions of $1,000 per share, plus all accrued but unpaid
dividends. As of March 31, 2021 and December 31, 2020, there
were 6,149 and 14,911 shares of
our Series A Preferred outstanding, respectively. As of March 31,
2021 and December 31, 2020, we had no cumulative undeclared dividends
on our Series A
Preferred.
The provisions of our Series A-1 Preferred
prohibit the payment of dividends on our Common Stock unless the
dividends on our preferred shares are first paid. In addition, upon
a liquidation, dissolution or sale of our business, the holders of
our Series A-1 Preferred will be entitled to receive, in preference
to any distribution to the holders of Common Stock, initial
distributions of $1,000 per share, plus all accrued but unpaid
dividends. As of March 31, 2021 And December 31, 2020, there
were 5,922 and 14,782 shares of
our Series A-1 Preferred outstanding, respectively. As of March 31,
2021 and December 31, 2020, 2020, we had no cumulative undeclared dividends
on our Series A-1
Preferred.
The provisions of
our Series B Preferred prohibit the payment of dividends on our
Common Stock unless the dividends on our preferred shares are first
paid. In addition, upon a liquidation, dissolution or sale of our
business, the holders of our Series B Preferred will be entitled to
receive, in preference to any distribution to the holders of Common
Stock, initial distributions of $2.50 per share, plus all accrued
but unpaid dividends. As of March 31,
2021 and December 31, 2020, there were 239,400 shares of
Series B Preferred outstanding. As of March 31, 2021 and December 31, 2020, we
had cumulative undeclared dividends on our Series B Preferred of
approximately $21,000 and $8,000,
respectively.
The provisions of our Series D Preferred prohibit
the payment of dividends on our Common Stock unless the dividends
on our preferred shares are first paid. In addition, upon a
liquidation, dissolution or sale of our business, the holders of
our Series D Preferred will be entitled to receive, in preference
to any distribution to the holders of Common Stock, initial
distributions of $1,000 per share, plus all accrued but unpaid
dividends. As of March 31, 2021
and December 31, 2020, there were 22,757 and 22,863 shares of
Series D Preferred outstanding, respectively. As of March 31, 2021
and December 31, 2020, we had no cumulative undeclared dividends on
our Series D Preferred.
The conversion of our Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock and Series D Preferred
Stock and the exercise of currently outstanding warrants could
result in significant dilution to the holders of our Common
Stock.
The holders of our
Series A Preferred Stock, Series A-1 Preferred Stock, Stock Series
B Preferred Stock and Series D Preferred Stock may elect to convert
their shares of Preferred Stock into shares of Common Stock. As of
March 31, 2021, we had outstanding: (i) 6,149 shares of Series A
Preferred Stock, which are convertible into 30,743,500 shares of
Common Stock; (ii) 5,922 shares of Series A-1 Preferred Stock,
which are convertible into 29,610,000 shares of Common Stock; (iii)
239,400 shares of Series B Preferred Stock, which are convertible
into 46,980 shares of Common Stock; and (iv) 22,757 shares of
Series D Preferred Stock, which are convertible into 390,348,199
shares of Common Stock. In addition to our outstanding shares of
Preferred Stock, as of March 31, 2021, there were outstanding
warrants to purchase 393,589 shares of our Common
Stock.
The conversion of
our Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock and Series D Preferred Stock, as well as the
exercise of our outstanding warrants could result in significant
dilution to existing common shareholders, adversely affect the
market price of our Common Stock and impair our ability to raise
capital through the sale of additional equity
securities.
Upon the occurrence of certain events, we may be required to redeem
all or a portion of our Preferred Stock.
Holders of certain of our Preferred Stock may
require us to redeem all or any portion of such Holder’s
shares Preferred Stock within
specific date from issuance or in the event of the consummation of
a Change of Control (as such term is defined in the Certificate of
Designations, Preferences and Rights of each class of Preferred
Stock). We cannot assure
you that we will maintain sufficient cash reserves or that our
business will generate cash flow from operations at levels
sufficient to permit us to redeem our shares of Preferred Stock if
and when required to do so. In the event we have insufficient cash
available or do not have access to additional third-party
financings on commercially reasonable terms or at all to complete
such redemption, our business, results of operations, and financial
condition may be materially adversely affected.
Certain large shareholders may have certain personal interests that
may affect the Company.
As a result of the
securities issued to Nantahala Capital Management, LLC
(“Nantahala
Capital Management”), and the
related entities controlled by Nantahala Capital Management, (i)
Blackwell Partners LLC - Series A, (ii) Nantahala Capital Partners
Limited Partnership, (iii) Nantahala Capital Partners II Limited
Partnership, (iv) Nantahala Capital Partners SI, LP, (v) NCP QR
Limited Partnership, and (vi) Silver Creek CS SAV, L.L.C.
(collectively, "Nantahala"),
Nantahala beneficially owns, in
the aggregate, approximately 36.7% of the Company’s outstanding voting
securities as of July 9, 2021. As a result, Nantahala
has the potential ability to exert influence over the outcome of
issues requiring approval by the Company’s
shareholders. This concentration of ownership may have effects
such as delaying or preventing a change in control of the Company
that may be favored by other shareholders or preventing
transactions in which shareholders might otherwise recover a
premium for their shares over current market
prices.
Our corporate documents and Delaware law contain provisions that
could discourage, delay or prevent a change in control of the
Company.
Provisions
in our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition involving us that our
stockholders may consider favorable. For example, our certificate
of incorporation authorizes Preferred Stock, which carries special
rights, including voting and dividend rights. With these rights,
holders of Preferred Stock could make it more difficult for a third
party to acquire us.
Our Amended Charter designates courts within the State of Delaware
as the sole and exclusive forum for certain types of actions and
proceedings that may be initiated by our stockholders, and the
federal district courts for the United States of America for claims
brought under the Securities Act of 1933, as amended, which could
limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers,
employees or agents.
Our Amended and
Restated Certificate of Incorporation (the “Amended Charter”) require that,
to the fullest extent permitted by law, and unless the Company
consents in writing to the selection of an alternative forum, a
state court located within the State of Delaware (or, if no state
court located within the State of Delaware has jurisdiction, the
federal district court for the District of Delaware), will, to the
fullest extent permitted by law, be the sole and exclusive forum
for each of the following:
●
any derivative
action or proceeding brought on behalf of the Company;
●
any action
asserting a claim of breach of a fiduciary duty owed by any
director or officer or other employee of the Company to the Company
or the Company’s stockholders;
●
any action
asserting a claim against the Company or any director or officer or
other employee of the Company arising pursuant to any provision of
the Delaware General Corporation Law or the Company’s Amended
Charter, or the Amended and Restated Bylaws; or
●
any action
asserting a claim against the Company or any director or officer or
other employee of the Company governed by the internal affairs
doctrine.
Furthermore, the
Amended Charter sets forth that the federal district courts of the
United States of America are the exclusive forum for the resolution
of any causes of action arising under the Securities Act of 1933,
as amended (the “Securities
Act”).
Because the
applicability of the exclusive forum provision is limited to the
extent permitted by law, we believe that the exclusive forum
provision would not apply to suits brought to enforce any duty or
liability created by the Securities Exchange Act of 1934, as
amended (“Exchange
Act”), or any other claim for which the federal courts
have exclusive jurisdiction. We note that there is uncertainty as
to whether a court would enforce the provision and that investors
cannot waive compliance with the federal securities laws and the
rules and regulations thereunder. Although we believe this
provision benefits us by providing increased consistency in the
application of Delaware law and federal law under the Securities
Act in the types of lawsuits to which they apply, the provisions
may have the effect of discouraging lawsuits against our directors
and officers.
We do not expect to pay cash dividends on our Common Stock for the
foreseeable future.
We
have never paid cash dividends on our Common Stock and do not
anticipate that any cash dividends will be paid on the Common Stock
for the foreseeable future. The payment of any cash dividend by us
will be at the discretion of our Board of Directors and will depend
on, among other things, our earnings, capital, regulatory
requirements and financial condition. Furthermore, the terms of our
Series A Preferred, Series A-1 Preferred, Series B Preferred and
Series D Preferred directly limit our ability to pay cash dividends
on our Common Stock.
GENERAL RISK FACTORS
Our business is subject to risks arising from epidemic diseases,
such as the recent global outbreak of
the COVID-19 coronavirus.
The
recent outbreak of the novel coronavirus, COVID-19, which has
been declared by the World Health Organization to be a pandemic,
has spread across the globe and is impacting worldwide economic
activity. A pandemic, including COVID-19 or other public
health epidemics, pose the risk that we or our employees,
contractors, suppliers, and other partners may be prevented from
conducting business activities for an indefinite period of time,
including shutdowns that may be requested or mandated by
governmental authorities. While it is not possible at this time to
estimate the impact that COVID-19 could have on our
business, the COVID-19 pandemic and mitigation measures
have had and may continue to have an adverse impact on global
economic conditions which could have an adverse effect on our
business and financial condition, including impairing our ability
to raise capital when needed.
COVID-19
has prevented employees from returning to physical offices. In many
cases, our potential customers in the government or commercial
enterprise-side like to test our software in their labs with their
systems and hardware. Potential customers have been unable to do
this and that has caused purchase decisions to be delayed as these
employees who would be testing are now working from their homes and
can’t simulate test environments. COVID-19 has further
led to a distributed work environment. Decision makers are now
working from their homes, from all different parts of a state or
country. Some have weak or no Internet connections, making it
harder to review paperwork to decide on a large financial purchase.
Some decision makers want to have more conversations with more
people, and mull over decisions longer, versus in the past, when an
individual could walk into a decision makers office and garner more
rapid approval. Some countries have limits on how many people are
permitted to gather in one meeting or have been hit particularly
hard with many residents suffering and dying from the COVID-19
virus. There is a new paradigm emerging in making critical
decisions from a video conference calls versus in
person.
An
economic recession had set in from the pandemic in 2020. Some
companies are not receiving payments and in turn are not making
payments to us, causing impairments in our ability to pay
others. COVID-19 has led to some of our customers and
potential customers being stricken with the virus causing them to
not be able to work for many weeks and therefore causing delays for
us in our projects or decisions. Technology partners have
slowed down and/or laid off employees, impacting us downstream
because decisions makers have been furloughed or the work has been
passed to new employees who need to come up to speed on a
particular project. The closing/downsizing of our offices due
to COVID-19 has further caused employees to work from home on
unsecured personal Wifi networks, and as such, working from home
may cause security breaches such as malware, ransomware, and
Phishing attempts. These attempts in some cases have knocked out
their ability to have a connection and be able to work until their
IT department resolves their issues.
This
outbreak could decrease spending, adversely affect demand for the
Company’s products, and harm the Company’s business and
results of operations. It is not possible for the Company to
predict the duration or magnitude of the adverse results of the
outbreak and its effects on the Company’s business or results
of operations, financial condition, or liquidity, at this
time.
We depend
on key personnel, the loss of any of whom could materially
adversely affect future operations.
Our
success will depend to a significant extent upon the efforts and
abilities of our executive officers and other key personnel. The
loss of the services of one or more of these key employees and any
negative market or industry perception arising from the loss of
such services could have a material adverse effect on us and the
trading price of our Common Stock. Our business will also be
dependent upon our ability to attract and retain qualified
personnel. Acquiring and keeping these personnel could prove more
difficult or cost substantially more than estimated and we cannot
be certain that we will be able to retain such personnel or attract
a high caliber of personnel in the future.
RISKS RELATED TO THIS OFFERING
The sale or issuance of our Common Stock to Lincoln Park may cause
dilution and the sale of the shares of Common Stock acquired by
Lincoln Park, or the perception that such sales may occur, could
cause the price of our Common Stock to fall.
On May 17, 2021, we entered into the Purchase
Agreement with Lincoln Park pursuant to which Lincoln Park has
committed to purchase up to $15,100,000 of our Common Stock. Upon the
execution of the Purchase Agreement, we issued 1.0 million Commitment Shares to Lincoln
Park as a fee for its commitment to enter into the Purchase
Agreement and purchase shares of our Common Stock thereunder. The
remaining shares of our Common Stock that may be issued under the
Purchase Agreement may be sold by us to Lincoln Park, at our sole
discretion, from time to time over a 24-month period commencing
after the satisfaction of certain conditions set forth in the
Purchase Agreement, including that the SEC has declared effective
the registration statement that includes this prospectus. The
purchase price for the shares that we may sell to Lincoln Park
under the Purchase Agreement will fluctuate based on the prevailing
price of our Common Stock on the date(s) of purchase. Depending on
market liquidity at the time, sales of such shares may cause the
trading price of our Common Stock to fall.
We
generally have the right to control the timing and amount of any
future sales of our shares to Lincoln Park. Additional sales of our
Common Stock, if any, to Lincoln Park will depend upon market
conditions and other factors to be determined solely by us. We may
ultimately decide to sell to Lincoln Park all, some or none of the
$15.1 million in shares of our
Common Stock that may be available for us to sell pursuant to the
Purchase Agreement. If and when we do sell any additional shares to
Lincoln Park, after Lincoln Park has acquired the shares, Lincoln
Park may resell all, some or none of those shares at any time or
from time to time in its discretion. Therefore, sales to Lincoln
Park by us could result in substantial dilution to the interests of
other holders of our Common Stock. Additionally, the sale of a
substantial number of shares of our Common Stock to Lincoln Park,
or the anticipation of such sales, could make it more difficult for
us to sell equity or equity-related securities in the future at a
time and at a price that we might otherwise wish to effect
sales.
We will require additional financing to sustain our operations and
without it we may not be able to continue operations.
We may
direct Lincoln Park to purchase up to $15,100,000 worth of shares of our Common
Stock under our agreement over a 24-month period generally in
amounts up to 250,000 shares of
our Common Stock, which share amount may be increased to include
additional shares of our Common Stock depending on the market price
of our Common Stock at the time of sale, and subject to a maximum
limit of $500,000 per purchase, on any such business day; however,
the Company and Lincoln Park may mutually agree to increase the
number of Regular Purchase Shares for any Regular Purchase to up to
2.0 million Purchase Shares. In addition to the 1.0 million Commitment Shares and the
1.0 million Initial Purchase
Shares, an additional 15,100,000 shares of our Common Stock are
being offered under this prospectus that may be sold by us to
Lincoln Park, at our discretion, from time to time over a 24-month
period commencing after the Commencement Date. Depending on the
price per share at which we sell our Common Stock to Lincoln Park
pursuant to the Purchase Agreement, we may need to sell to Lincoln
Park more shares of our Common Stock than are offered under this
prospectus in order to receive aggregate gross proceeds equal to
$15,100,000. The number of
shares ultimately offered for resale by Lincoln Park is dependent
upon the number of shares we sell to Lincoln Park under the
Purchase Agreement.
The extent we rely
on Lincoln Park as a source of funding will depend on a number of
factors including the prevailing market price of our Common Stock
and the extent to which we are able to secure working capital from
other sources. If obtaining sufficient funding from Lincoln Park
were to prove unavailable or prohibitively dilutive, we will need
to secure another source of funding in order to satisfy our working
capital needs. Even if we sell all $15,100,000 under the Purchase Agreement to
Lincoln Park, we may still need additional capital to fully
implement our business, operating and development plans. Should the
financing we require to sustain our working capital needs be
unavailable or prohibitively expensive when we require it, the
consequences could be a material adverse effect on our business,
operating results, financial condition and prospects.
Future sales and issuances of our Common Stock or other securities
may result in significant dilution and could cause the price of our
Common Stock to decline.
To raise capital,
we may sell Common Stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we
determine from time to time, including pursuant to the Purchase
Agreement with Lincoln Park. These sales, or the perception in the
market that the holders of a large number of shares intend to sell
shares, could reduce the market price of our Common Stock. These
sales may also result in material dilution to our existing
stockholders, and new investors could gain rights superior to our
existing stockholders.
In addition, sales
of a substantial number of shares of our outstanding Common Stock
in the public market could occur at any time. Certain of our
stockholders, including Lincoln Park, hold a substantial number of
our Common Stock that many of them are now able to sell in the
public market. Sales of stock by these stockholders could have a
material adverse effect on the trading price of our Common
Stock.
We cannot predict
what effect, if any, sales of our shares in the public market or
the availability of shares for sale will have on the market price
of our Common Stock. However, future sales of substantial amounts
of our Common Stock in the public market, including shares issued
upon exercise of outstanding warrants or options, or the perception
that such sales may occur, could adversely affect the market price
of our Common Stock.
Our management will have broad discretion over the use of the net
proceeds from our sale of shares of Common Stock to Lincoln Park,
you may not agree with how we use the proceeds and the proceeds may
not be invested successfully.
Our management will
have broad discretion as to the use of the net proceeds from our
sale of shares of Common Stock to Lincoln Park, and we could use
them for purposes other than those contemplated at the time of
commencement of this offering. Accordingly, you will be relying on
the judgment of our management with regard to the use of those net
proceeds, and you will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being used
effectively. It is possible that, pending their use, we may invest
those net proceeds in a way that does not yield a favorable, or
any, return for us. The failure of our management to use such funds
effectively could have a material adverse effect on our business,
financial condition, operating results and cash flows.
General
On May 17, 2021 (the “Execution Date”), we entered into
a Purchase Agreement and a Registration Rights Agreement, with
Lincoln Park. Pursuant to the terms of the Purchase Agreement,
Lincoln Park has agreed to purchase from us up to $15,100,000 of our Common Stock from time to
time during the term of the Purchase Agreement, subject to certain
limitations.
Other than the
Initial Purchase Shares, which we sold to Lincoln Park on the
Execution Date, we do not have the right to commence any sales to
Lincoln Park under the Purchase Agreement until the Commencement
Date (defined below) has occurred. Thereafter, we may, from time to
time, and at our sole discretion, on any single business day,
direct Lincoln Park to purchase shares of our Common Stock in
amounts up to 250,000 shares,
which amounts may be increased depending on the market price of our
Common Stock at the time of sale and subject to a maximum
commitment by Lincoln Park of $500,000 per Regular Purchase; however, the Company and Lincoln Park may
mutually agree to increase the Regular Purchase share amount to up
to Two Million (2,000,000) Purchase Shares. In addition, at
our discretion, Lincoln Park has committed to purchase other
amounts under an Accelerated Purchase (as defined below) under
certain circumstances. The purchase price per share sold will be
based on the market price of our Common Stock immediately preceding
the time of sale as computed under the Purchase Agreement. Lincoln
Park may not assign or transfer its rights and obligations under
the Purchase Agreement.
Pursuant to the
terms of the Purchase Agreement, in no event may we issue or sell
to Lincoln Park under the shares of our Common Stock under the
Purchase Agreement which, when aggregated with all other
shares of Common Stock then beneficially owned by Lincoln Park and
its affiliates (as calculated pursuant to Section 13(d) of the
Exchange Act and Rule 13d-3 promulgated thereunder), would result
in the beneficial ownership by Lincoln Park and its
affiliates of more than 4.99% of the then issued and
outstanding shares of Common Stock.
Pursuant to the
Registration Rights Agreement, the Company is required to register
the shares of Common Stock that have been and may be issued to
Lincoln Park under the Purchase Agreement. We have filed the
registration statement with the SEC that includes this prospectus
to register for resale under the Securities Act, up to 17,100,000 shares of Common Stock,
representing 4.99% of our
issued and outstanding shares of Common Stock on July 9, 2021, and after giving effect to the
conversion of Series A Preferred and Series A-1 Preferred, which
will fully convert into Common Stock by August 1,
2021.
Purchase
of Shares Under the Purchase Agreement
Under the terms and
subject to the conditions of the Purchase Agreement, the Company
has the right, but not the obligation, to sell to Lincoln Park, and
Lincoln Park is obligated to purchase up to $15,100,000 of shares of Common Stock,
including the Initial Purchase Shares purchased by Lincoln Park on
the Execution Date. Such sales of Common Stock by the Company, if
any, will be subject to certain limitations, and may occur from
time to time, at the Company’s sole discretion, over the
24-month period commencing on the Commencement Date when the
registration statement covering the resale of shares of Common
Stock that have been and may be issued under the Purchase
Agreement, which the Company agreed to file with the SEC pursuant
to the Registration Rights Agreement, is declared effective by the
SEC and a final prospectus in connection therewith is filed and the
other conditions set forth in the Purchase Agreement are satisfied,
all of which are outside the control of Lincoln Park.
Under the Purchase
Agreement, on any business day over the term of the Purchase
Agreement, the Company has the right, in its sole discretion, to
present Lincoln Park with a purchase notice (each, a "Purchase Notice") directing Lincoln
Park to complete a Regular Purchase of up to 250,000 shares of Common Stock per business
day, which increases to up to 500,000 shares in the event the price of
the Company’s Common Stock is not below $0.50 per share (subject to adjustment for
any reorganization, recapitalization, non-cash dividend, stock
split, reverse stock split or other similar transaction as provided
in the Purchase Agreement). In each
case, Lincoln Park’s maximum commitment in any single Regular
Purchase may not exceed $500,000; however, the Company and Lincoln
Park may mutually agree to increase the Regular Purchase share
amount to up to Two Million (2,000,000) Purchase Shares. The
Purchase Agreement provides for a purchase price per Purchase Share
(the "Purchase Price")
equal to the lesser of:
●
the
lowest sale price of the Company's Common Stock on the purchase
date; and
●
the
average of the three lowest closing sale prices for the Company's
Common Stock during the fifteen consecutive business days ending on
the business day immediately preceding the purchase date of such
shares.
In addition, on any
date on which the Company submits a Purchase Notice to Lincoln
Park, the Company also has the right, in its sole discretion, to
present Lincoln with an accelerated purchase notice (each, an
"Accelerated Purchase
Notice") directing Lincoln Park to purchase an amount of
stock (the "Accelerated
Purchase") equal to up to the lesser of (i) three times the
number of shares of Common Stock purchased pursuant to such Regular
Purchase; and (ii) 30% of the aggregate shares of the Company's
Common Stock traded during all or, if certain trading volume or
market price thresholds specified in the Purchase Agreement are
crossed on the applicable Accelerated Purchase Date, the portion of
the normal trading hours on the applicable Accelerated Purchase
Date prior to such time that any one of such thresholds is crossed
(such period of time on the applicable Accelerated Purchase Date,
the "Accelerated Purchase
Measurement Period"), provided that Lincoln Park will not be
required to buy shares of Common Stock pursuant to an Accelerated
Purchase Notice that was received by Lincoln Park on any business
day on which the last closing trade price of the Company's Common
Stock on the OTC Markets (or alternative national exchange in
accordance with the Purchase Agreement) is below $0.25 per share.
The purchase price per share of Common Stock for each such
Accelerated Purchase will be equal to 95% of the lesser
of:
●
the
volume weighted average price of the Company's Common Stock during
the applicable Accelerated Purchase Measurement Period on the
applicable Accelerated Purchase Date; and
●
the
closing sale price of the Company's Common Stock on the applicable
Accelerated Purchase Date.
The Company may
also direct Lincoln Park on any business day on which an
Accelerated Purchase has been completed and all of the shares to be
purchased thereunder have been properly delivered to Lincoln Park
in accordance with the Purchase Agreement, to purchase an amount of
stock (the "Additional Accelerated
Purchase") equal to up to the lesser of (i) three times the
number of shares purchased pursuant to such Regular Purchase; and
(ii) 30% of the aggregate number of shares of the Company's Common
Stock traded during a certain portion of the normal trading hours
on the applicable Additional Accelerated Purchase date as
determined in accordance with the Purchase Agreement (such period
of time on the applicable Additional Accelerated Purchase date, the
"Additional Accelerated Purchase
Measurement Period"), provided that the closing price of the
Company's Common Stock on the business day immediately preceding
such business day is not below $0.50 (subject to adjustment for any
reorganization, recapitalization, non-cash dividend, stock split,
reverse stock split or other similar transaction as provided in the
Purchase Agreement). Additional Accelerated Purchases will be equal
to 95% of the lower of:
●
the
volume weighted average price of the Company's Common Stock during
the applicable Additional Accelerated Purchase Measurement Period
on the applicable Additional Accelerated Purchase date;
and
●
the
closing sale price of the Company's Common Stock on the applicable
Additional Accelerated Purchase date.
In the case of the
regular purchases and accelerated purchases, the purchase price per
share will be equitably adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, reverse stock
split or other similar transaction occurring during the business
days used to compute the purchase price.
Other than as
described above, there are no trading volume requirements or
restrictions under the Purchase Agreement, and we will control the
timing and amount of any sales of our Common Stock to Lincoln
Park.
Events
of Default
Events of default
under the Purchase Agreement include the following:
●
the
effectiveness of a registration statement registering the resale of
the Securities lapses for any reason (including, without
limitation, the issuance of a stop order or similar order) or such
registration statement (or the prospectus forming a part thereof)
is unavailable to Lincoln Park for resale of any or all of the
Securities to be issued to Lincoln Park under the Transaction
Documents, and such lapse or unavailability continues for a period
of ten (10) consecutive Business Days or for more than an aggregate
of thirty (30) Business Days in any 365-day period, but excluding a
lapse or unavailability where (i) the Company terminates a
registration statement after Lincoln Park has confirmed in writing
that all of the Securities covered thereby have been resold or (ii)
the Company supersedes one registration statement with another
registration statement, including (without limitation) by
terminating a prior registration statement when it is effectively
replaced with a new registration statement covering Securities
(provided in the case of this clause (ii) that all of the
Securities covered by the superseded (or terminated) registration
statement that have not theretofore been resold are included in the
superseding (or new) registration statement);
●
the
suspension of the Common Stock from trading on the Principal Market
for a period of one (1) Business Day, provided that the Company may
not direct Lincoln Park to purchase any shares of Common Stock
during any such suspension;
●
the
delisting of the Common Stock from the OTCQB, provided, however,
that the Common Stock is not immediately thereafter trading on The
Nasdaq Capital Market, the New York Stock Exchange, The Nasdaq
Global Market, The Nasdaq Global Select Market, the NYSE American,
the NYSE Arca, the OTC Bulletin Board, the OTCQX operated by the
OTC Markets Group, Inc. (or nationally recognized successor to any
of the foregoing);
●
the
failure for any reason by the Transfer Agent to issue Purchase
Shares to Lincoln Park within three (3) Business Days after the
applicable Purchase Date, Accelerated Purchase Date or Additional
Accelerated Purchase Date (as applicable) on which Lincoln Park is
entitled to receive such Purchase Shares;
●
the
Company breaches any representation, warranty, covenant or other
term or condition under any Transaction Document if such breach has
or could have a Material Adverse Effect and except, in the case of
a breach of a covenant which is reasonably curable, only if such
breach continues for a period of at least five (5) Business
Days;
●
if any
Person commences a proceeding against the Company pursuant to or
within the meaning of any Bankruptcy Law;
●
if,
pursuant to or within the meaning of any Bankruptcy Law, the
Company (i) commences a voluntary case, (ii) consents to the entry
of an order for relief against it in an involuntary case, (iii)
consents to the appointment of a Custodian of it or for all or
substantially all of its property, or (iv) makes a general
assignment for the benefit of its creditors or is generally unable
to pay its debts as the same become due;
●
a court
of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (i) is for relief against the Company in an
involuntary case, (ii) appoints a Custodian of the Company or for
all or substantially all of its property, or (iii) orders the
liquidation of the Company or any Subsidiary or;
●
if at
any time the Company is not eligible to transfer its Common Stock
electronically as DWAC Shares.
Lincoln Park does
not have the right to terminate the Purchase Agreement upon any of
the events of default set forth above. During an event of default,
all of which are outside of Lincoln Park’s control, we may
not direct Lincoln Park to purchase any shares of our Common Stock
under the Purchase Agreement.
Termination
Rights of the Company
We have the
unconditional right, at any time, for any reason and without any
payment or liability to Lincoln Park, to give notice to Lincoln
Park to terminate the Purchase Agreement.
No
Short-Selling or Hedging by Lincoln Park
Lincoln Park has
agreed that neither it nor any of its affiliates shall engage in
any direct or indirect short-selling or hedging of our Common Stock
during any time prior to the termination of the Purchase
Agreement.
Prohibitions
on Variable Rate Transactions
There are no
restrictions on future financings, rights of first refusal,
participation rights, penalties or liquidated damages in the
Purchase Agreement or Registration Rights Agreement, other than a
prohibition on entering into a “Variable Rate
Transaction,” as defined in the Purchase
Agreement.
Lincoln
Park 2020 Financing
On
April 28, 2020, the Company entered into a Securities Purchase
Agreement, as amended on June 11, 2020 (the “2020 Lincoln Purchase Agreement”),
with Lincoln Park pursuant to which Lincoln Park committed to
purchase up to $10,250,000 of our Common Stock. The Company issued
2,500,000 shares of Common Stock to Lincoln Park in consideration
for entering into the 2020 Lincoln Purchase Agreement, and sold an
aggregate of 5,700,000 shares of Common Stock to Lincoln Park under
the terms thereof, resulting in gross proceeds to the Company of
approximately $918,000. The 2020 Lincoln Purchase Agreement was
terminated by the Company and Lincoln Park prior to entering into
the Purchase Agreement and as such does not affect the Purchase
Agreement.
Effect
of Performance of the Purchase Agreement on Our
Stockholders
All 17,100,000 shares registered in this
offering which have been and may be issued or sold by us to Lincoln
Park under the Purchase Agreement are expected to be freely
tradable. It is anticipated that shares registered in this offering
may be sold over a period of up to 24-months commencing on the date
that the registration statement including this prospectus becomes
effective. The sale by Lincoln Park of a significant number of
shares registered in this offering at any given time could cause
the market price of our Common Stock to decline and to be highly
volatile. Sales of our Common Stock to Lincoln Park, if any, will
depend upon market conditions and other factors to be determined by
us. We may ultimately decide to sell to Lincoln Park all, some or
none of the additional shares of our Common Stock that may be
available for us to sell pursuant to the Purchase Agreement. If and
when we do sell shares to Lincoln Park, after Lincoln Park has
acquired the shares, Lincoln Park may resell all, some or none of
those shares at any time or from time to time in its discretion.
Therefore, sales to Lincoln Park by us under the Purchase Agreement
may result in substantial dilution to the interests of other
holders of our Common Stock. In addition, if we sell a substantial
number of shares to Lincoln Park under the Purchase Agreement, or
if investors expect that we will do so, the actual sales of shares
or the mere existence of our arrangement with Lincoln Park may make
it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might
otherwise wish to effect such sales. However, we have the right to
control the timing and amount of any additional sales of our shares
to Lincoln Park and the Purchase Agreement may be terminated by us
at any time at our discretion without any cost to us.
The Purchase
Agreement prohibits us from issuing or selling to Lincoln Park
under the Purchase Agreement any shares of our Common Stock if
those shares, when aggregated with all other shares of our Common
Stock then beneficially owned by Lincoln Park and its affiliates,
would exceed the Beneficial Ownership Limitation.
The following table
sets forth the amount of gross proceeds we would receive from
Lincoln Park from our sale of shares to Lincoln Park under the
Purchase Agreement at varying purchase prices:
Assumed
Average Purchase Price Per Share
|
Number
of Registered Shares to be Issued if Full Purchase (1)
|
Percentage
of Outstanding Shares After Giving Effect to the Issuance to
Lincoln Park (2)
|
Proceeds
from the Sale of Shares to Lincoln Park Under the $15.1M Purchase
Agreement (3)
|
|
$0.10
|
15,100,000
|
4.6%
|
$1,510,000
|
|
$0.25
|
15,100,000
|
4.6%
|
$3,775,000
|
|
$0.50
|
15,100,000
|
4.6%
|
$7,550,000
|
|
$1.00
|
15,100,000
|
4.6%
|
$15,100,000
|
|
$1.50
|
15,100,000
|
4.6%
|
$22,650,000
|
|
$2.00
|
15,100,000
|
4.6%
|
$30,200,000
|
(1)
Includes
the total number of purchase shares which we would have sold under
the Purchase Agreement at the corresponding assumed purchase price
per share set forth in the adjacent column, which does not include
the 1.0 million Commitment
Shares, previously issued to Lincoln Park, nor the 1.0 million Initial Purchase Shares
previously sold to Lincoln Park. Although the Purchase Agreement
provides that we may sell up to $15,100,000 of our Common Stock to Lincoln
Park, we are only registering 17,100,000 shares (including the
1.0 million Commitment Shares
and the 1.0 million Initial
Purchase Shares previously issued to Lincoln Park) under this
prospectus, which may or may not cover all the shares we ultimately
sell to Lincoln Park under the Purchase Agreement, depending on the
purchase price per share. As a result, we have included in this
column only those shares that we are registering in this
offering.
(2)
The
denominator is
based on 331,392,419 shares outstanding as of July 9, 2021, which includes (i)
1.0 million Commitment Shares
and 1.0 million Initial
Purchase Shares issued to Lincoln Park following the execution of
the Purchase Agreement, and (ii) the number of shares set forth in
the adjacent column which we would have sold to Lincoln Park,
assuming the purchase price in the adjacent column. The numerator
is based on the number of shares issuable under the Purchase
Agreement at the corresponding assumed purchase price set forth in
the adjacent column.
(3)
Does
not include $100,000 in proceeds from sale of 1.0 million Initial Purchase
Shares.
This prospectus
relates to only the resale by the selling stockholder, Lincoln
Park, of shares of Common Stock that have been or may be issued and
sold to Lincoln Park pursuant to the Purchase Agreement. We are
filing the registration statement of which this prospectus forms a
part pursuant to the provisions of the Registration Rights
Agreement, which we entered into with Lincoln Park on May 17, 2021 concurrently with our
execution of the Purchase Agreement, in which we agreed to provide
certain registration rights with respect to sales by Lincoln Park
of the shares of our Common Stock that have been and may be issued
to Lincoln Park under the Purchase Agreement.
Lincoln Park, as
the selling stockholder, may, from time to time, offer and sell
pursuant to this prospectus any or all of the shares that we have
sold and may sell to Lincoln Park under the Purchase Agreement. The
selling stockholder may sell some, all or none of its shares. We do
not know how long the selling stockholder will hold the shares
before selling them, and we currently have no agreements,
arrangements or understandings with the selling stockholder
regarding the sale of any of the shares.
The following table
presents information regarding the selling stockholder and the
shares that it may offer and sell from time to time under this
prospectus. The table is prepared based on information supplied to
us by the selling stockholder, and reflects its holdings as of
July 9, 2021. Neither Lincoln
Park nor any of its affiliates has held a position or office, or
had any other material relationship, with us or any of our
predecessors or affiliates. Beneficial ownership is determined in
accordance with Section 13(d) of the Exchange Act and Rule 13d-3
thereunder.
|
Selling
Stockholder
|
Shares
Beneficially Owned Before this Offering
|
Percentage
of Outstanding Shares Beneficially Owned Before this
Offering
|
Shares to be Sold in this Offering Assuming
the Company issues the
Maximum Number of Shares Under the Purchase Agreement
|
Percentage
of Outstanding Shares Beneficially Owned After this
Offering
|
|
Lincoln Park Capital Fund, LLC
(1)
|
3,156,500(2)
|
1.0%(3)
|
15,100,000(4)
|
5.3%
|
(1)
Josh
Scheinfeld and Jonathan Cope, the Managing Members of Lincoln Park
Capital, LLC, are deemed to be beneficial owners of all of the
shares of Common Stock owned by Lincoln Park Capital Fund, LLC.
Messrs. Cope and Scheinfeld have shared voting and investment power
over the shares being offered under the prospectus filed with the
SEC in connection with the transactions contemplated under the
Purchase Agreement. Lincoln Park Capital, LLC is not a licensed
broker dealer or an affiliate of a licensed broker
dealer.
(2)
Includes
(i) 1.0 million shares sold to
Lincoln Park as Initial Purchase Shares under the Purchase
Agreement; and (ii) 1.0 million
shares issued to Lincoln Park as Commitment Shares which are being
registered under the registration statement of which this
prospectus is a part. See the description under the heading
The Lincoln Park
Transaction below for more information about the Purchase
Agreement.
(3)
Based
on 331,392,419 shares
of our Common Stock outstanding as of
July 9, 2021.
(4)
Although
the Purchase Agreement provides that we may sell up to
$15,100,000 of our Common Stock
to Lincoln Park, in addition to the 1.0 million Commitment Shares and
the 1.0 million Initial
Purchase Shares, an additional 15,100,000 shares of our Common Stock are
being offered under this prospectus that may be sold by us to
Lincoln Park, at our discretion, from time to time over a 24-month
period commencing after the Commencement Date. Depending on the
price per share at which we sell our Common Stock to Lincoln Park
pursuant to the Purchase Agreement, we may need to sell to Lincoln
Park under the Purchase Agreement more shares of our Common Stock
than are offered under this prospectus in order to receive
aggregate gross proceeds equal to the $15,100,000 total commitment available to us
under the Purchase Agreement. If we choose to do so, we must first
register for resale under the Securities Act such additional
shares. The number of shares ultimately offered for resale by
Lincoln Park is dependent upon the number of shares we sell to
Lincoln Park under the Purchase Agreement. See “The Lincoln Park
Transaction.”
The Common Stock
offered by this prospectus is being offered by the selling
stockholder, Lincoln Park. The Common Stock may be sold or
distributed from time to time by the selling stockholder directly
to one or more purchasers or through brokers, dealers, or
underwriters who may act solely as agents at market prices
prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or at fixed prices, which may
be changed. The sale of the Common Stock offered by this prospectus
could be affected in one or more of the following
methods:
●
ordinary
brokers’ transactions;
●
transactions
involving cross or block trades;
●
through
brokers, dealers, or underwriters who may act solely as
agents;
●
“at
the market” into an existing market for the Common
Stock;
●
in
other ways not involving market makers or established business
markets, including direct sales to purchasers or sales effected
through agents;
●
in
privately negotiated transactions; or
●
any
combination of the foregoing.
In order to comply
with the securities laws of certain states, if applicable, the
shares may be sold only through registered or licensed brokers or
dealers. In addition, in certain states, the shares may not be sold
unless they have been registered or qualified for sale in the state
or an exemption from the state’s registration or
qualification requirement is available and complied
with.
Lincoln Park is an
“underwriter” within the meaning of Section 2(a)(11) of
the Securities Act.
Lincoln Park has
informed us that it intends to use an unaffiliated broker-dealer to
effectuate all sales, if any, of the Common Stock that it may
purchase from us pursuant to the Purchase Agreement. Such sales
will be made at prices and at terms then prevailing or at prices
related to the then current market price. Each such unaffiliated
broker-dealer will be an underwriter within the meaning of Section
2(a)(11) of the Securities Act. Lincoln Park has informed us that
each such broker-dealer will receive commissions from Lincoln Park
that will not exceed customary brokerage commissions.
Brokers, dealers,
underwriters or agents participating in the distribution of the
shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling stockholder
and/or purchasers of the Common Stock for whom the broker-dealers
may act as agent. The compensation paid to a particular
broker-dealer may be less than or in excess of customary
commissions. Neither we nor Lincoln Park can presently estimate the
amount of compensation that any agent will receive.
We know of no
existing arrangements between Lincoln Park or any other
stockholder, broker, dealer, underwriter or agent relating to the
sale or distribution of the shares offered by this prospectus. At
the time a particular offer of shares is made, a prospectus
supplement, if required, will be distributed that will set forth
the names of any agents, underwriters or dealers and any
compensation from the selling stockholder, and any other required
information.
We will pay the
expenses (except brokerage fees and commissions and similar
expenses) incurred in registering the shares, including legal and
accounting fees. We have agreed to indemnify Lincoln Park and
certain other persons against certain liabilities in connection
with the offering of shares of Common Stock offered hereby,
including liabilities arising under the Securities Act or, if such
indemnity is unavailable, to contribute amounts required to be paid
in respect of such liabilities. Lincoln Park has agreed to
indemnify us against liabilities under the Securities Act that may
arise from certain written information furnished to us by Lincoln
Park specifically for use in this prospectus or, if such indemnity
is unavailable, to contribute amounts required to be paid in
respect of such liabilities.
Lincoln Park has
represented to us that at no time prior to the Purchase Agreement
has Lincoln Park or its agents, representatives or affiliates
engaged in or effected, in any manner whatsoever, directly or
indirectly, any short sale (as such term is defined in Rule 200 of
Regulation SHO of the Exchange Act) of our Common Stock or any
hedging transaction, which establishes a net short position with
respect to our Common Stock. Lincoln Park agreed that during the
term of the Purchase Agreement, it, its agents, representatives or
affiliates will not enter into or effect, directly or indirectly,
any of the foregoing transactions.
We have advised
Lincoln Park that it is required to comply with Regulation M
promulgated under the Exchange Act. With certain exceptions,
Regulation M precludes the selling stockholder, any affiliated
purchasers, and any broker-dealer or other person who participates
in the distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is
the subject of the distribution until the entire distribution is
complete. Regulation M also prohibits any bids or purchases made in
order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the
marketability of the securities offered by this
prospectus.
This offering will
terminate on the earlier of (i) termination of the Purchase
Agreement or (ii) the date that all shares offered by this
prospectus have been sold by Lincoln Park.
Our Common Stock is
currently listed for quotation on the
OTCQB Marketplace under the symbol
“IWSY.”
This prospectus
relates to shares of our Common Stock that may be offered and sold
from time to time by Lincoln Park. We may receive up to $15.0
million in aggregate gross proceeds under the Purchase Agreement
from any sales we make to Lincoln Park pursuant to the Purchase
Agreement after the date of this prospectus. However, we may not be
registering for sale or offering for resale under the registration
statement of which this prospectus is a part all of the shares
issuable pursuant to the Purchase Agreement. In any evert, we will
receive no proceeds from the sale of any shares of Common Stock by
Lincoln Park pursuant to this prospectus. As we are unable to
predict the timing or amount of potential issuances of all of the
shares offered hereby (other than the Commitment Shares or the
Initial Purchase Shares), we have not allocated any proceeds of
such issuances to any particular purpose. Accordingly, all such
proceeds are expected to be used for general research and development, working
capital and general corporate purposes.
Pending
other uses, we intend to invest any proceeds from the offering in
short-term investments or hold them as cash. We cannot predict
whether the proceeds invested will yield a favorable return. Our
management will have broad discretion in the use of the net
proceeds from this offering, and investors will be relying on the
judgment of our management regarding the application of the net
proceeds.
DESCRIPTION OF OUR SECURITIES
General
Our certificate of incorporation, as amended (our
“Charter”), authorizes the issuance of up to 1.0
billion shares of our common stock, $0.01 par value per share
(“Common
Stock”), and 5.0 million
shares of preferred stock, $0.01 par value per share
(“Preferred
Stock”).
Effective as of
January 28, 2021 and February
16, 2021, respectively, our Board of Directors and a
majority of our outstanding voting securities, on an as converted
basis (the “Majority
Shareholders”) approved and authorized an amendment to
our Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 1.0 billion shares to
2.0 billion shares, resulting
in a total increase of 1.0
billion shares of Common Stock. The Company is not
increasing the number of authorized shares of Preferred Stock. The
Certificate of Amendment to reflect the 1.0 billion share increase in the number of
authorized shares of our Common Stock was filed with the Delaware
Division of Corporations on April 21, 2021.
As of July 9,
2021, we had 331,392,419 shares of Common Stock issued and
outstanding. Our authorized but unissued shares of Common Stock are
available for issuance without action by our stockholders. All
shares of Common Stock now outstanding are fully paid and
non-assessable. In addition, our Board of Directors has designated
five series of Preferred Stock; (i) Series A Preferred, (ii) Series
A-1 Preferred, (iii) Series B Preferred, (iv) Series C Preferred
and (v) Series D Preferred. As of July 9, 2021, there were 1,109.5
shares of Series A Preferred outstanding, 1,064.1 shares of Series
A-1 Preferred outstanding, 239,400 shares of series B Preferred
outstanding, 0 shares of Series C Preferred outstanding, and
22,958.3 shares of Series D Preferred
outstanding.
We
may elect or be required to amend our Charter to increase the
number of shares of Common Stock authorized for issuance prior to
completing sales of shares of our Common Stock, or securities
convertible and/or exchangeable into shares of our Common Stock
described in this prospectus.
Transfer Agent
The transfer agent and registrar for our Common Stock is
Computershare Trust Company, N.A. The transfer agent and
registrar’s address is 250 Royall Street, Canton,
Massachusetts 02021.
Common Stock
This section describes the general terms of our Common Stock that
we may offer from time to time. For more detailed information, a
holder of our Common Stock should refer to our Charter and our
bylaws, copies of which are filed with the SEC as exhibits to the
registration statement of which this prospectus is a
part.
Except
as otherwise expressly provided in our Charter, or as required by
applicable law, all shares of our Common Stock have the same rights
and privileges and rank equally, share ratably and are identical in
all respects as to all matters, including, without limitation,
those described below. All outstanding shares of Common Stock are
fully paid and nonassessable.
The
holders of our Common Stock have equal ratable rights to dividends
from funds legally available, when, as and if declared by our Board
of Directors. To date, we have not paid any dividends on our
Common Stock. Holders of Common Stock are also entitled to share
ratably in all of our assets available for distribution to holders
of Common Stock upon liquidation, dissolution or winding up of the
affairs. The holders of our Common Stock have no preemptive or
conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to our Common
Stock.
Each holder of Common Stock is entitled to one
vote for each share of Common Stock held on all matters submitted
to a vote of the stockholders, including the election of
directors. The holders of
shares of Common Stock do not have cumulative voting rights, which
means that the holders of more than 50% of such outstanding shares,
voting for the election of directors, can elect all of the
directors to be elected, if they so choose and in such event, the
holders of the remaining shares will not be able to elect any of
our directors. The holders of 50% percent of the outstanding
Common Stock constitute a quorum at any meeting of shareholders,
and the vote by the holders of a majority of the outstanding shares
are required to effect certain fundamental corporate changes, such
as liquidation, merger or amendment of our
Charter.
We
have never paid or declared any cash dividends on our Common Stock,
and we do not anticipate paying any cash dividends on our
Common Stock in the foreseeable future. Shares of our
Series B Preferred Stock accrue dividends at a rate of 8.5% per
annum, which dividends are payable semiannually in cash. Shares of
our Series A Preferred and Series A-1 Preferred accrue dividends at
a rate of 4% payable with Common Stock. Shares of our Series C
Preferred accrue dividends at a rate of 8% payable with Common
Stock or 10% payable with shares. Series D Preferred accrue
dividends at a rate of 4% payable with cash or shares of Series D
Preferred.
DESCRIPTION OF OUR BUSINESS
ImageWare
Systems, Inc., a Delaware corporation, has its principal place of
business at 11440 West Bernardo Court, Suite 300, San Diego,
California 92127. We maintain a corporate website at www.iwsinc.com. Our Common
Stock is currently listed for quotation on the OTCQB marketplace
under the symbol “IWSY”. As used in this
prospectus, “we”, “us”, “our”, “ImageWare”, “ImageWare Systems” or the
“Company”
refers to ImageWare Systems, Inc. and all of its
subsidiaries.
Overview
ImageWare Systems,
Inc. (“ImageWare,” the
“Company,”
“we,”
“our”) provides
defense-grade biometric identification and authentication solutions
to safeguard your data, products, services or facilities. We are
experts in biometric authentication and considered
a preeminent patent holder of multimodal biometrics IP, having
many of the most-cited patents in the industry. Our patented IWS
Biometric Engine® is one
of the most accurate and fastest biometrics matching engines in the
industry, capable of our patented biometrics fusion. Part of our
heritage is in law enforcement, having built the first statewide
digital booking platform for United States local law enforcement in
the late 1990’s – and having more than three decades of
experience in the challenging government sector creating biometric
smart cards and logical access for millions of individuals. We
are a “biometrics first” company, leveraging unique
human characteristics to provide unparalleled accuracy for
identification while protecting your identity.
The
Company’s products also provide law enforcement and public
safety sector with integrated biographic, mugshot, SMT, and
fingerprint capture for booking, in addition to investigative
capabilities. The Company also provides comprehensive
authentication security software using biometrics to secure
physical and logical access to facilities, computer networks or
Internet sites. Biometric technology is now an integral part of all
markets that the Company addresses, and every product leverages our
patented IWS Biometric Engine®.
The IWS Biometric Engine® is a patented
biometric identity and authentication database built for
multi-biometric enrollment, management and authentication. It is
hardware agnostic and can utilize different types of biometric
algorithms. It allows different types of biometrics to be operated
at the same time on a seamlessly integrated platform. It is also
offered as a Software Development Kit (“SDK”), enabling developers and system
integrators to implement biometric solutions or integrate biometric
capabilities, into existing applications.
Our
secure credential solutions empower customers to design and create
smart digital identification wristbands and badges for access
control systems. We develop, sell and support software and design
systems that utilize digital imaging and biometrics for photo
identification cards, credentials and identification systems. Our
products in this market consist of IWS EPI Suite and IWS EPI
Builder. These products allow for production of digital
identification badges and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
and governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine®.
The Company is also a
developer of a biometric based multi-factor authentication
(“MFA”)
Cloud-based service. ImageWare Authenticate (formerly, GoVerify
ID®) brings together Cloud and mobile technologies to offer
biometric multi-factor authentication for the enterprise, and
across industries. ImageWare Authenticate consists of mobile and
desktop clients, and the backend system which is a Cloud-based
Software-as-a-Service (“SaaS”)
servicing Cloud-based biometric template matching requests.
ImageWare Authenticate comes in two offerings, Workforce and
Customer. ImageWare Authenticate Customer is leveraged by product
developers to enable biometric authentication for their consumers.
For the enterprise, ImageWare Authenticate Workforce provides
turnkey integration with Microsoft Windows, Microsoft Active
Directory, CA SSO, IBM Security Access Manager
(“ISAM”),
SAP Cloud Platform, Fujitsu's RunMyProcess, Palo Alto
Networks VPN and HPE’s Aruba ClearPass. These
integrations provide multi-modal biometric authentication to
replace or augment passwords for use with enterprise and consumer
class systems.
Our law enforcement
solutions enable agencies to quickly capture, archive, search,
retrieve, and share digital images, fingerprints and other
biometrics, as well
as criminal history records on a stand-alone, networked, wireless
or Web-based platform. We develop, sell and support a suite of
modular software products used by law enforcement and public safety
agencies to create and manage criminal history records and to
investigate crime. Our IWS Law Enforcement solution consists of
five software modules: Capture and Investigative modules, which
provide a criminal booking system with related databases, as well
as the ability to create and print mug photo/scars, marks, and
tattoos (SMT), as well as image lineups and electronic mug-books; a
Facial Recognition module, which uses biometric facial recognition
to identify suspects; a Web module, which provides access to
centrally stored records over the Internet in a connected or
wireless fashion; and a LiveScan module, which incorporates
LiveScan capabilities into IWS Law Enforcement platform providing
integrated fingerprint and palm print biometric management for
civil and law enforcement use. The IWS Biometric Engine® is
also available to our law enforcement clients and allows them to
capture and search using multiple biometrics.
Recent
Developments
New Products
In July 2020, we
introduced BioIntellic™, our standalone, highly scalable
anti-spoofing detection feature (embedded in the IWS
Biometric Engine®) to
ensure secure onboarding. BioIntellic™ bolsters our
joint offering with our existing proofing partner in the African
market, Contactable, and also supports our existing MTN business as
well as drives new business in the African region and
beyond.
In October 2021, we
completed a new QuickCapture Mobile software product that resides
on the Laxton Chameleon 5 and 8 devices. QuickCapture Mobile will
be an inherent part of our newest generation law enforcement
platform, called LE 2.0. This powerful solution allows officers,
public safety and military personnel in the field to have dynamic
data on a perpetrator in the palm of their hands.
In December 2020,
we reached code completion of our GoVerifyID product, now renamed
to Imageware Authenticate, which introduced a new administration
portal for easier management and usability of the product along
with compatibility with many other 3rd party identity and Cloud
services, through the inclusion of identity protocols SAML and
OIDC.
Coronavirus (COVID-19) Pandemic
On March 11, 2020,
the World Health Organization declared the novel strain of
coronavirus (“COVID-19”) a global pandemic and
recommended containment and mitigation measures worldwide. As of
July 2021, the global outbreak of COVID-19 continues
to rapidly evolve, and the extent to which COVID-19 may impact our
business and markets we serve will depend on future developments,
which are highly uncertain and cannot be predicted with confidence,
such as the duration of the outbreak, travel restrictions and
social distancing in the United States and other countries,
business closures or business disruptions, and the effectiveness of
actions taken both in the United States and other countries. We are
continuing to vigilantly monitor the situation with our primary
focus on health and safety of our employees and
clients.
The Series D Financing
On November 12,
2020 and December 23, 2020, the Company consummated private
placements of 12,060 shares of its Series D Convertible Preferred
Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds include approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Purchase Agreement"), by and between
the Company and certain accredited investors (the "Purchasers"), for the sale of the
Series D Preferred at a purchase price of $1,000 per share of
Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of shares of Series D
Preferred.
On the fourth
anniversary of the Issuance Date (as defined in the Series D
Certificate), or in the event of the consummation of a Change of
Control (as defined in the Series D Certificate), if any shares of
Series D Preferred are outstanding, then each holder of Series D
Preferred shall have the right (the “Holder Redemption
Right”), at such holder’s option, to
require the Company to redeem all or any portion of such
holder’s shares of Series D Preferred at the Liquidation
Preference Amount per share of Series D Preferred plus an amount
equal to all accrued but unpaid dividends, if any, (such price, the
“Holder Redemption
Price”), which Holder Redemption Price
shall be paid in cash.
In connection with the sale of the Series D
Preferred, we granted certain registration rights to the Investors
with respect to the Conversion Shares and Dividend Shares, pursuant
to a Registration Rights Agreement by and among us and the
Investors. The registration statement registering the Conversion
Shares and Dividend Shares was declared effective by the United
States Securities and Exchange Commission (the
“SEC”) on February 12, 2021.
Solutions
and Products
We are a
"biometrics first" security company who brings the highest level of
security to systems, data and places, by identifying and
authenticating people through biometrics. Our solutions are focused
on biometrics and secure credentials providing complete,
cross-functional interoperable systems and an open
architecture.
IWS Biometric Engine. This is a
biometric identity and authentication database for multi-biometric
enrollment, management and authentication, managing population
databases of unlimited sizes without regard to hardware or
algorithm. Searches can be 1:1 (verification), 1:N
(identification), and N:N (database integrity). IWS Biometric
Engine is biometric agnostic, enabling the use of biometric devices
and algorithms from any vendor, and with current support of the
following biometric types: finger, face, iris, palm, and voice. We
leverage the IWS Biometric Engine® to create products that
provide government, law enforcement, public safety, border
management and enterprise businesses, with a wide variety of
solutions that address specific problems, mandates and technology
standards.
ImageWare Authenticate. The
Company introduced GoVerify ID®, now known as ImageWare
Authenticate, a multi-factor biometric authentication, MFA product,
for the enterprise markets on November 14, 2016. ImageWare
Authenticate supports multimodal biometric Cloud-based matching and
authentication including, but not limited to, face, voice,
fingerprint, iris, palm, and more. All the biometrics can be
combined with authentication and access control tools, including
tokens, digital certificates, passwords, and PINS, to provide the
ultimate level of assurance, accountability, and ease of use for
corporate networks, web applications, mobile devices, and PC
desktop environments. ImageWare Authenticate provides multimodal
biometric identity authentication that can be used in place of
passwords or as a strong second factor authentication method.
ImageWare Authenticate is provided as a Cloud-based SaaS solution,
thereby, eliminating complex IT deployment of biometric software
and eliminating startup costs. ImageWare Authenticate works with
existing mobile devices, eliminating the need for specialized
biometric scanning devices typically used with most biometric
solutions. We enhanced the product and completed this work on
December 31, 2020. We relaunched ImageWare Authenticate on February
1, 2021.
IWS EPI Suite. This is an ID software
solution for producing, issuing, and managing secure credentials
and personal identification cards, also called biometric smart
badges. It is used by many human resource departments, along with
other corporate groups, to enroll employees and print physical
badges which may be used later for physical access. 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. IWS EPI
Suite was designed to integrate with our customers’ existing
security and computing infrastructure. We believe that this
compatibility may be an appealing feature to corporations,
government agencies, transportation departments, schools, and other
public institutions.
IWS EPI Builder. This is an SDK and a
leading secure credential component of identity management and
security solutions, providing all aspects of ID functionality from
image and biometric capture to the enrollment, issuance and
management of secure documents. It contains components which
developers or systems integrators can use to support and produce
secure credentials, including national IDs, passports,
International Civil Aviation Office -compliant travel documents,
smartcards 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
(1:1 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. We intend to
update the EPI Suite and Builder platforms in late 2021 and offer
these products in the Cloud.
IWS Law Enforcement. IWS Law
Enforcement is a digital booking, identification and investigative
platform that enables users to digitally capture, store, search and
retrieve images and demographic data, including mugshots and line
ups, fingerprints and scars, marks and tattoos (SMT’s). Law
enforcement may choose between submitting fingerprint data directly
to the State Automated Fingerprint Identification System
(“AFIS”), FBI
criminal repository, or other agencies as required. Additional
features and functionality include real-time access to images and
data, creation of photo lineups or electric mug books, and
production of identification cards and credentials. IWS Law
Enforcement also uses off-the-shelf, biometric 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 or handheld to larger, integrated systems. To avoid
duplication of entries, the system can be integrated easily with
several other information storage and retrieval systems, such as a
records/jail management system (“RMS/JMS”) or an automated fingerprint
identification system. We intend to update the Law Enforcement
platform in first half of 2021 and offer the full suite in the
Cloud as a SaaS offering.
The
IWS Law Enforcement platform contains the following
components:
Capture. 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. This software module is FBI
certified and complies with the FBI Integrated Automated
Fingerprint Identification System (“IAFIS”) Image Quality
Specifications (“IQS”) while utilizing FBI
certified LiveScan devices from most major vendors. 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
mugshots. 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.
Investigative. This software module
allows users to search the database created with IWS Law
Enforcement. 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.
EPI Designer for Law Enforcement. The
EPI Designer for LE software is a design solution created for the
IWS Law Enforcement databases based on the IWS EPI Suite
program. This program allows integration with various IWS
databases for the production of unique booking/inmate reports,
wristbands, photo ID cards, Wanted or BOLO fliers, etc., created
from the information stored in booking records. 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.
Quick Capture. Quick Capture is a
multiple biometric capture application that dynamically adapts to a
client’s required use case, including different city, state,
and federal charge codes. With it, you can collect a variety of
biometrics (face, finger, palm, iris, voice, etc.) using a variety
of biometric hardware in the order desired as well as any needed
biographic information associated with the subjects.
BioIntellic. BioIntellic is a facial
matching and anti-spoofing product integrated into ImageWare
Authenticate. It is designed to prevent presentation attacks, by
ensuring the captured biometric image is that of a live individual,
not a picture of 3D mask. BioIntellic is also available as a
standalone product, enabling companies to quickly integrate facial
matching and liveness detection into their offerings.
Maintenance and Customer Support
Maintenance and support enrollment entitles software license
customers to technical support services, including telephone and
email support, problem resolution services, and the right to
receive unspecified product upgrades, maintenance releases and
patches released during the term of the support period. Maintenance
and support service fees are an important source of recurring
revenue, and we invest continuing resources into providing
maintenance and support services.
Customers
We have a wide
variety of domestic and international customers. Most of our IWS
Law Enforcement customers are government agencies at the federal,
state and local levels in the United States and Canada, but we also
have clients outside of North America. For the three months ended
March 31, 2021, two customers accounted for approximately 45% or
$333,000 of our total revenue. For the
year ended December 31, 2020, two customers accounted for
approximately 61% or $2,921,000 of total revenue and had trade
receivables of approximately $250,000 as of the end of the
year.
Our
Strategy
Our strategy is to
be a “biometric first” cybersecurity company bringing
the highest level of security to systems, data and places by
identifying and authenticating people through biometrics. We sell
to governments, law enforcement and public safety, as well as
enterprises, through key partners and large systems integrators and
with our own direct sales team.
With recent
COVID-19 events, remote work and social distancing have quickly
been brought to the forefront of society. And while the impact of
these events will be seen in the coming years, many problems have
been immediately realized by corporations and government agencies,
who are diligently looking for solutions to operate in a new
business environment.
Within a matter of
weeks, corporations and government agencies have had to heavily
rely upon remote access technologies to enable work continuity
through the pandemic. This increase in employees remotely accessing
sensitive corporate systems has increased the risk of both
cybercrime and unintentional information leaks. This risk is also
increased by the fact that many employees now use a mixture of
personal and corporate owned devices on the job, a trend known as,
Bring Your Own Device (BYOD).
Verification of an
individual through biometrics is an effective way to authenticate
users accessing sensitive information and systems. ImageWare
Authenticate provides this functionality and is already integrated
in many of the authentication systems leveraged by large companies
and agencies to manage the identities of their employees and users.
We will market and sell ImageWare Authenticate as a solution for
protecting corporate data to the most relevant business verticals
during this time of increased susceptibility to broad cyberattacks,
such as malware, viruses, trojans, ransomware infections and
phishing attacks.
Additionally,
social distancing and the need to limit personal contact throughout
everyday life is driving governments and corporations to deploy new
ways to continue work and commerce while minimizing contact points
between individuals. We believe this trend will increase the
acceptance and use of biometrics as a means of contactless and
touchless authentication for health, retail, finance/banking,
government services, higher education and
transportation.
Scaling out
biometrics across these verticals is going to require new methods
and solutions to support the increased number of users and
transactions. With our decades of experience innovating and scaling
government grade biometric solutions and our years executed
strategy of creating multimodal, vendor agnostic solutions,
ImageWare has had a rich portfolio of products and solutions to
address these new challenges brought on by the
pandemic.
Additionally, the
law enforcement community continues to be an important market and
customer base. Over the past few years, innovation within our law
enforcement product line has been static, which has resulted in
revenue being primarily driven from support and maintenance.
Recently ImageWare released a new product offering to the law
enforcement sector called, QuickCapture Mobile. Quick Capture
Mobile streamlines the process of capturing biometrics from
perpetrators on a mobile, PC-based device, in the field. The law
enforcement market will immediately benefit from this product. We
believe we can develop the Quick Capture product to service other
verticals such as; corporate, telecommunications, academia,
hospitality and entertainment.
We believe the
increasing demand for biometric technology will drive demand for
our solutions. In the coming year, we will work to develop an
Identity Platform, which combines all of our products onto one
end-to-end, Cloud-based platform, allowing large clients to do
enrollments (Enroll, Verify, Credential and Authenticate). The
building blocks of the Identity Platform consist of upgrades to our
current standalone products (IWS LE, EPI Builder, and ImageWare
Authenticate) as well as a new identity proofing product, to be
developed to verify the authenticity of government issued IDs. The
Enroll, Verify, Credential and Authenticate workflow, is
foundational to the majority of governments and corporate
opportunities we compete for, and therefore, a key to the Identity
Platform. This single platform which allows a customer to create a
digital identity fully vetted against a government issued ID, use
it thereafter for a reliable biometric authentication and manage
that identity through its life cycle is compelling. We are
scheduling the Identity Platform to be completed in late
2021.
Sales
and Marketing
We market and sell
our products in most major world markets directly through our
salesforce and indirectly through channel partners, including
resellers, distributors and systems integrators. Our sales force
includes both field, and inside sales, which provides us a
lower-cost channel for additional sales into existing customers and
for expanding our customer base.
International
Operations
We are a global
company. We are headquartered in San Diego, California with a
remote office in Ottawa, Canada. Our main business operations are
based in San Diego, California. We regularly seek out opportunities
to efficiently expand our operations in international locations
that offer highly talented resources as a way to maximize our
global competitiveness.
Software
Licenses
The bulk of our
revenue presently is generated from new subscription and historical
maintenance payments for our software solutions for Law
Enforcement, Badging, Identity Management, and Multi-factor Access,
MFA. We currently have four primary revenue
sources:
●
Annual Maintenance
of our Law Enforcement Solution;
●
Perpetual license
revenue of our Badging Solution;
●
Term Subscriptions
of our ImageWare Authenticate solution; and
●
Professional
Services fees associated with implementation and training for our
customers.
We are actively
engaged in simplifying our revenue sources, migrating our existing
customers Annual Maintenance, and perpetual license agreements to
more consistent and sustainable subscription models.
Software
as a Service Business Model
We also provide an on-demand SaaS offering for ImageWare
Authenticate. SaaS offerings will be offered on a
subscription term-limited basis. We are exploring offering
additional products as SaaS offerings on a subscription
term-limited basis.
Competition
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:
●
Our ability to
provide a system which enables the enrollment, management and
authentication of multiple biometrics managing population databases
of unlimited sizes;
●
Searches can be 1:1
(verification), 1:N (identification), and N:N (database integrity);
and
●
The system is
technology and biometric agnostic, enabling the use of biometric
devices and algorithms from any vendor, and the support of the
following biometric types: finger, face, iris, palm and
voice
Our
multifactor-biometric product faces competition from Duo, HYPR,
Daon and Aware Inc., none of which have offerings with the scope
and flexibility of our IWS Biometric Engine and its companion suite
of products or relevant patent protection.
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 strong brand
reputation with a customer base, which includes small and
medium-sized businesses, Fortune 1000 corporations and large
government agencies;
●
the ease of
integrating our technology into other complex
applications;
●
the leveraged
strength that comes from offering customers software tools,
packaged solutions and web-based service applications that support
a wide range of hardware peripherals; and
●
traditional NFC
access control systems are easily hacked
Our software faces
competition from a number of companies, like HID Global, ASSA
ABLOY, Gemalto, as well as small, regionally based
companies.
The Law Enforcement and Public Safety Markets
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:
●
the unique ability
to integrate our modular products into a complete biometric,
LiveScan, imaging and investigative system;
●
our reputation as a
reliable systems supplier;
●
the usability and
functionality of our products;
●
the responsiveness,
availability and reliability of our customer support;
and
●
hardware agnostic
across many biometric vendors.
Our
law enforcement product line faces competition from other companies
such as DataWorks Plus, Idemia, Gemalto and
NEC. Internationally, there are often a number of local
companies offering solutions in most countries.
Intellectual
Property
We rely on
trademark, patent, trade secret and copyright laws and
confidentiality and license agreements to protect our intellectual
property. We have several federally registered trademarks,
including the trademark ImageWare and IWS Biometric Engine, as well
as trademarks for which there are pending trademark registrations
with the United States, Canadian and other International Patent
& Trademark Offices.
We hold several
issued patents and have several other patent applications pending
for elements of our products. We believe we have the foundational
patents regarding the use of multiple biometrics and continue to be
an IP leader in the biometric arena. It is our belief that this
intellectual property leadership will create a sustainable
competitive advantage.
We are an early
pioneer of patents related to multi-modal biometrics and currently
are a worldwide leader in multi-modal biometric patents, with 27
issued patents worldwide and 14 pending or allowed patent
applications worldwide as well. The Company’s patents are as
follows:
US Issued Patents -
17
US Allowed Patents
- 1
US Patent
Applications - 3
International
Issued Patents - 10
International
Patent Applications - 10
Total Worldwide
Issued Patents - 27
Total Worldwide
Allowed Patents - 1
Total Worldwide
Patent Applications - 14
Employees
We
had a total of 44 full-time employees as of December 31, 2020. In
2020, we had 40 employees based in the United States, three
employees based in Canada and one employee based in Mexico. 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.
Additional
Available Information
We make available,
free of charge, at our corporate website www.iwsinc.com copies of our
annual reports filed with the SEC on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy
statements, and all amendments to these reports, as soon as
reasonably practicable after such material is electronically filed
with or furnished to the SEC pursuant to Section 13(a) or
15(d) of the Exchange Act. We also provide copies of our
Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to
investors upon request. Additionally, all reports filed by us with
the SEC are available free of charge via EDGAR through the SEC
website at www.sec.gov.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 prospectus.
Readers are also urged to carefully review and consider the various
disclosures made by us, which attempt to advise interested parties
of the factors which affect our business, including (without
limitation) the disclosures made under the captions
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Risk
Factors”, and in the audited consolidated financial
statements and related notes included elsewhere in this
prospectus.
Overview
The Company is a
pioneer and leader in biometric identification and authentication
software. Using 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
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 mugshot, 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 the products leveraged by
our patented IWS Biometric Engine®
The IWS Biometric
Engine® is a patented biometric identity and authentication
database built for multi-biometric enrollment, management and
authentication. It is hardware agnostic and can utilize different
types of biometric algorithms. It allows different types of
biometrics to be operated at the same time on a seamlessly
integrated platform. It is also offered as a Software Development
Kit (“SDK”),
enabling developers and system integrators to implement biometric
solutions or integrate biometric capabilities into existing
applications.
Our secure
credential solutions empower customers to design and create smart
digital identification wristbands and badges for access control
systems. We develop, sell and support software and design systems
that utilize digital imaging and biometrics for photo
identification cards, credentials and identification systems. Our
products in this market consist of IWS EPI Suite and IWS EPI
Builder. These products allow for production of digital
identification badges and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
and governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine®.
The Company is also
a developer of a biometric based multi-factor authentication (MFA)
Cloud-based service. ImageWare Authenticate brings together Cloud
and mobile technologies to offer multi-factor authentication for
the enterprise, and across industries. ImageWare Authenticate
consists of mobile and desktop clients, and the backend system
which is a Cloud-based Software-as-a-Service (“SaaS”) servicing Cloud-based
biometric template matching requests. ImageWare Authenticate comes
in two offerings, Workforce and Customer. ImageWare Authenticate
Customer is leveraged by product developers to enable biometric
authentication for their consumers. For the enterprise, ImageWare
Authenticate Workplace provides turnkey integration with Microsoft
Windows, Microsoft Active Directory, CA SSO, IBM Security Access
Manager (“ISAM”), SAP Cloud
Platform, Fujitsu's RunMyProcess, Palo Alto Networks
VPN and HPE’s Aruba ClearPass. These integrations
provide multi-modal biometric authentication to replace or augment
passwords for use with enterprise and consumer class
systems.
Our law enforcement
solutions enable agencies to quickly capture, archive, search,
retrieve, and share digital images, fingerprints and other
biometrics, as well
as criminal history records on a stand-alone, networked, wireless
or Web-based platform. We develop, sell and support a suite of
modular software products used by law enforcement and public safety
agencies to create and manage criminal history records and to
investigate crime. Our IWS Law Enforcement solution consists of
five software modules: Capture and Investigative modules, which
provide a criminal booking system with related databases as well as
the ability to create and print mug photo/scars, marks, and tattoos
(SMT), as well as image lineups and electronic mug-books; a Facial
Recognition module, which uses biometric facial recognition to
identify suspects; a Web module, which provides access to centrally
stored records over the Internet in a connected or wireless
fashion; and a LiveScan module, which incorporates LiveScan
capabilities into IWS Law Enforcement platform providing integrated
fingerprint and palm print biometric management for civil and law
enforcement use. The IWS Biometric Engine® is also available
to our law enforcement clients and allows them to capture and
search using multiple biometrics.
Recent Market Conditions
During March 2020, a global pandemic was declared
by the World Health Organization related to the rapidly growing
outbreak of a novel strain of coronavirus
(“COVID-19”).
The
pandemic has significantly impacted the economic conditions both in
the United States and worldwide, with accelerated effects in
February 2020 through the date of this prospectus, as federal,
state and local governments react to the public health crisis,
creating significant uncertainties in both the worldwide and the
United States economies. The situation is rapidly changing and
additional impacts to our business may arise that we are not aware
of currently. We cannot predict whether, when or the manner in
which the conditions surrounding COVID-19 will change
including the timing of lifting any restrictions or office closure
requirements.
The
full extent of COVID-19’s impact on our operations and
financial performance depends on future developments that are
uncertain and unpredictable, including the duration and spread of
the pandemic, its impact on capital and financial markets and any
new information that may emerge concerning the severity of the
virus, its spread to other regions as well as the actions taken to
contain it, among others.
On March 27, 2020, President Trump signed into law
the “Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”). The CARES Act, among other things,
includes provisions relating to refundable payroll tax credits,
deferment of employer side social security payments, net operating
loss carryback periods, alternative minimum tax credit refunds,
modifications to the net interest deduction limitations, increased
limitations on qualified charitable contributions and technical
corrections to tax depreciation methods for qualified improvement
property.
The Company continues to examine the impact that
the CARES Act may have on our business. Currently the Company is
unable to determine the impact that the CARES Act will have on our
financial condition, results of operation or
liquidity.
Critical Accounting 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 revenue and
expense during a fiscal period. The SEC considers an accounting
policy to be critical if it is important to a company’s
financial condition and results of operations, and if it requires
significant judgment and estimates on the part of management in its
application.
Significant
estimates include the evaluation of our ability to continue as a
going concern, the allowance for doubtful accounts receivable,
assumptions used in the Black-Scholes model to calculate the fair
value of share-based payments, fair value of Series D Preferred and
financial instruments issued with and affected by the Series D
Preferred Financing, fair value of financial instruments with and
affected by the Series C Preferred, fair value of Series A
Preferred, fair value of Series A-1 Preferred, assumptions used in
the application of revenue recognition policies, assumptions used
in the derivation of the Company’s incremental borrowing rate
used in the computation of the Company’s operating lease
liabilities 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.
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.
Revenue
Recognition. Effective
January 1, 2018, we adopted Accounting Standards Codification
(“ASC”), Topic 606, Revenue from Contracts with
Customers (“ASC 606”), using the modified retrospective
transition method.
In
accordance with ASC 606, revenue is recognized when control of the
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services.
The
core principle of the standard is that we should recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which we expect to
be entitled in exchange for those goods or services. To achieve
that core principle, we apply the following five step
model:
1.
Identify
the contract with the customer;
2.
Identify
the performance obligation in the contract;
3.
Determine
the transaction price;
4.
Allocate
the transaction price to the performance obligations in the
contract; and
5.
Recognize revenue when (or as) each performance
obligation is satisfied.
At
contract inception, we assess the goods and services promised in a
contract with a customer and identify as a performance obligation
each promise to transfer to the customer either: (i) a good or
service (or a bundle of goods or services) that is distinct or (ii)
a series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the customer. We
recognize revenue only when we satisfy a performance obligation by
transferring a promised good or service to a customer.
Determining
the timing of the satisfaction of performance obligations as well
as the transaction price and the amounts allocated to performance
obligations requires judgement.
We
disclose disaggregation of our customer revenue by classes of
similar products and services as follows:
●
Software
licensing and royalties;
●
Sales
of computer hardware and identification media;
●
Post-contract customer
support.
Software licensing and royalties
Software
licenses consist of revenue from the sale of software for identity
management applications. Our software licenses are functional
intellectual property and typically provide customers with the
right to use our software in perpetuity as it exists when made
available to the customer. We recognize revenue from software
licensing at a point in time upon delivery, provided all other
revenue recognition criteria are met.
Royalties
consist of revenue from usage-based arrangements and guaranteed
minimum-based arrangements. We recognize revenue for royalty
arrangements at the later of (i) when the related sales occur, or
(ii) when the performance obligation to which some or all of the
royalty has been allocated has been satisfied.
Computer hardware and identification media
We
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, provided all other
revenue recognition criteria are met.
Services
Services
revenue is comprised primarily of software customization services,
software integration services, system installation services and
customer training. Revenue is generally recognized upon completion
of services and customer acceptance provided all other revenue
recognition criteria are met.
Post-contract customer support (“PCS”)
PCS consists of maintenance on software and
hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance
agreements. Revenue is generally recognized ratably over the
respective maintenance periods provided no significant obligations
remain. Costs related to such contracts are expensed as
incurred.
Arrangements with multiple performance obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer. In addition to selling
software licenses, hardware and identification media, services and
post-contract customer support on a standalone basis, certain
contracts include multiple performance obligations. For such
arrangements, we allocate revenue to each performance obligation
based on our best estimate of the relative standalone selling
price. The standalone selling price for a performance obligation is
the price at which we would sell a promised good or service
separately to a customer. The primary methods used to estimate
standalone selling price are as follows: (i) the expected cost-plus
margin approach, under which we forecast our expected costs of
satisfying a performance obligation and then add an appropriate
margin for that distinct good or service and (ii) the percent
discount off of list price approach.
Contract costs
We
recognize an asset for the incremental costs of obtaining a
contract with a customer if we expect the benefit of those costs to
be longer than one year. We apply a practical expedient to expense
costs as incurred for costs to obtain a contract when the
amortization period is one year or less.
Other items
We
do not offer rights of return for our products and services in the
normal course of business.
Sales
tax collected from customers is excluded from revenue.
Allowance
for Doubtful Accounts. We provide an allowance for our accounts
receivable for estimated losses that may result from our
customers’ inability to pay. We determine the amount of
allowance by analyzing historical losses, customer concentrations,
customer creditworthiness, current economic trends, and the age of
the accounts receivable balances and changes in our customer
payment terms when evaluating the adequacy of the allowance for
doubtful accounts.
Impairment
of Goodwill, Other Intangible and Long-Lived Assets.
The Company
accounts for its intangible assets under the provisions of ASC 350,
“Intangibles - Goodwill and Other”. In accordance with
ASC 350, intangible assets with a definite life are analyzed for
impairment under ASC 360-10-05 “Property, Plant and
Equipment” and intangible assets with an indefinite life are
analyzed for impairment under ASC 360 annually, or more often if
circumstances dictate. The Company performs its annual simplified
impairment test in the fourth quarter of each year. In December
2018, the Company adopted the provisions of ASU 2017-04,
“Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment”. The provisions
of ASU 2017-04 eliminate the requirement to calculate the implied
fair value of goodwill to measure a goodwill impairment charge.
Instead, entities will record an impairment charge based on the
excess of a reporting unit's carrying amount over its fair value.
Entities that have reporting units with zero or negative carrying
amounts will no longer be required to perform a qualitative
assessment assuming they pass the simplified impairment
test.
The
Company did not record any goodwill impairment charges for the
three months ended March 31, 2021 or year ended December 31,
2020.
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. The Company’s
management currently believes there is no impairment of its
long-lived assets. There can be no assurance, however, that market
conditions will not change or demand for the Company’s
products under development will continue. 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 revenue and operating expense. 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. At
March 31, 2021 and December 31, 2020, the Company had one
stock-based compensation plan for employees and nonemployee
directors, which authorizes the granting of various equity-based
incentives including stock options and restricted
stock.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “Compensation – Stock
Compensation”. 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 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.
ASC 718 requires the use of a valuation model to
calculate the fair value of stock-based awards. For the years ended
December 31, 2020 and 2019, the Company has elected to use the
Black-Scholes option-pricing 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-pricing 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 options granted
during the years ended December 31, 2020 and 2019 ranged
from 57% and 83%.
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 Topic 14. The expected term used by the
Company to value the grants issued in 2020 and 2019 as computed by
this method was 5.17 years. The effect of 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 averaged 2.58% for the years ended
December 31, 2020 and 2019. Dividend yield is zero, as the
Company does not expect to declare any dividends on the
Company’s common shares 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 5.0% for corporate officers, 4.1%
for members of the Board of Directors and 15.0% for all other
employees. The Company reviews the expected forfeiture rate
annually to determine if that percent is still reasonable based on
historical experience.
Income
Taxes. The Company accounts for
income taxes in accordance with ASC 740, “Accounting for 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
740-10 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
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 consolidated financial statements from
such positions are then measured based on the largest benefit that
has a greater than fifty 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.
Significant
judgment is required in evaluating the Company’s uncertain
tax positions and determining the Company’s provision for
income taxes. No assurance can be given that the final tax outcome
of these matters will not be different from that which is reflected
in the Company’s historical income tax provisions and
accruals. 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.
The Internal Revenue Code (the
“Revenue
Code”) limits the
availability of certain tax credits and net operating losses that
arose prior to certain cumulative changes in a corporation’s
ownership resulting in a change of control of the Company. The
Company’s use of its net operating loss carryforwards and tax
credit carryforwards will be significantly limited because the
Company believes it underwent “ownership changes”, as
defined under Section 382 of the Revenue Code, in 1991, 1995, 2000,
2003, 2004, 2011, 2012, 2018 and 2020, though the Company has not
performed a study to determine the limitation. The Company has
reduced its deferred tax assets to zero relating to its federal and
state research credits because of such limitations. The
Company continues to disclose the tax effect of the net operating
loss carryforwards at their original amount as the actual
limitation has not yet been quantified. The Company has also
established a full valuation allowance for substantially all
deferred tax assets due to uncertainties surrounding its ability to
generate future taxable income to realize these assets. Since
substantially all deferred tax assets are fully reserved, future
changes in tax benefits will not impact the effective tax rate.
Management periodically evaluates the recoverability of the
deferred tax assets. If it is determined at some time in the future
that it is more likely than not that deferred tax assets will be
realized, the valuation allowance would be reduced accordingly at
that time.
On March 27, 2020, President Trump signed the CARES Act into law,
which, among other things, includes provisions relating to
refundable payroll tax credits, deferment of employer side social
security payments, net operating loss carryback periods,
alternative minimum tax credit refunds, modifications to the net
interest deduction limitations, increased limitations on qualified
charitable contributions and technical corrections to tax
depreciation methods for qualified improvement
property.
The Company continues to examine the impact that the CARES Act may
have on our business. Currently the Company is unable to determine
the impact that the CARES Act will have on our financial condition,
results of operation or liquidity.
Fair-Value
Measurements. 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).
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 as well as valuation techniques employing Monte Carlo
simulation methodologies.
Lease Liabilities and Operating Lease Right-of-Use
Assets
The Company is a
party to certain contractual arrangements for office space which
meet the definition of leases under Accounting Standards
Codification (“ASC”) Topic 842 – Leases
(“ASC 842”). In
accordance with ASC 842, the Company has determined that such
arrangements are operating leases and accordingly the Company has,
as of January 1, 2019, recorded operating lease right-of-use assets
and related lease liability for the present value of the lease
payments over the lease terms using the Company’s estimated
weighted-average incremental borrowing rate of approximately 14.5%.
The Company has utilized the practical expedient regarding lease
and nonlease components and has combined such items into a single
combined component. The Company has also utilized the practical
expedient regarding leases of twelve months or less and has
excluded such leases from its computation of lease liability and
related right-of-use assets. The Company has also elected the
optional transition package of practical expedients which
include:
A package of
practical expedient to not reassess:
●
Whether
a contract is or contains a lease
For
a detailed discussion on the application of these and other
accounting policies, see Note 2 to the Notes to the Consolidated
Financial Statements for the Year Ended December 31, 2020 included
elsewhere in this prospectus.
Comparison of the Three Months Ended March 31, 2021 to the Three
Months Ended March 31, 2020
|
|
Three
Months Ended
March
31,
|
|
|
|
Net Product Revenue
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software and
royalties
|
$39
|
$125
|
$(86)
|
(69)%
|
|
Percentage of total
net product revenue
|
70%
|
83%
|
|
|
|
Hardware and
consumables
|
$13
|
$14
|
$(1)
|
(7)%
|
|
Percentage of total
net product revenue
|
23%
|
9%
|
|
|
|
Services
|
$4
|
$11
|
$(7)
|
(64)%
|
|
Percentage of total
net product revenue
|
7%
|
7%
|
|
|
|
Total net product
revenue
|
$56
|
$150
|
$(94)
|
(63)%
|
Software and
royalty revenue decreased approximately $86,000 during the three
months ended March 31, 2021 as compared to the corresponding period
in 2020. This decrease is attributable to lower identification
project related revenue of approximately $53,000, lower
identification royalties of approximately $30,000 and lower law
enforcement software revenue of approximately $7,000 offset by
higher sales of boxed identity management software sold through our
distribution channel of approximately $4,000.
Revenue from the
sale of hardware and consumables decreased approximately $1,000
during the three months ended March 31, 2021 as compared to the
corresponding period in 2020 due to a decrease in consumables
procurement by our law enforcement customers.
Services
revenue is comprised primarily of software integration services,
system installation services and customer training. Such revenue
decreased approximately $7,000 during the three months ended March
31, 2021 as compared to the corresponding period of 2020 due to a
decrease in the service element of project related work completed
during the three months ended March 31, 2021.
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;
however, government procurement initiatives, implementations and
pilots are frequently delayed and extended and we cannot predict
the timing of such initiatives.
As
discussed more fully elsewhere in this Quarterly Report, the full
extent of COVID-19’s impact on our operations and financial
performance depends on future developments that are uncertain and
unpredictable, including the duration and spread of the pandemic,
its impact on capital and financial markets and any new information
that may emerge concerning the severity of the virus, its spread to
other regions as well as the actions taken to contain it, among
others.
During the three months ended March 31,
2021, we have focused on
strategically updating our products with the latest mobile and
cloud technology prioritized by market opportunities. We
relaunched GoVerify ID® in
July 2020. This relaunch includes a new container and
microservices-based architecture along with refreshed mobile and
desktop clients. We believe these updates will result in additional
customers implementing our GoVerify ID® solution.
Additionally, we have focused on the integration of the suite of
products that comprise out Identity Platform. Throughout the
remainder of 2021 we plan to continue to enhance our Identity
Platform products, including our EPI (our biometric smart access
cards) and law enforcement offerings by leveraging cloud and mobile
technologies to improve both functionality and value to the
customer. Management believes that these initiatives will result in
the expansion of our solutions into both law enforcement and
non-governmental sectors including commercial, consumer and
healthcare applications further resulting in additional
implementations of both our Authenticate products and Identity
Platform products.
|
|
Three
Months Ended
March
31,
|
|
|
|
Maintenance Revenue
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total maintenance
revenue
|
$677
|
$646
|
$31
|
5%
|
Maintenance
revenue was approximately $677,000 for the three months ended March
31, 2021, as compared to approximately $646,000 for the
corresponding period in 2020. Identity management maintenance
revenue generated from identification software solutions was
approximately $361,000 for the three months ended March 31, 2021 as
compared to approximately $317,000 during the comparable period in
2020. Law enforcement maintenance revenue was approximately
$316,000 and $329,000 for the three months ended March 31, 2021 and
2020, respectively. The decrease of $13,000 in law enforcement
software maintenance revenue for the three months ended March 31,
2021 as compared to the corresponding period of 2020 is reflective
of the expiration of certain maintenance contracts. The increase in
our Identity Management maintenance revenue of approximately
$44,000 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.
|
|
Three
Months Ended
March
31,
|
|
|
|
Cost of Product Revenue:
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Software and
royalties
|
$—
|
$14
|
$(14)
|
(100)%
|
|
Percentage of
software and royalty product revenue
|
0%
|
11%
|
|
|
|
Hardware and
consumables
|
$9
|
$6
|
$3
|
50%
|
|
Percentage of
hardware and consumables product revenue
|
69%
|
43%
|
|
|
|
Services
|
$—
|
$1
|
$(1)
|
(100)%
|
|
Percentage of
services product revenue
|
0%
|
9%
|
|
|
|
Total product cost
of revenue
|
$9
|
$21
|
$(12)
|
(57)%
|
|
Percentage of total
product revenue
|
16%
|
14%
|
|
|
The cost of software and royalty product revenue
decreased approximately $14,000 due primarily to lower software and
royalty revenue for the three months ended March 31, 2021 of
approximately $86,000 combined with the 2021 revenue being
comprised of solutions containing no third-party software
costs. 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 revenue
for our hardware and consumables sales increased by approximately
$3,000 for the three months ended March 31, 2021 as compared to the
corresponding period in 2020 despite lower hardware and consumable
revenue of $1,000 due to the 2021 period containing a larger mix of
consumables with slightly higher costs of revenue than the
corresponding period in 2020.
|
Maintenance cost of revenue
|
Three
Months Ended
March
31,
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Total maintenance
cost of revenue
|
$110
|
$98
|
$12
|
12%
|
|
Percentage of total
maintenance revenue
|
16%
|
15%
|
|
|
Cost
of maintenance revenue increased approximately $12,000 during the
three months ended March 31, 2021 as compared to the corresponding
period in 2020 due primarily to higher maintenance revenue of
approximately $31,000. This increase is reflective of higher
maintenance labor costs incurred during the three months ended
March 31, 2021 as compared to the corresponding period in 2020 due
primarily to the composition of engineering resources used in the
provision of maintenance services.
|
|
Three
Months Ended
March
31,
|
|
|
|
Product
gross profit
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$39
|
$111
|
$(72)
|
(65)%
|
|
Percentage of
software and royalty product revenue
|
100%
|
89%
|
|
|
|
Hardware and
consumables
|
$4
|
$8
|
$(4)
|
(50)%
|
|
Percentage of
hardware and consumables product revenue
|
31%
|
57%
|
|
|
|
Services
|
$4
|
$10
|
$(6)
|
(60)%
|
|
Percentage of
services product revenue
|
100%
|
91%
|
|
|
|
Total product gross
profit
|
$47
|
$129
|
$(82)
|
(64)%
|
|
Percentage of total
product revenue
|
84%
|
86%
|
|
|
Software
and royalty gross profit decreased approximately $72,000 for the
three months ended March 31, 2021 from the corresponding period in
2020 due primarily to lower software and royalty revenue of
approximately $86,000 combined with lower software and royalty cost
of revenue of $14,000 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.
Services
gross profit decreased approximately $6,000 for the three months
ended March 31, 2021 as compared to the corresponding period in
2020 due to lower service revenue of approximately $7,000 combined
with lower service cost of revenue of $1,000 for the three months
ended March 31, 2021 as compared to the corresponding period in
2020. Although changes in costs of services product revenue are
sometimes caused by revenue level fluctuations, costs of services
can also 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.
|
Maintenance gross profit
|
Three
Months Ended
March
31,
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total maintenance
gross profit
|
$567
|
$548
|
$19
|
3%
|
|
Percentage of total
maintenance revenue
|
84%
|
85%
|
|
|
Gross
profit related to maintenance revenue increased 3% or approximately
$19,000 for the three months ended March 31, 2021 as compared to
the corresponding period in 2020. This increase reflects higher
maintenance revenue of approximately $31,000 combined with higher
cost of maintenance revenue of approximately $12,000 due primarily
to the composition of engineering resources used in the provision
of maintenance services. Maintenance gross profit can change from
period to period depending upon both the level and complexity of
engineering service resources utilized in the provision of
maintenance services.
|
|
Three
Months Ended
March
31,
|
|
|
|
Operating expense
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
$1,347
|
$983
|
$364
|
37%
|
|
Percentage of total
net revenue
|
184%
|
123%
|
|
|
|
Sales and
marketing
|
$724
|
$1,058
|
$(334)
|
(32)%
|
|
Percentage of total
net revenue
|
99%
|
133%
|
|
|
|
Research and
development
|
$1,168
|
$1,868
|
$(700)
|
(37)%
|
|
Percentage of total
net revenue
|
159%
|
235%
|
|
|
|
Depreciation and
amortization
|
$18
|
$18
|
$—
|
—%
|
|
Percentage of total
net revenue
|
2%
|
2%
|
|
|
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 $364,000 during the three months ended
March 31, 2021 as compared to the corresponding period in 2020 is
comprised of the following major components:
●
Decrease
in personnel related expense of approximately $38,000.
●
Increase
in professional services of approximately $317,000, which includes
higher legal fees of approximately $55,000 for various general
corporate matters, higher patent related expense of approximately
$39,000 resulting primarily from professional and legal fees
related to the Company’s patent monetization efforts, higher
audit fees of $14,000, higher contract services of approximately
$66,000 and higher contractor fees of $141,000, higher Board of
Director fees of $16,000 and higher general corporate expense of
$3,000 offset by lower investor relations fees of approximately
$17,000.
●
Increase
in insurances, licenses, dues and other costs of approximately
$87,000;
●
Increase
in rent and office related costs of approximately $30,000;
and
●
Decrease
in stock-based compensation expense of approximately
$32,000.
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 $334,000 during the
three months ended March 31, 2021 as compared to the corresponding
period in 2020 is primarily comprised of the following major
components:
●
Decrease in
personnel related expense of approximately $264,000, driven
primarily by the effect of headcount decreases;
●
Decrease in
contractor and contract services of approximately $21,000 resulting
from decreased utilization of certain sales consultants of
approximately $53,000, offset by higher contract service expense
including dues and subscriptions of approximately
$32,000;
●
Decrease in travel,
trade show expense and office related expense of approximately
$5,000;
●
Decrease in
stock-based compensation expense of approximately $8,000;
and
●
Decrease in our
Mexico sales office expense and other of approximately $36,000 due
to headcount reductions at this location.
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 decreased approximately $700,000 for the three
months ended March 31, 2021 as compared to the corresponding period
in 2020 due primarily to the following major
components:
●
Decrease in
personnel related expense of approximately $524,000 driven
primarily by the effect of headcount decreases;
●
Decrease in
contractor fees and contract services of approximately $113,000
resulting from the cancellation of certain engineering
contractors;
●
Decrease in stock
based-compensation expense of approximately $7,000;
and
●
Decrease in office
related expense, engineering tools, supplies and travel of
approximately $56,000.
Depreciation and Amortization
During
the three months ended March 31, 2021 and 2020, depreciation and
amortization expense was approximately $18,000. The relatively
small amount of depreciation and amortization reflects the
relatively small property and equipment carrying
value.
Interest
Expense (Income), Net
For the three months ended March 31, 2021, we
recognized net interest expense of $0. For the three months ended
March 31, 2020, we recognized interest expense of $25,000
and interest income of approximately
$1,000. Interest expense for the three months ended March 31, 2020
reflects interest incurred on a related party factoring
agreement.
Other (Income)
Expense, Net
During
the three months ended March 31, 2021, we recognized other expense
of approximately $82,000 from the write-off of certain furniture
and fixtures and recognized other income of approximately $57,000
from the settlement of certain liabilities at less than their
carrying amount.
Change in Fair Value of Derivative Liabilities
For the three
months ended March 31, 2021, we recognized income of approximately
$1,172,000 from the decrease of derivative liabilities arising from
the consummation of the Series D Financing in November 2020. Such
decrease was determined by management using fair value
methodologies and is included as income under the caption
“Change in fair value of derivative liabilities” in our
condensed consolidated statement of operations for three months
ended March 31, 2021.
For the three
months ended March 31, 2020, we recognized income of approximately
$197,000 from the decrease of derivative liabilities arising from
the consummation of the Series C Financing in September 2018. Such
decrease was determined by management using fair value
methodologies and is included as income under the caption
“Change in fair value of derivative liabilities” in our
condensed consolidated statement of operations for three months
ended March 31, 2020.
Loss on Extinguishment of Derivative Liabilities
During the three
months ended March 31, 2021, we recognized a loss on the
extinguishment of derivative liabilities of approximately $335,000
pursuant to the conversion of 354 shares of Series D Preferred into
Common Stock. Such loss is included in the caption “Loss on
extinguishment of derivative liabilities” in our condensed
consolidated statement of operations for three months ended March
31, 2021.
Comparison of Results for Fiscal Years Ended December 31, 2020 and
2019
Product
Revenue
|
|
Twelve Months Ended
December 31,
|
|
|
|
Net Product Revenue
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Software
and royalties
|
$872
|
$489
|
$383
|
78%
|
|
Percentage
of total net product revenue
|
39%
|
53%
|
|
|
|
Hardware
and consumables
|
$84
|
$96
|
$(12)
|
(13)%
|
|
Percentage
of total net product revenue
|
4%
|
10%
|
|
|
|
Services
|
$1,275
|
$338
|
$937
|
277%
|
|
Percentage
of total net product revenue
|
57%
|
37%
|
|
|
|
Total
net product revenue
|
$2,231
|
$923
|
$1,308
|
142%
|
Software and royalty revenue increased 78% or
approximately $383,000 during the year ended December 31, 2020 as
compared to the corresponding period in 2019. This increase
is attributable to higher identification project related revenue of
approximately $539,000, offset by lower law enforcement project
related revenue of approximately $11,000, lower royalty revenue of
approximately $116,000 and lower sales of boxed identity management
software sold through our distribution channel of approximately
$29,000. The increase in
identification project related revenue is reflective of the
expansion of the Company’s identity management software base
combined with the sale of additional software licenses into
existing identification projects caused by increased end-user
utilization during the year ended December 31, 2020 as compared to
the corresponding period in 2019. The decrease in our law
enforcement project revenue resulted from a decrease in the timing
of procurement by our law enforcement customers. The decrease in
boxed identity management software sold through our distribution
channel reflects slightly lower procurement from both domestic and
international customers and the decrease in royalty revenue
reflects the expiration of a minimum royalty
contract.
Revenue
from the sale of hardware and consumables decreased approximately
$12,000 during the year ended December 31, 2020 as compared to the
corresponding period in 2019 due to a decrease in project related
solutions containing hardware and consumable sales primarily to law
enforcement customers.
Services revenue is comprised primarily of
software integration services, system installation services and
customer training. Such revenue increased $937,000 during the
year ended December 31, 2020 as compared to the corresponding
period in 2019, due to an
increase in the service element of project related work completed
during the year ended December 31, 2020.
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;
however, government procurement initiatives, implementations and
pilots are frequently delayed and extended and we cannot predict
the timing of such initiatives.
As
discussed more fully elsewhere in this prospectus, the full extent
of COVID-19’s impact on our operations and financial
performance depends on future developments that are uncertain and
unpredictable, including the duration and spread of the pandemic,
its impact our ability to close sales transactions and on capital
and financial markets and any new information that may emerge
concerning the severity of the virus, its spread to other regions
as well as the actions taken to contain it, among
others.
During the year ended December 31, 2020, we have focused on
strategically updating our products with the latest mobile and
cloud technology prioritized by market opportunities. We relaunched
ImageWare Authenticate (formerly GoVerify ID®) in July 2020. This relaunch includes a new
container and microservices-based architecture along with refreshed
mobile and desktop clients. We believe these updates will result in
additional customers implementing our ImageWare Authenticate
solution. Additionally, we have focused on the integration of the
suite of products that comprise our Identity Platform. Throughout
2021 we plan to continue to enhance our Identity Platform products,
including our EPI (our biometric smart access cards) and law
enforcement offerings by leveraging cloud and mobile technologies
to improve both functionality and value to the customer. Management
believes that these initiatives will result in the expansion of our
solutions into both law enforcement and non-governmental sectors
including commercial, consumer and healthcare applications, further
resulting in additional implementations of both our ImageWare
Authenticate products and Identity Platform
products.
Maintenance Revenue
|
|
Twelve Months Ended
December 31,
|
|
|
Maintenance Revenue
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance revenue
|
$2,554
|
$2,583
|
$(29)
|
(1)%
|
Maintenance revenue was approximately $2,554,000
for the year ended December 31, 2020, as compared to approximately
$2,583,000 for the corresponding periods in 2019. For the year
ended December 31, 2020, identity management maintenance revenue
was approximately $1,264,000 as compared to $1,275,000 for the
comparable period in 2019. The decrease of $11,000
in identification software
maintenance revenue for the year ended December 31, 2020 as
compared to the corresponding period of 2019 is reflective of the
expiration of certain maintenance contracts combined with the
timing of the commencement of maintenance services related to a
certain customer. The decrease of $18,000 in law enforcement maintenance revenue for the
year ended December 31, 2020 as compared to the corresponding
period of 2019 is reflective of the expiration of certain
maintenance contracts.
We
anticipate growth of our maintenance revenue through the retention
of existing customers combined with the expansion of our installed
base resulting from the completion of project-oriented work;
however, we cannot predict the timing of this anticipated
growth.
Cost of Product Revenue
|
|
Twelve Months Ended
December 31,
|
|
|
|
Cost of Product Revenue:
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Software
and royalties
|
$54
|
$36
|
$18
|
50%
|
|
Percentage
of software and royalty product revenue
|
6%
|
7%
|
|
|
|
Hardware
and consumables
|
$52
|
$66
|
$(14)
|
(21)%
|
|
Percentage
of hardware and consumables product revenue
|
62%
|
69%
|
|
|
|
Services
|
$694
|
$116
|
$578
|
498%
|
|
Percentage
of services product revenue
|
54%
|
34%
|
|
|
|
Total
product cost of revenue
|
$800
|
$218
|
$582
|
267%
|
|
Percentage
of total product revenue
|
36%
|
24%
|
|
|
The cost of software and royalty product revenue
increased approximately $18,000 from higher software and royalty
revenue for the year ended December 31, 2020 of approximately
$383,000 due to a significant percentage of the revenue increase
containing solutions with extremely minimal third-party software
costs. 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 product
revenue for our hardware and consumable sales during the year ended
December 31, 2020 decreased approximately
$14,000 as
compared to the corresponding period in 2019 due primarily to lower hardware and consumable
product revenue of approximately $12,000 during the 2020 period.
The
cost of services revenue increased approximately $578,000 during
the year ended December 31, 2020 as compared to the corresponding
period in 2019 due to higher service revenue of approximately
$937,000. Cost of services revenue as a percentage of service
revenue increased to 54% for the year ended December 31, 2020 as
compared to 34% for the corresponding 2019 period. This increase
reflects the one-time impact of additional service costs incurred
in the completion of the service element for a particular customer.
Although changes in costs of services product revenue are sometimes
caused by revenue level fluctuations, costs of services can also
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
|
Twelve Months Ended
December 31,
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance cost of revenue
|
$448
|
$425
|
$23
|
5%
|
|
Percentage
of total maintenance revenue
|
18%
|
16%
|
|
|
Cost
of maintenance revenue increased approximately $23,000 during the
year ended December 31, 2020 as compared to the corresponding
period in 2019 despite lower maintenance revenue of approximately
$29,000. This increase is reflective of higher maintenance labor
costs incurred during the year ended December 31, 2020 as compared
to the corresponding period in 2019 due primarily to the
composition of engineering resources used in the provision of
maintenance services.
Product
Gross Profit
|
|
Twelve
Months Ended
December
31,
|
|
|
|
Product
gross profit
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$818
|
$453
|
$365
|
81%
|
|
Percentage of
software and royalty product revenue
|
94%
|
93%
|
|
|
|
Hardware and
consumables
|
$32
|
$30
|
$2
|
7%
|
|
Percentage of
hardware and consumables product revenue
|
38%
|
31%
|
|
|
|
Services
|
$581
|
$222
|
$359
|
162%
|
|
Percentage of
services product revenue
|
46%
|
66%
|
|
|
|
Total product gross
profit
|
$1,431
|
$705
|
$726
|
103%
|
|
Percentage of total
product revenue
|
64%
|
76%
|
|
|
Software and royalty gross profit increased 81% or
approximately $365,000 for the year ended December 31, 2020 as
compared to the corresponding period in 2019, due primarily to higher software and royalty
revenue of approximately $383,000 combined with higher software and
royalty cost of revenue of $18,000 for the same period. This
revenue increase with only a minimal increase in software and
royalty cost of revenue reflects
extremely low third-party software costs. 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 $2,000 for the year ended December 31, 2020, as
compared to the 2019 period, due primarily to lower hardware and
consumable revenue of approximately $12,000 combined with lower cost of hardware and
consumable revenue of approximately $14,000. These decreases result
from a decrease in project related solutions containing hardware
and consumable components.
Services
gross profit increased approximately $359,000 for the year ended
December 31, 2020 as compared to the corresponding period in 2019
due to higher service revenue of approximately $937,000 combined
with higher service cost of revenue of $578,000 for the year ended
December 31, 2020 as compared to the corresponding period in 2019.
The decrease in services gross profit as a percentage of services
revenue from 66% in the year ended December 31, 2019 to 46% in the
corresponding period of 2020 reflects the one-time impact of
additional service costs incurred in the completion of the service
element for a particular customer. Although changes in costs of
services product revenue are sometimes caused by revenue level
fluctuations, costs of services can also 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.
Maintenance
Gross Profit
|
Maintenance gross profit
|
Twelve
Months Ended
December
31,
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance gross profit
|
$2,106
|
$2,158
|
$(52)
|
(2)%
|
|
Percentage
of total maintenance revenue
|
82%
|
84%
|
|
|
Gross
profit related to maintenance revenue decreased 2% or approximately
$52,000 for the year ended December 31, 2020 as compared to the
corresponding period in 2019. This decrease reflects lower
maintenance revenue of approximately $29,000 combined with higher
cost of maintenance revenue of approximately $23,000. The decrease
in maintenance revenue results from the timing of maintenance
revenue recognition related to a certain customer combined with the
expiration of certain maintenance contracts. The increase cost of
maintenance revenues for the year ended December 31, 2020 as
compared to the corresponding period in 2019 is due primarily to
the composition of engineering resources used in the provision of
maintenance services. The decrease in maintenance revenue results
from the timing of maintenance revenue recognition related to a
certain contract. Maintenance gross profit can change from period
to period depending upon both the level and complexity of
engineering resources utilized in the provision of the maintenance
services.
Operating
Expense
|
|
Twelve
Months Ended
December
31,
|
|
|
|
Operating expense
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
General
and administrative
|
$4,102
|
$3,614
|
$488
|
14%
|
|
Percentage
of total net revenue
|
86%
|
103%
|
|
|
|
Sales
and marketing
|
$2,936
|
$3,937
|
$(1,001)
|
(25)%
|
|
Percentage
of total net revenue
|
61%
|
112%
|
|
|
|
Research and
development
|
$5,706
|
$7,488
|
$(1,782)
|
(24)%
|
|
Percentage
of total net revenue
|
119%
|
214%
|
|
|
|
Depreciation
and amortization
|
$72
|
$71
|
$1
|
1%
|
|
Percentage
of total net revenue
|
2%
|
2%
|
|
|
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 $488,000 in general and
administrative expense for the year ended December 31, 2020 as
compared to the corresponding period in 2019 is comprised of the
following major components:
●
Overall decrease in
personnel related expense of approximately $55,000 is due to
reductions in employer contributions to employee benefit plans of
approximately $230,000 offset by higher personnel expenses of
approximately $175,000 due to the effects of various senior
management changes;
●
Increases in
professional services of approximately $252,000 which includes
higher legal fees of approximately $197,000, higher patent-related
legal and other fees of approximately $155,000 resulting from the
Company’s efforts to monetize certain patents, higher
contractor and contract service expenses of approximately $23,000
and higher general corporate expense of $16,000 offset by
reductions in Board of Director fees of approximately $6,000, lower
investor and public relations fees of approximately $106,000 and
lower audit fees of approximately $27,000,
●
Increase in
insurances, licenses, dues, rent, office related costs and other of
approximately $21,000;
●
Increase in
financing expense of approximately $66,000; and
●
Increase in
stock-based compensation expense related to options and restricted
stock units ("RSU’s") of approximately
$204,000.
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 Expense
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
personnel.
The
dollar decrease of approximately $1,001,000 during the year ended
December 31, 2020 as compared to the corresponding period in 2019
is primarily comprised of the following major
components:
●
Decrease
in personnel related expense of approximately $369,000 driven
primarily by headcount reductions;
●
Decrease
in contractor and contract services of approximately $388,000
resulting from lower contract service expense of approximately
$303,000 which includes lower dues and subscription expense, and
reduced utilization of certain sales consultants of approximately
$85,000.;
●
Decrease
in travel, trade show expense and office related expense of
approximately $257,000;
●
Decrease
in stock-based compensation expense of approximately $45,000;
and
●
Increase
in our Mexico sales office expense of approximately $58,000 due to
certain personnel separation expenses.
Research and Development Expense
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.
Research and
development expense decreased approximately
$1,782,000 for the year ended
December 31, 2020, as compared to the corresponding period in 2019,
due primarily to the following major
components:
●
Decrease in
personnel related expense of approximately $1,092,000 due to
headcount reductions;
●
Decrease in
contractor fees and contract services of approximately
$537,000;
●
Decrease in rent,
office related expense and engineering tools and supplies of
approximately $128,000; and
●
Decrease in stock
based-compensation expense of approximately $25,000.
Depreciation and Amortization
During
the year ended December 31, 2020, depreciation and amortization
expense increased approximately $1,000 as compared to the
corresponding period in 2019. The relatively small amount of
depreciation and amortization reflects the relatively small
property and equipment carrying value.
Interest Expense (Income), Net
For
the year ended December 31, 2020, we recognized interest income of
$2,000 and interest expense of $104,000. Interest expense for the
year ended December 31, 2020 was comprised of approximately $94,000
on our related party notes payable and approximately $10,000 on
notes payable under the PPP Loan program. For the year ended
December 31, 2019, we recognized interest income of $90,000 and
interest expense of $0.
Other Expense
For the year ended
December 31, 2020, we recognized other income of approximately $0
and other expense of approximately $4,000. Other expense for
the year ended December 31, 2020 is comprised of
approximately $4,000 in
late payment penalty fees.
For the year ended
December 31, 2019, we recognized other income of approximately
$0 and other expense of
$1,000. Other expense for the year ended December 31, 2019 is
comprised of approximately $1,000 in foreign transaction
expense.
Change in Fair Value of Derivative Liabilities
For the year ended December 31, 2020, we
recognized approximately $369,000 from the decrease of derivative
liabilities arising from the consummation of the Series C
Convertible Preferred Stock financing in September 2019
(“Series C
Financing”). Such decrease was determined by
management using fair value methodologies and is included as
non-cash income under the caption “Change in fair value of
derivative liabilities” in our consolidated statement of
operations for twelve months ended December 31, 2020. Also for the
year ended December 31, 2020, we recognized approximately
$1,883,000 from the change in fair value of derivative liabilities
arising from the Series D Financing. Such decrease was determined
by management using fair value methodologies and is included as
non-cash income under the caption “Change in fair value of
derivative liabilities” in our consolidated statement of
operations for twelve months ended December 31, 2020.
For the year ended December 31, 2019, we
recognized approximately $696,000 from the decrease of derivative
liabilities arising from the consummation of the Series C Financing
in September 2019. Such decrease was determined by management using
fair value methodologies and is included as non-cash income under
the caption “Change in fair value of derivative
liabilities” in our consolidated statement of operations for
twelve months ended December 31, 2019.
Income Tax Expense
During
the years ended December 31, 2020 and 2019, we recorded an expense
for income taxes of $7,000 and $10,000, respectively. These tax
expenses relate to taxes on income generated in certain foreign
jurisdictions offset by research and development tax credits
generated in certain foreign jurisdictions.
We
have incurred consolidated pre-tax losses during the years ended
December 31, 2020, and 2019, and have incurred operating losses in
all prior periods. Management has determined that it is more likely
than not that a tax benefit from such losses will not be realized
and has established a full valuation allowance for any tax
benefits. Accordingly, we did not record a benefit for income taxes
for these periods.
Liquidity,
Capital Resources and Going Concern
Historically,
our principal sources of cash have included customer payments from
the sale of our products, proceeds from the issuance of common and
preferred stock and proceeds from the issuance of debt. Our
principal uses of cash have included cash used in operations,
product development, and payments relating to purchases of property
and equipment. 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 SaaS capabilities for existing products as well as
general working capital. Management expects 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. Historically the Company has not
been able to generate sufficient net revenue to achieve and sustain
positive cash flows from operations and management has determined
that there is substantial doubt about the Company’s ability
to continue as a going concern.
Series D Preferred Stock Financings
On November 12,
2020 and December 23, 2020, the Company consummated private
placements of 12,060 shares of its Series D Convertible Preferred
Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds included approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Series D Purchase Agreement"), by and
between the Company and certain accredited investors (the
"Purchasers"), for the sale
of the Series D Preferred at a purchase price of $1,000 per share
of Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities, and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of cash or shares of
Series D Preferred.
Concurrently with
the execution of the Purchase Agreement, the Company and the
Investors executed (i) a Registration Rights Agreement, pursuant to
which the Company agreed to file a registration statement with the
SEC within thirty days of closing to register the shares of Common
Stock issuable upon conversion of the Series D Preferred; (ii) a
Series C Exchange Agreement (the "Exchange Agreement"), pursuant to which
the Company and certain holders of the Company’s Series C
Preferred agreed to exchange their Series C Preferred, with a
liquidation preference of approximately $10.0 million, for Series D
Preferred at closing; and (iii) a Term Loan and Security Agreement
(“Loan
Agreement”), pursuant to which each investor signatory
thereto agreed to make a term loan to the Company, secured by all
assets of the Company, in an amount equal to 20% of such
investor’s purchase commitment as set forth in the Purchase
Agreement (“Bridge
Loan”), which Bridge Loan, plus accrued interest,
rolled into, and was used to purchase, Series D Preferred at
Closing.
Bridge
Loan
Concurrently with the execution of the Series D
Purchase Agreement, the Company and certain investors in the Series
D Financing executed the Loan Agreement, pursuant to which each
such investor signatory thereto (the "Investors") agreed to the Bridge Loan, secured by all
assets of the Company, in an amount equal to 20% of such
Investor’s purchase commitment as set forth in the Series D
Purchase Agreement, which Bridge Loan, plus accrued interest,
rolled into, and was used to purchase, Series D Preferred at
Closing. For more information regarding the Series D Purchase
Agreement, the Investors, the Loan Agreement, and the Bridge Loan,
see Note 1, Description of Business and Operations to the
consolidated financial statements.
Pursuant
to the Bridge Loan, the Company received proceeds of $2,187,000 in
September 2020. The Bridge Loan bears interest at a fixed
rate of 12% and is due and payable in arrears on the earlier of the
Loan Conversion Date, as such term is defined in the Loan
Agreement, or six months after the disbursement of the Bridge Loan.
All amounts due and payable pursuant to the Bridge Loan are
automatically convertible, without further action by the Investors,
into shares of Series D Preferred at closing at a purchase price of
$1,000 for each share of Series D Preferred. The repayment of all
amounts due under the terms of the Loan Agreement are secured by
all assets of the Company. On November 12, 2020, contemporaneously
with the closing of the Series D Preferred Financing, all amounts
due under the Bridge Loan were converted into shares of Series D
Preferred Stock.
Lincoln Park Capital Fund, LLC 2020 Financing
On April 28, 2020,
the Company entered into a purchase agreement, and as amended on
June 11, 2020 (the “2020 Lincoln Purchase Agreement”), and
a registration rights agreement (the “2020 Lincoln Registration Rights
Agreement”) with Lincoln Park Capital Fund, LLC
(“Lincoln
Park”) pursuant to which Lincoln Park committed to
purchase up to $10,250,000 of our Common Stock.
Under the terms and
subject to the conditions of the 2020 Lincoln Purchase Agreement,
we have the right, but not the obligation, to sell to Lincoln Park,
and Lincoln Park is obligated to purchase up to $10,250,000 of
shares of Common Stock. Future sales of Common Stock under the 2020
Lincoln Purchase Agreement, if any, will be subject to certain
limitations, and may occur from time to time, at our sole
discretion, over the 24-month period commencing on July 8, 2020,
and the other conditions set forth in the 2020 Lincoln Purchase
Agreement are satisfied (such date on which all of such conditions
are satisfied, the “Commencement Date”). During the
year ended December 31, 2020, the Company sold an aggregate of
5,700,000 shares of Common Stock to Lincoln Park under the terms of
the Lincoln Purchase Agreement resulting in gross cash proceeds to
the Company of approximately $918,000.
The 2020 Lincoln
Purchase Agreement and the 2020 Lincoln Registration Rights
Agreement contain customary representations, warranties, agreements
and conditions and indemnification obligations of the parties. The
Company has the right to terminate the Purchase Agreement at any
time, at no cost or penalty. The Company issued to Lincoln Park
2,500,000 shares of Common Stock in consideration for entering into
the 2020 Lincoln Purchase Agreement. Pursuant to this issuance,
$400,000 was recorded by the Company as a deferred stock issuance
cost. Such amount is recorded in the Company’s consolidated
balance sheet under the caption “Other assets”. Such
deferred stock issuance costs will be recognized as a charge
against paid in capital in proportion to securities sold under the
2020 Lincoln Purchase Agreement. During the year ended December 31,
2020, the Company recognized approximately $36,000, respectively,
as a charge against paid in capital relating to securities sold
under the Lincoln Purchase Agreement.
Due to the
terms of the 2020 Lincoln Purchase Agreement as described above,
management is not currently expecting the related proceeds from the
Lincoln Purchase Agreement to be sufficient to sustain operations
for an extended period of time.
Going Concern and Management’s Plan
At March 31, 2021, we had negative working capital
of approximately $20,887,000 as compared to negative working
capital of approximately $19,349,000 at December 31, 2020.
Included in our negative working
capital as of March 31, 2021 are $22,850,000 of derivative
liabilities which are not required to be settled in cash except in
the event of the consummation of a Change of Control or at any time
after the fourth anniversary of the Series D Preferred issuance, at
which time the holders of the Series D Preferred may require the
Company to redeem in cash any or all of the holder’s
outstanding Series D Preferred at an amount equal to the Series D
Liquidation Preference Amount. At March 31, 2021 the Liquidation
Preference Amount totaled $22,757,000.
On
March 11, 2020, the World Health Organization declared
the COVID-19 outbreak a pandemic.
The COVID-19 pandemic is affecting the United States and
global economies and may affect the Company's operations and those
of third parties on which the Company relies. Additionally, as the
duration of the COVID-19 pandemic is difficult to assess
or predict, the impact of the COVID-19 pandemic on the
financial markets may reduce our ability to access capital, which
could negatively impact the Company's short-term and long-term
liquidity. These effects could have a material impact on the
Company's liquidity, capital resources, operations and business and
those of the third parties on which the Company
relies.
To
address our working capital requirements, management has begun
instituting several cost cutting measures and may seek additional
equity and/or debt financing through the issuance of additional
debt and/or equity securities. Other than the Lincoln Purchase
Agreement, there are currently no financing arrangements to support
our projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, or other agreements, and
no assurances can be given that we will be successful in raising
additional debt and/or equity securities, or entering into any
other transaction that addresses our ability to continue as a going
concern.
However,
in view of the matters described in
the preceding paragraphs, 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 generate positive cash flows from operations. The
Company, however, 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. Therefore, management’s plans do
not alleviate the substantial doubt regarding the Company’s
ability to continue as a going concern.
The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts and classifications of liabilities that might be necessary
should the Company be unable to continue as a going
concern.
Operating Activities
We used net cash of $3,290,000 in operating
activities for the three months ended March 31, 2021 as compared to
net cash used of $1,980,000 during the comparable period in 2020. During the
three months ended March 31, 2021, net cash used in operating
activities consisted of net loss of $1,885,000 and an increase in
working capital and other assets and liabilities of $767,000. Those
amounts are in addition to approximately $638,000 of non-cash
income, including $1,172,000 in income from the change in fair
value of derivative liabilities offset by $78,000 in stock-based
compensation, $18,000 in depreciation and amortization $82,000 in
non-cash expense from the disposal of fixed assets, $21,000 from
the issuance of common stock as compensation in lieu of cash and
$335,000 from loss on extinguishment of derivative liabilities.
During the three months ended March 31, 2021, we used cash of
$459,000 from increases in current assets combined with $10,000
from decreases in our operating leases right-of-use assets and used
cash of $298,000 through
decreases in current liabilities and deferred
revenue.
Net cash used in operating activities was
approximately $8,009,000 during the year ended December 31, 2020 as
compared to $11,267,000 during the year ended December 31, 2019.
During the year ended December 31, 2020, net cash used in operating
activities consisted of net loss of $7,253,000 and an increase in
working capital and other assets and liabilities of $438,000. Those
amounts in addition to approximately $1,194,000 of non-cash income,
including $2,252,000 in income from the change in fair value of
derivative liabilities offset by $862,000 in stock-based
compensation, $72,000 in depreciation and amortization and $124,000
from the application of rent deposits. During the year ended
December 31, 2020, we generated cash of $690,000 from decreases in
current assets offset by $20,000 from increases in our operating
leases right-of-use assets and used cash of $410,000
through decreases in current
liabilities and deferred revenue offset by increases of $178,000 in
pension liability.
During
the year ended December 31, 2019, net cash used in operating
activities consisted of net loss of $11,581,000 and an increase in
working capital and other assets and liabilities of $287,000. Those
amounts were offset by approximately $723,000 of non-cash costs and
$696,000 in non-cash income. Non-cash costs were $652,000 in
stock-based compensation and $71,000 in depreciation and
amortization. Non-cash income consisted of $696,000 in the change
in fair value of derivative liabilities. During the year ended
December 31, 2019, we used cash of $209,000 from increases in
current assets offset by $168,000 from decreases in our operating
leases right-of-use assets and generated cash of $357,000 through
increases in current liabilities and deferred revenue offset by
$32,000 used from decreases in contract costs.
Investing Activities
Net
cash used in investing activities during the three months ended was
$53,000 as compared to $0 for the corresponding period in 2020. For
the three months ended March 31, 2021, we used cash of $53,000 to
funds capital expenditures of computer hardware.
There was no net cash used or generated from
investing activities for the year ended December
31, 2020. For the year ended December 31, 2019, we used cash of $31,000 to fund capital
expenditures.
Financing Activities
There
was no net cash used or provided by financing activities during the
three months ended March 31, 2021 as compared to $972,000 in cash
provided from financing activities during the corresponding period
in 2020, during which period we generated cash of approximately
$622,000 from the sale of 4,000,000 shares of Common Stock for
$0.16 per share, or $640,000 before recognition of approximately
$18,000 in direct offering costs. We also generated cash of
$350,000 from the issuance of a related party note
payable.
Cash generated from financing activities was
approximately $15,475,000 for the year ended December 31, 2020,
which consisted of cash of approximately $12,060,000 generated from
the sale of 12,060 shares of
Series D Preferred. Such amount includes $2,187,000 received by the
Company in the form of a Bridge Loan which was converted into
shares of Series D Preferred before recognition of approximately
$726,000 in cash direct stock issuance costs. We also generated
cash of approximately $900,000 from the issuance of related party
notes payable and generated cash of $1,571,000 from the issuance of
the PPP Loan under the CARES Act. Also in the year ended December
31, 2020, we generated cash of approximately $2,360,000 from the
sales of 15,700,000 shares of Common Stock before recognition of
approximately $64,000 in direct stock issuance costs. We used cash
of approximately $575,000 to repay certain related party notes
payable and used cash of approximately $51,000 for the payment of
dividends on our Series B Preferred.
Cash
generated from financing activities was approximately $6,635,000
for the year ended December 31, 2019, which consisted of cash
generated of approximately $166,000 from the exercise of 351,334
stock options resulting in the issuance of 351,334 shares of Common
Stock, and cash generated of $6,520,000 from the sale of 5,954,545
shares of Common Stock, offset by cash used of approximately
$51,000 for the payment of dividends on our Series B Preferred
Stock.
Real Property Leases
Our
corporate headquarters is located in San Diego, California, where
we now occupy approximately 500 square feet of office space at a
cost of approximately $2,000 per month. We entered into this
facility’s lease in February 2021 and this new lease
commenced on March 1, 2021 and is on a month-to-month basis. In
addition to our corporate headquarters, we also occupied the
following spaces at December 31, 2020:
●
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. The Company extended this lease for a 30-day period and is
currently evaluating alternative premises which the Company
believes are readily available;
●
9,720 square feet
in Portland, Oregon, at a cost of approximately $23,000 per month
until the expiration of the lease on February 28, 2023;
and
●
183 square feet of
office space in Mexico City, Mexico, at a cost of approximately
$2,000 per month until September 30, 2021.
Prior
to entering into our current lease agreement in January 2021 and
moving our corporate headquarters to a new location, we occupied
8,511 square feet of office space in San Diego, at a cost of
approximately $30,000 per month. In January 2021, we entered in a
subleasing agreement for our previously occupied corporate
headquarters located in San Diego, California. The term of the
sublease commences on April 1, 2021 and expires on April 20, 2025
coterminous with the expiration of the Company's master lease.
Sublease payments due the Company approximate $26,000 per month
over the term of the sublease.
Stock-Based Compensation
Stock-based
compensation related to equity options and restricted stock has
been classified as follows in the accompanying consolidated
statements of operations (in thousands):
|
|
|
|
|
|
|
|
Cost
of revenue
|
$15
|
$13
|
|
General
and administrative
|
550
|
347
|
|
Sales
and marketing
|
163
|
148
|
|
Research
and development
|
134
|
135
|
|
|
|
|
|
Total
|
$862
|
$643
|
Off-Balance Sheet Arrangements
At
March 31, 2021 and December 31, 2020, 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 Registration
Statement.
Recently Issued Accounting Pronouncements
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. See Note 2 to the consolidated financial
statements contained elsewhere in this prospectus for a detailed
discussion of recently issued accounting
pronouncements.
Impact of Inflation
The
primary inflationary factor affecting our operations is labor
costs, and we do not believe that inflation has materially affected
earnings during the past four years. Substantial increases in costs
and expense, particularly labor and operating expense, could have a
significant impact on our operating results to the extent that such
increases cannot be passed along to customers and end
users.
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information
regarding each of our directors and executive officers as of the
date of this prospectus.
|
Name
|
|
Age
|
|
Title/Position Held with the Company
|
|
Kristin
Taylor
|
|
53
|
|
President, Chief
Executive Officer, Director
|
|
James M.
Demitrieus
|
|
72
|
|
Director
|
|
Douglas
Morgan
|
|
68
|
|
Director
|
|
Lauren C.
Anderson
|
|
63
|
|
Director
|
|
James W.
Sight
|
|
65
|
|
Director
|
There are no
familial relationships between any of the Company’s executive
officers and directors listed above.
The following
biographical information regarding the foregoing directors and
officers of the Company following the Board Restructuring is
presented below:
Kristin Taylor, President,
Chief Executive Officer and Director. Ms. Taylor serves as
our President and Chief Executive Officer since her appointment in
March 2020 and as a member of our Board since May 2020, and is a
seasoned innovative technology executive with over 20 years of
experience in leading organizational modernization and developing
go-to-market strategies. She formerly served as Principal of
Veritas Lux since November 2019 and principal of Kristin Taylor
Consulting since 2012, in which she developed a proprietary
algorithmic methodology to weigh and rank the most influential
global technical analysts. From 2017 to 2019, Ms. Taylor served as
Global Vice President of Worldwide Analyst Relations at IBM and led
the efforts to modernize and transform IBM's analyst relations
organization to drive revenue, not just influence. From 2013 to
2017, she served as Vice President, Global Analyst and Public
Relations at MediaTek, the third largest fabless semiconductor
company in the world with a $30 billion market cap, where she led
the buildout of a new global Public and Analyst Relations
organization to penetrate the North American, European, Latin
American, Russian and Indian markets. Prior to that, she served in
various positions of increasing responsibility with Qualcomm from
1998 to 2010 including: Head of Industry Analyst Relations, Senior
Director of Business Development, and Director of Information
Technology. Ms. Taylor developed and commercialized a highly
successful embedded computing module, designed for notebook
computers which thrust Qualcomm into the computing sector in 2006
to create hundreds of millions of valuation as they expanded from
mobile. Ms. Taylor earned her Bachelor's degree in Sociology and
Business Management from the University of New Hampshire in Durham,
New Hampshire.
James M.
Demitrieus. Mr. Demitrieus was appointed as a
member of the Board of Directors on November 13, 2020. From March
2018 to present, Mr. Demitrieus has served as Managing Director of
Jameson Associates, a specialty investment management and financial
advisory firm. Prior to Jameson, he served in multiple
positions at Eyelock Corporation beginning in 2009, including Chief
Executive Officer from 2010 to 2018. Eyelock Corporation
provides iris based biometric solutions to various business
verticals. Prior to Eyelock Corporation, he served in various
senior executive roles, including as President of Sherwood Valve, a
division of Harsco Corporation, and as Chief Executive Officer
at Aluma Systems. Earlier in Mr. Demitrieus’ career, he
served in numerous senior accounting and finance roles, including
with the public accounting firm of Arthur Andersen & Co.
Mr. Demitrieus holds a Bachelor's in Business Administration
from Adelphi University in New York.
Mr. Demitrieus was
selected as a member of the Board due to his experience in the
field of biometrics, as well as his extensive management, finance
and accounting experience, that management believes will provide
the Board with valuable insights regarding monetizing the
Company’s product offerings and intellectual
property.
Douglas Morgan. Mr.
Morgan was appointed as a member of the Board of Directors on
November 24, 2020. From March 2019 to present, Mr. Morgan has
served as an Advisory Board member and Consultant to Clyra Medical
Technologies, a biotechnology company specializing in wound healing
and antimicrobial solutions, and prior to that as a Consultant to
the public parent company, BioLargo (symbol: BLGO) on business
strategy and a capital raise. He is CEO of Performance
Strategies, Inc., a business and technology consulting firm where
he has worked with companies across numerous sectors including
security, payments and biotech, assisting them with financing
strategies, market positioning, technology development and IP
strategy. Earlier in his career, he helped found Hirsch
Electronics, a security systems company known for its patented
ScamblePad product. He served as Hirsch’s VP
Engineering managing the development of their entire line of
security systems and controllers, and later as a Director helped
negotiate Hirsch’s merger with publicly traded Identiv
(symbol: INVE) where he again served on the Board of
Directors. He graduated Summa Cum Laude from both MIT with a
BS in Computer Science, and Stanford University with an MS in
Electrical Engineering, and was also a National Science Foundation
Fellow.
Mr. Morgan was
selected as a member of the Board due to his past experience in the
Security industry, his background in intellectual property
development and strategies, and his work and broad experience in
business strategy, product definition and market positioning for
technology-based companies.
Lauren C.
Anderson. Ms. Anderson joined
the Company’s Board in February 2021. Ms. Anderson is the
founder and Chief Executive Officer of LC Anderson International
Consulting, founded in 2013. Ms. Anderson, a former Federal Bureau
of Investigation ("FBI") Senior Executive, has a background in high
risk, complex, domestic, and international environments and
currently serves as an
advisor to the U.S. Comptroller General at the Government Accountability Office on
international security, intelligence, criminal justice, law
enforcement, and women’s leadership. Ms. Anderson also serves
as an advisor and special skilled role player for the U.S. Army,
and she is an advisor with Stellar Solutions. Ms. Anderson worked
in various leadership roles for the FBI from February 1984 until
December 2012, and was the FBI Legal Attaché at United States
Embassies in France and Morocco from March 2002 through November
2006. Ms. Anderson holds numerous professional awards and
certifications, including achievement awards from the Director of
National Intelligence, Legal Momentum, LIM College and Muhlenberg
College. She is a member of the Council on Foreign Relations, a
director emeritus for the Women's Forum of NY, served as a judge
for the Women's Safety XPrize and the Stevie Awards, and is a
mentor with the Women's Foreign Policy Group and Girl Security. She
holds a security clearance and numerous certifications with the
United States government. Ms. Anderson has an Honorary Doctorate of
Humane Letters, awarded in 2019, by LIM College, New York City, a
Bachelor of Arts in Psychology from Muhlenberg College, in
Allentown, Pennsylvania, and completed executive programs at each
of Harvard Business School, Northwestern University's Kellogg
School of Management, Cambridge Judge Business School, and the
George C. Marshall European Center for Security Studies in
Garmisch, Germany.
Ms. Anderson was
selected as a member of the Board due to her extensive experience
as a security expert at the highest level within the Federal
government, and her relationships with law enforcement and
government agencies, each key markets for the Company.
James W.
Sight. Mr. Sight joined the
Company’s Board in April 2021. Mr. Sight currently
serves on the Board of Directors of Griffon Corporation (NYSE: GFF)
and Fiduciary Benchmarks Insights, LLC, an independent, private
company that provides consulting services to the retirement plan
industry. Mr. Sight has been a private investor for over
twenty-five years, serving on the boards of numerous public
companies, including most recently Photomedex, Inc. (formerly
NASDAW: PHMD) from 2010 through 2015. Mr. Sight has over
two decades of experience in corporate restructurings and
financings, having advised both public companies and creditors in
these areas serving as a board member, consultant and on
creditors’ committees. From 2007 through 2012,
Mr. Sight was a significant shareholder of Feldman Mall
Properties, Inc., a real estate investment trust (formerly NYSE:
FLMP), and served in the office of the REIT’s President; and
from 1998 to 2006, he served as a consultant to LSB Industries
(NYSE: LXU).
Mr. Sight was
selected as a member of the Board due to his capital market experience, as well as his
experience working with undervalued companies, that management
believes will assist in the Board’s efforts to create value
for shareholders as it executes its business
plan.
There have been no
events under any bankruptcy act, no criminal proceedings and no
judgments or injunctions material to the evaluation of the ability
and integrity of any director or nominee set forth above during the
past ten years.
Board of Directors; Attendance at Meetings
The Board held four
meetings and acted by unanimous written consent five times during
the year ended December 31, 2020. Each director attended at least
75% of Board meetings during the year ended December 31, 2020. We
have no formal policy with respect to the attendance of Board
members at annual meetings of shareholders, but encourage all
incumbent directors and director nominees to attend each annual
meeting of shareholders.
Director
Independence
Our Board has
determined that all of its current members, other than Ms. Taylor,
are “independent” within the meaning of the Nasdaq
Stock Market Rules and SEC rules regarding
independence.
Board
Committees and Charters
Our Board has an
Audit Committee, a Compensation Committee and a Nominating and
Corporate Governance Committee, each of which has the composition
and responsibilities described below.
Audit Committee
The Audit Committee
provides assistance to the Board in fulfilling its legal and
fiduciary obligations in matters involving our accounting,
auditing, financial reporting, internal control and legal
compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our
accounting practices and systems of internal accounting controls.
The Audit Committee also oversees the audit efforts of our
independent accountants and takes those actions as it deems
necessary to satisfy it that the accountants are independent of
management. The Audit Committee currently consists of Messrs.
Demitrieus (Committee Chair), and Morgan, each of whom is a
non-management member of our Board. Mr. Demitrieus is also our
Audit Committee financial expert, as currently defined under
current SEC rules. The Audit Committee met four times during
the year ended December 31, 2020. We believe that the
composition of our Audit Committee meets the criteria for
independence under, and the functioning of our Audit Committee
complies with the applicable Nasdaq Stock Market Rules and SEC
rules and regulations.
Compensation Committee
The Compensation
Committee determines our general compensation policies and the
compensation provided to our directors and officers. The
Compensation Committee also reviews and determines bonuses for our
officers and other employees. In addition, the Compensation
Committee reviews and determines equity-based compensation for our
directors, officers, employees and consultants and administers our
stock option plans. The Compensation Committee currently
consists of Messrs. Morgan (Committee Chair) and Demitrieus,
each of whom is a non-management member of our Board. The
Compensation Committee did not meet during the year ended December
31, 2020. All members of the Compensation Committee currently meet
the criteria for independence under the applicable Nasdaq Stock
Market Rules and SEC rules and regulations.
Nominating and Corporate Governance
Committee
The Nominating and
Corporate Governance Committee is responsible for making
recommendations to the Board regarding candidates for directorships
and the size and composition of the Board. In addition, the
Nominating and Corporate Governance Committee is responsible for
overseeing our corporate governance guidelines and reporting and
making recommendations to the Board concerning corporate governance
matters. The Nominating and Corporate Governance Committee
currently consists of all the members of the Board. The
Nominating and Corporate Governance Committee did not meet during
the year ended December 31, 2020.
Board
Leadership Structure
Our Board has
discretion to determine whether to separate or combine the roles of
Chief Executive Officer and Chair of the Board. Prior to the
appointment of Kristin Taylor as President and Chief Executive
Officer on March 2, 2020, and during the year ended December 31,
2019, S. James Miller held the roles of both Chief Executive
Officer and Chair of the Board since 1996, and our Board believed
that at the time, his combined role was advantageous to the Company
and its shareholders. Currently, Ms. Taylor serves as both Chief
Executive Officer and Chair of the Board as the Board believes, at
this time, her combined role is advantageous to the Company and its
shareholders.
The Board maintains
effective independent oversight through a number of governance
practices, including open and direct communication with management,
input on meeting agendas, and regular executive
sessions.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Exchange Act requires our directors and executive officers,
and persons who beneficially own more than 10% of a registered
class of our equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of our
Common Stock and other equity securities. Such persons are required
by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely
on a review of the copies of such reports furnished to us and
written representations that no other reports were required, during
the fiscal year ended December 31, 2020, all Section 16(a)
filing requirements were complied with in a timely
manner.
Board Role in Risk
Assessment
Management, in
consultation with outside professionals, as applicable, identifies
risks associated with the Company’s operations, strategies
and financial statements. Risk assessment is also performed through
periodic reports received by the Audit Committee from management,
counsel and the Company’s independent registered public
accountants relating to risk assessment and management. Audit
Committee members meet privately in executive sessions with
representatives of the Company’s independent registered
public accountants. The Board also provides risk oversight through
its periodic reviews of the financial and operational performance
of the Company.
Code
of Ethics
The Company has
adopted a Code of Business
Conduct and Ethics policy that applies to our directors
and employees (including the Company’s principal executive
officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions). The
Company intends to promptly disclose (i) the nature of any
amendment to this code of ethics that applies to our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions and (ii) the nature of any waiver, including an implicit
waiver, from a provision of this code of ethics that is granted to
one of these specified individuals, the name of such person who is
granted the waiver and the date of the waiver on our website in the
future. A copy of our Code of Business Conduct and
Ethics can be obtained from our website at
http://www.iwsinc.com.
Indemnification
of Officers and Directors
To the extent permitted by Delaware law, the Company will
indemnify its directors and officers against expenses and
liabilities they incur to defend, settle, or satisfy any civil
or criminal action brought against them on account
of their being or having been Company directors or officers
unless, in any such action, they are adjudged to have acted
with gross negligence or willful misconduct.
Summary Compensation Table
The following table
sets forth certain information about the compensation paid or
accrued during the years ended December 31, 2020 and 2019 to our
Chief Executive Officer and each of our two most highly compensated
executive officers other than our Chief Executive Officer who were
serving as executive officers at December 31, 2020, and whose
annual compensation exceeded $100,000 during such year or would
have exceeded $100,000 during such year if the executive officer
were employed by the Company for the entire fiscal year
(collectively the “Named
Executive Officers”).
|
Name and Principal Position
(1)
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kristin Taylor
(4)
|
2020
|
$275,000
|
$-
|
$-
|
$-
|
$11,561
|
(8)
|
$286,561
|
|
Chief Executive Officer and Chair of the Board
|
2019
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
$-
|
|
|
|
|
|
|
|
|
|
|
Sudheer
Koganti
|
2020
|
$131,629
|
$12,500
|
$-
|
$
|
$-
|
|
$144,129
|
|
Vice President of Engineering
|
2019
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
$-
|
|
|
|
|
|
|
|
|
|
|
Chris
Dickson
|
2020
|
$113,352
|
$10,359
|
$-
|
|
$40,680
|
(9)
|
$164,391
|
|
Vice President of Sales
|
2019
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
$-
|
|
|
|
|
|
|
|
|
|
|
S. James Miller,
Jr. (5)
|
2020
|
$227,359
|
$-
|
$-
|
$47,250
|
$72,665
|
(10)
|
$347,274
|
|
Former Chair of the Board and Former Chief Executive
Officer
|
2019
|
$400,856
|
$-
|
$-
|
$-
|
$16,799
|
|
$417,655
|
|
|
|
|
|
|
|
|
|
|
Jonathan Morris
(6)
|
2020
|
$168,000
|
$-
|
$-
|
$-
|
$-
|
|
$168,000
|
|
Former Senior Vice President and Chief Financial
Officer
|
2019
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
$-
|
|
|
|
|
|
|
|
|
|
|
David Harding
(7)
|
2020
|
$152,778
|
$-
|
$-
|
$-
|
$26,086
|
(11)
|
$178,864
|
|
Former Vice President and Chief Technical Officer
|
2019
|
$275,000
|
$-
|
$-
|
$-
|
$-
|
|
$275,000
|
|
(1)
|
Jay B. Lewis served
as Senior Vice President and Chief Financial Officer of the Company
from January 8, 2021 to April 7, 2021, after the fiscal year end
date of December 31, 2020, and therefore has been excluded from the
table.
|
|
|
|
|
(2)
|
All option awards
were granted under the Company’s 2020 Plan or 1999
Plan.
|
|
|
|
|
(3)
|
The amounts
presented in this column do not reflect the cash value or
realizable value of option grants to the named executive officers
during the year ended December 31, 2020 or 2019. The amounts
reflect the grant date fair value of the options awarded in the
fiscal years ended December 31, 2020 and 2019, respectively, in
accordance with the provisions of FASB ASC Topic 718. We have
elected to use the Black-Scholes option-pricing model, which
incorporates various assumptions including volatility, expected
life, and interest rates. We are required to make various
assumptions in the application of the Black-Scholes option-pricing
model and have determined that the best measure of expected
volatility is based on the historical weekly volatility of our
Common Stock. Historical volatility factors utilized in our
Black-Scholes computations for options granted during the years
ended December 31, 2020 and 2019 ranged from 57% to 83%. We have elected to estimate the
expected life of an award based upon the SEC approved
“simplified method” noted under the provisions of Staff
Accounting Bulletin Topic 14. The expected term used by the Company
during the years ended December 31, 2020 and 2019 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 years ended December 31, 2020 and 2019 was
2.58%. Dividend yield is zero,
as we do not expect to declare any dividends on shares of our
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.
We have estimated an annualized forfeiture rate of 5.0% for
corporate officers, 4.1% for members of the Board and 15.0% for all
other employees. We review the expected forfeiture rate annually to
determine if that percent is still reasonable based on historical
experience.
|
|
|
|
|
(4)
|
Ms. Taylor was
appointed as the Company’s President and Chief Executive
Officer on March 2, 2020, and received no compensation prior to her
employment. Under the terms of Kristin
Taylor’s Employment Agreement, dated March 2, 2020, Ms.
Taylor is entitled to an option to purchase 1,750,000 shares of
Common Stock, which equity award was amended on April 16, 2021 to
an option to purchase 27,000,000 million shares, and which was
granted as of April 16, 2021.
|
|
|
|
|
(5)
|
Effective November
12, 2020, Mr. Miller, Former Chief Executive Officer of the
Company, resigned from his position as a member of the Board of
Directors of the Company. Although Mr. Miller currently provides
consulting services to the Company under the terms of an Amended
and Restated Consulting Agreement (“Consulting Agreement”), such
Consulting Agreement terminated on April 12, 2021.
|
|
|
|
|
(6)
|
Mr. Morris was
appointed as the Company’s Senior Vice President and Chief
Financial Officer on May 1, 2020, and received no compensation
prior to his employment. Effective December 31, 2020, Mr.
Morris’s employment as an officer and employee of the Company
was terminated by mutual agreement between Mr. Morris and the
Company.
|
|
|
|
|
(7)
|
Effective July 21,
2020, Mr. Harding resigned from his position with the
Company.
|
|
|
|
|
(8)
|
Includes group
benefits paid to all employees of the Company.
|
|
|
|
|
(9)
|
Includes $31,126
paid to Mr. Dickson in commissions earned during the fiscal year,
and $9,554 in group benefits paid to all employees of the
Company.
|
|
|
|
|
(10)
|
Includes $39,315 in
accrued paid time off paid to Mr. Miller upon his resignation, and
$33,350 in group benefits paid to all employees of the
Company.
|
|
|
|
|
(11)
|
Includes $17,029 in
accrued paid time off paid to Mr. Harding upon his resignation, and
$9,057 in group benefits paid to all employees of the
Company.
|
Outstanding
Equity Awards at Fiscal Year-End
The following table
sets forth information regarding unexercised options, stock that
has not vested and equity incentive awards held by each of the then
Named Executive Officers outstanding as of December 31,
2020:
|
|
|
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options:
Exercisable
(#)
|
Number of
Securities
Underlying
Unexercised
Options:
Unexercisable
(#)
|
Option
Exercise
Price
($)
|
|
Number
of Shares That
Have Not Vested
(#)
|
Market Value of Shares That Have Not
Vested
($)
|
|
Named
Executive Officers (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sudheer
Koganti
|
-
|
100,000
|
0.13
|
7/29/2030
|
100,000
|
$-
|
|
Chris
Dickson
|
-
|
100,000
|
0.13
|
7/29/2030
|
100,000
|
$-
|
|
|
|
|
|
|
|
|
|
Former
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Harding
|
-
|
-
|
$N/A
|
N/A
|
-
|
$-
|
|
S. James
Miller, Jr.
|
-
|
-
|
$N/A
|
N/A
|
-
|
$-
|
(1)
Jay B.
Lewis served as Senior Vice President and Chief Financial Officer
of the Company from January 8, 2021 to April 7, 2021, after the
fiscal year end date of December 31, 2020, and therefore has been
excluded from the table.
(2)
Under
the terms of Kristin Taylor’s Employment Agreement, dated
March 2, 2020, Ms. Taylor is entitled to an option to purchase
1,750,000 shares of Common Stock, which equity award was amended on
April 16, 2021 to an option to purchase 27,000,000 million shares,
and which has not been granted as of the date of this
prospectus.
Employment Agreements
Kristin Taylor. On
March 2, 2020, we entered into an employment agreement with Ms.
Kristin Taylor, the Company’s President and Chief Executive
Officer. This agreement provides for an annual base salary of
$330,000 for a period of 24 months effective March 2, 2020. Ms.
Taylor’s annual base salary was increased to $350,000
effective February 1, 2021. Ms. Taylor’s employment agreement
also provides for (i) the grant of a stock option to purchase 1.75
million shares of the Company's Common Stock, which stock option
was subsequently amended on April 16, 2021 to the grant of a stock
option to purchase 27,000,000 million shares of Common Stock. Upon
issuance, as amended, the stock option shall vest (i) 2.7 million
Options immediately upon the date of the Grant, and (ii) the
remaining 24.3 million Options over a period of three years with
(A) one-third of the remaining 24.3 million Options vest on March
1, 2022; and (iii) the remaining two-thirds vesting in equal
monthly amounts for 24 months thereafter; (ii) an annual bonus
equal to 100% of Ms. Taylor's annual salary, such bonus to be
determined at the discretion of the Company’s Board In the
event of termination of her employment other than by reason of
death or disability, or for cause, the employment agreement is also
anticipated to provide Ms. Taylor with certain severance payments,
including continuation of her salary for the greater of one year or
the remaining term under her employment agreement.
Former
Named Executive Officers
S. James
Miller, Jr. On October 1, 2005, the
Company entered into an employment agreement with Mr. Miller,
pursuant to which Mr. Miller served as President and Chief
Executive Officer until his resignation on March 2, 2020. On March
2, 2020, the Company entered into a Transition Services Agreement
(the “Transition
Agreement”) with Mr. Miller, whereby Mr. Miller
continued to serve the Company as its Executive Chairman of the
Board of Directors until May 2, 2021; however, the Transition Agreement was
terminated on November 13, 2020, when the Company and Mr. Miller
entered into the Consulting Agreement (the “Consulting Agreement”). Under the
Consulting Agreement, Mr. Miller is to provide consulting services
for up to 16 hours per week in consideration for the payment to Mr.
Miller of a monthly consulting fee of $19,000 payable for five
months or through until April 12, 2021 (the “Termination Date”). In addition,
Mr. Miller is entitled to a commission equal to 1.0% of all amounts
actually paid to the Company resulting from certain contracts
and/or purchase orders received by the Company prior to the
Termination Date, provided the Company receives at least $1.7
million in revenue from such contracts and/or purchase orders. In
all cases, the maximum commission that Mr. Miller may receive based
on the foregoing is $228,000. In addition, Mr. Miller was entitled
to 525,000 vested restricted stock units (“RSUs”), and his remaining 262,000
RSUs were terminated.
David
Harding. On January 1, 2013, the Company entered into
an Employment Agreement with Mr. David Harding, pursuant to
which Mr. Harding served as the Company’s Vice President and
Chief Technical Officer until his resignation on July 21,
2020. The Agreement was originally for a one-year term, ending
on December 31, 2013; however, the Agreement was amended to extend
the expiration date to December 31, 2020. Under the terms of the
Agreement, Mr. Harding was paid a semi-monthly base salary of
$9,375. Following his resignation, Mr. Harding received his then
current salary accrued through the effective date of his
resignation, plus accrued compensation in connection with unused
vacation.
Jay B.
Lewis. Mr. Lewis joined the
Company as its Senior Vice President and Chief Financial Officer on
January 7, 2021 until his resignation effective April 7, 2021.
Under the terms of a letter agreement between Mr. Lewis and
Company, Mr. Lewis was to be paid an annual base salary of
$240,000. Following his resignation, Mr. Lewis received his
then current salary accrued through the effective date of his
resignation.
For purposes of the
above-referenced agreements, termination for “cause”
means the executive’s commission of a criminal act or an act
of fraud, embezzlement, breach of trust or other act of gross
misconduct; violations of policies or rules of the Company; refusal
to follow the direction given by the Company from time to time or
breach of any covenant or obligation under the above-referenced
agreements or other agreements with the Company; neglect of duty;
misappropriation, concealment, or conversion of any money or
property of the Company; intentional damage or destruction of
property of the Company; reckless conduct which endangers the
safety of other persons or property during the course of employment
or while on premises leased or owned by the Company; or a breach of
any obligation or requirement set forth in the above-referenced
agreements. A “change in control” as used in these
agreements generally means the occurrence of any of the following
events: (i) the acquisition by any person or group of 50% or
more of the Company’s outstanding voting stock; (ii) the
consummation of a merger, consolidation, reorganization, or similar
transaction other than a transaction: (1) in which
substantially all of the holders of the Company’s voting
stock hold or receive directly or indirectly 50% or more of the
voting stock of the resulting entity or a parent company thereof,
in substantially the same proportions as their ownership of the
Company immediately prior to the transaction, or (2) in which
the holders of the Company’s capital stock immediately before
such transaction will, immediately after such transaction, hold as
a group on a fully diluted basis the ability to elect at least a
majority of the directors of the surviving corporation (or a parent
company); (iii) there is consummated a sale, lease, exclusive
license, or other disposition of all or substantially all of the
consolidated assets of the Company and the Company’s
subsidiaries, other than a sale, lease, license, or other
disposition of all or substantially all of the consolidated assets
of the Company and the Company’s subsidiaries to an entity,
50% or more of the combined voting power of the voting securities
of which are owned by the Company’s shareholders in
substantially the same proportions as their ownership of the
Company immediately prior to such sale, lease, license, or other
disposition; or (iv) individuals who, on the date the
applicable agreement was adopted by the Board, are directors (the
“Incumbent
Board”) cease for any reason to constitute at least a
majority of the directors; provided, however, that if the
appointment or election (or nomination for election) of any new
director was approved or recommended by a majority vote of the
members of the Incumbent Board then still in office, such new
member shall, for purposes of the applicable agreement, be
considered as a member of the Incumbent Board.
Other than as set
forth above, there were no arrangements or understandings between
the Company’s Named Executive Officers and any other person
pursuant to which they were appointed as officers as of December
31, 2020. None of the Company’s Named Executive Officers as
of December 31, 2020 had a family relationship that is required to
be disclosed under Item 401(d) of Regulation
S-K.
Description of Equity Compensation Plans
2020 Omnibus Stock Incentive Plan
On June 9, 2020, the Company adopted the 2020
Omnibus Stock Incentive Plan (the “2020 Plan”), which reserves for issuance 25.0 million
shares of Common Stock thereunder. The purposes of our 2020 Plan
are to enhance our ability to attract and retain highly qualified
officers, non-employee directors, key employees and consultants,
and to motivate those service providers to serve the Company and to
expend maximum effort to improve our business results by providing
to those service providers an opportunity to acquire or increase a
direct proprietary interest in our operations and future success.
The 2020 Plan also will allow us to promote greater ownership in
our Company by the service providers in order to align the service
providers’ interests more closely with the interests of our
stockholders. Awards granted under the 2020 Plan are designed to
qualify for special tax treatment under Section 422 of the
Code.
On January 28, 2021, and February 16, 2021,
respectively, our Board and the Majority Shareholders
approved an amendment to the 2020 Plan, to increase the number of shares of
Common Stock available for issuance under the 2020 Plan by 120.0
million shares, from 25.0 million shares to 145.0 million shares
(the “Plan
Amendment”). The Plan Amendment became effective as of
April 20, 2021.
The 2020 Plan superseded and replaced
Company’s 1999 Stock Award Plan (the
“1999
Plan”). Any awards
outstanding under the 1999 Plan on the date of approval of the 2020
Plan remained subject to the 1999 Plan and no new awards were
granted under the 1999 Plan following the adoption of the 2020
Plan. All shares of Common Stock that remained authorized and
available for issuance under the 1999 Plan, as well as any shares
subject to outstanding awards under the 1999 Plan that subsequently
expired, terminated, or were surrendered or forfeited for any
reason, without issuance of shares, automatically became available
for issuance under the 2020 Plan.
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table sets forth information as of December 31, 2020,
with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance, aggregated as follows:
|
|
Number
of securities to be issued upon exercise of outstanding options and
rights
|
Weighted-
average exercise price of outstanding options and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
Plan Category
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
2,585,500
|
$0.19
|
26,382,377
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
2,585,500
|
$0.19
|
26,382,377
|
Each
of our non-employee directors receives a monthly retainer of $3,000
for serving on the Board, which fee may be paid either in cash,
options or shares of Common Stock. Audit Committee Board
members receive additional monthly compensation of $208, or $458 if
the Committee Chair. Compensation Committee Board members
receive additional monthly compensation of $208, or $417 if the
Committee Chair. The members of the Board are also eligible
for reimbursement for their expenses incurred in attending Board
meetings in accordance with our policies. For the fiscal year ended
December 31, 2020 the total amounts of compensation to non-employee
directors (excluding reimbursable expenses) was approximately
$168,000, of which $23,000 was
paid in cash, and the remainder was paid in share-based
compensation.
Each of
our non-employee directors is also eligible to receive stock option
grants under the 2020 Plan. The 2020 Plan was adopted by the Board
of Directors to enhance our ability to attract and retain highly
qualified officers, non-employee directors, key employees and
consultants. Awards granted under the 2020 Plan are designed to
qualify for special tax treatment under Section 422 of the Internal
Revenue Code of 1986 (the “Code”). A total of 145.0 million
shares of Common Stock are authorized for issuance under the 2020
Plan. The term of stock options granted under the 2020 Plan is
ten years, unless otherwise modified by the Board or
Compensation Committee. In the event of a merger of us with or into
another corporation or a consolidation, acquisition of assets or
other change-in-control transaction involving us, an equivalent
option will be substituted by the successor corporation;
provided, however, that we
may cancel outstanding options upon consummation of the transaction
by giving at least thirty (30) days’
notice.
The
following table sets forth the compensation awarded to, earned by,
or paid to each person who served as a director during the year
ended December 31, 2020, other than a director who also served as
an executive officer:
|
|
Fees Earned or
Paid in Cash ($)
|
|
|
All Other
Compensation ($)
|
|
|
Current
Directors (1)(2)
|
|
|
|
|
|
|
Douglas
Morgan
|
$3,083
|
$-
|
$-
|
$-
|
$3,083
|
|
James
Demitrieus
|
$4,583
|
$-
|
$-
|
$-
|
$4,583
|
|
|
|
|
|
|
|
|
Former
Directors (3)
|
|
|
|
|
|
|
David
Carey
|
$6,250
|
$26,935
|
$2,993
|
$-
|
$36,178
|
|
Neal
Goldman
|
$2,083
|
$24,544
|
$2,993
|
$-
|
$29.620
|
|
Guy Steve
Hamm
|
$4,583
|
$26,935
|
$2,993
|
$-
|
$34.511
|
|
Dana
Kammersgard
|
$-
|
$24,863
|
$2,993
|
$-
|
$27,856
|
|
David
Loesch
|
$2,083
|
$26,935
|
$2,993
|
$-
|
$32,011
|
|
John Cronin
(4)
|
$625
|
$-
|
$-
|
$-
|
$625
|
|
(1)
|
The
amounts reflect the grant date fair value of options recognized as
compensation in 2020, in accordance with the provisions of FASB ASC
Topic 718, and thus may include amounts from awards granted prior
to 2020.
|
|
(2)
|
Mr.
Sight was appointed to serve as a member of our Board subsequent to
December 31, 2020, and therefore has been excluded from the table
above.
|
|
(3)
|
Messrs. Carey, Goldman, Hamm, Kammersgard, Loesch and Miller
resigned from their positions as a member of our Board on November
12, 2020.
|
|
(4)
|
Mr.
Cronin resigned from his position as a member of our Board on April
1, 2020.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of July 9, 2021, we had five classes of voting
stock issued and outstanding: (i) Common Stock; (ii) our Series A
Preferred; (iii) our Series A-1 Preferred; (iv) our Series B
Preferred; and (v) our Series D Preferred. The following tables
sets forth information regarding shares of Series A Preferred,
Series A-1 Preferred, Series B Preferred, Series D Preferred and
Common Stock beneficially owned as of July 9, 2021.
The following tables set forth information
regarding shares of Series A Preferred, Series A-1 Preferred,
Series B Preferred, Series D Preferred, and Common Stock
beneficially owned as of July
9, 2021 by
(i)
Each of our officers and directors;
(ii)
All officer and directors as a group; and
(iii)
Each
person known by us to beneficially own five percent or more of the
outstanding shares of our Common Stock, Series A Preferred, Series
A-1 Preferred, Series B Preferred and Series D
Preferred.
Percent ownership
is calculated based on 1,109.5 shares of Series A Preferred,
1,064.1 shares of Series A-1 Preferred, 239,400 shares of Series B
Preferred, 22,958.3 shares of Series D Preferred and 331,392,419
shares Common Stock outstanding as of July 9, 2021.
|
Beneficial Ownership of Series
A Preferred
Name, Address and Title (if
applicable) (1)
|
Series A Preferred Stock (2)(3)
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
CAP 1 LLC (4)
14000
Quail Spring Parkway, Suite 2200
Oklahoma
City, OK 73134
|
150
|
13.5%
|
|
Wynnefield Partners (5)
450 7th Ave. Suite
509
New York, NY,
10123
|
75
|
6.8%
|
|
Neal
Goldman
767 Third Avenue,
16th Floor
New York, NY
10017
|
471.7
|
42.5%
|
*
less than 1%
(1)
Each of the Company’s Named Executive Officers and directors
who do not hold shares of Series A Preferred are excluded from this
table. The business address of each of the executive officers and
directors is 11440 W. Bernardo Court, Suite 300, San Diego,
California 92127.
(2)
In
connection with a private placement transaction completed in
November and December 23, 2020 (the
“Series D
Financing”), all
of the outstanding shares of Series A-1 Preferred will be converted
into shares of Common Stock over a period of time with 100% of the
such outstanding shares being converted by August 1,
2021.
(3)
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
(4)
Mr. David Sackler, President of CAP I LLC, may be deemed to have
voting and investment discretion over the securities identified
herein.
(5)
Wynnefield Partners owns shares in its Wynnefield Partners SmallCap
Value Fund, Wynnefield Partners SmallCap Value LP 1 Funds, and its
Wynnefield SmallCap Value Offshore Fund.
|
Beneficial Ownership of Series A-1 Preferred
Name, Address and Title (if applicable)(1)
|
Series A-1
Preferred
Stock(2)(3)
|
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
CAP 1 LLC (4)
14000
Quail Spring Parkway, Suite 2200
Oklahoma
City, OK 73134
|
150.0
|
14.1%
|
|
Wynnefield Partners (5)
|
|
|
|
450 7th Ave. Suite
509
New York, NY,
10123
|
75.0
|
7.0%
|
|
|
|
|
|
Neal
Goldman
767 Third Avenue,
16th Floor
New York, NY
10017
|
471.7
|
44.3%
|
(1)
Each of the Company’s Named Executive Officers and directors
who do not hold shares of Series A-1 Preferred are excluded from
this table. The business address of each of the executive officers
and directors is 11440 W. Bernardo Court, Suite 300, San
Diego, California 92127.
(2)
In
connection with the Series D
Financing , all of the outstanding shares of Series A-1
Preferred will be converted into shares of Common Stock over a
period of time with 100% of such outstanding shares being converted
by August 1, 2021.
(3)
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
(4)
Mr. David Sackler, President of CAP I LLC, may be deemed to have
voting and investment discretion over the securities identified
herein.
(5)
Wynnefield Partners owns shares in its Wynnefield Partners SmallCap
Value Fund, Wynnefield Partners SmallCap Value LP 1 Funds, and its
Wynnefield SmallCap Value Offshore Fund.
|
Beneficial Ownership of Series B Preferred
Name, Address and Title (if
applicable) (1)
|
Series B
Preferred
Stock (2)
|
|
|
Darrelyn
Carpenter
|
28,000
|
12%
|
|
Howard
Harrison
|
20,000
|
8%
|
|
Wesley
Hampton
|
16,000
|
7%
|
|
Frederick
C. Orton
|
20,000
|
8%
|
(1)
Each of the Company’s Named Executive Officers and directors
who do not hold shares of Series B Preferred are excluded from this
table. The business address of each of the executive officers and
directors is 11440 W. Bernardo Court, Suite 300, San Diego,
California 92127.
(2)
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
|
Beneficial Ownership of Series
D Preferred
|
|
|
|
Name, Address and Title (if applicable) (1)
|
|
|
|
|
|
|
|
Blackwell Partners LLC (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
2,471.7
|
10.8%
|
|
Nantahala Capital Partners Limited
Partnership (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
965.4
|
4.2%
|
|
Nantahala Capital Partners II Limited
Partnership (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
2,811.9
|
12.2%
|
|
Nantahala Capital Partners SI
LP (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
7,291.9
|
31.8%
|
|
NCP QR LP (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
1,118.5
|
4.9%
|
|
Plum Investments L.P. (4)
|
|
|
|
1807
S. San Gabriel Blvd.
|
|
|
|
San
Gabriel, CA 91776
|
1,541.0
|
6.7%
|
|
Silver Creek CS SAV, L.L.C. (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
737.6
|
3.2%
|
*
less than 1%
(1)
Each of the Company’s Named Executive Officers and directors
who do not hold shares of Series D Preferred are excluded from this
table.
(2)
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
(3)
Nantahala Capital Management, LLC is a Registered Investment
Adviser and has been delegated the legal power to vote and/or
direct the disposition of securities on behalf of these entities as
a General Partner or Investment Manager and would be considered the
beneficial owner of such securities. Wilmot B. Harkley and Daniel
Mack, as principles of Nantahala Capital Management, LLC, may be
deemed to hold voting and dispositive power over the shares
identified herein. The above shall not be deemed to be an admission
by the record owners or these selling shareholders that they are
themselves beneficial owners of these shares of securities for
purposes of Section 13(d) of the Exchange Act or any other purpose.
The above shall not be deemed to be an admission by the record
owners that they are themselves beneficial owners of these shares
of Series D Preferred for purposes of Section 13(d) of the Exchange
Act or any other purpose.
(4)
Tom Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold
voting and dispositive power over the shares identified
herein.
Beneficial Ownership of Common Stock
Percentage of
beneficial ownership is calculated based on 331,392,419 shares of
common stock outstanding as of July 9, 2021. Beneficial ownership
is determined in accordance with the rules of the SEC which
generally attribute beneficial ownership of securities to persons
who possess sole or shared voting power or investment power with
respect to those securities and includes shares of our common stock
issuable pursuant to the exercise of stock options, warrants,
preferred stock or other securities that are immediately
exercisable or convertible or exercisable or convertible within 60
days of July 9, 2021.
To
calculate a stockholder’s percentage of beneficial ownership
of common stock, we must include in the numerator and denominator
those shares of common stock underlying options, warrants,
preferred stock, and other convertible securities that such
stockholder is considered to beneficially own. Shares of common
stock underlying options, warrants, preferred stock and convertible
securities held by other stockholders, however, are disregarded in
this calculation. Therefore, the denominator used in calculating
beneficial ownership of each of the stockholders may be
different.
The following table
gives effect to the shares of common stock issuable within 60 days
of July 9, 2021, upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that
date.
|
|
|
|
|
Name and Address
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
Kristin Taylor, President and Chief Executive
Officer (3)
|
2,700,000
|
*
|
|
James M. Demitrieus (4)
|
1,050,000
|
*
|
|
Douglas Morgan (5)
|
1,050,000
|
*
|
|
Lauren C. Anderson
(6)
|
375,000
|
*
|
|
James W. Sight
(7)
|
4,728,162
|
1.4%
|
|
Total
beneficial ownership of Directors and Named Executive Officers as a
group (five persons):
|
9,903,162
|
3.0%
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
Blackwell Partners LLC (8)(9)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
43,283,802
|
13.1%
|
|
Nantahala Capital Partners
Limited Partnership (9)(10)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
16,995,130
|
5.1%
|
|
Nantahala Capital Partners II
Limited Partnership (9)(11)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
49,095,067
|
14.8%
|
|
Nantahala Capital Partners SI
LP(9)(12)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
128,162,389
|
38.7%
|
|
NCP QR LP (5)(13)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
19,868,361
|
6.0%
|
|
Neal Goldman (14)
767 Third Avenue, 16th Floor
New
York, NY10017
|
86,826,431
|
25.5%
|
|
Plum Investments (15)
1807
S. San Gabriel Blvd.
San
Gabriel, CA 91776
|
39,970,180
|
12.1%
|
|
Silver Creek CS, SAV,
L.L.C (9)(16)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
13,019,334
|
3.9%
|
|
W Ryan Goldman
(17)
570 Lawrence
Ave
Westfield, NJ.
07060
|
17,512,864
|
5.3%
|
|
Shellback Financial
(18)
16045 54th Ave
N
Minneapolis, MN.
55446
|
17,632,933
|
5.3%
|
|
(1)
|
All entries exclude beneficial ownership of shares issuable
pursuant to options, warrants, or other convertible securities that
have not vested, are not convertible, or that are not otherwise
exercisable as of the date hereof, or which will not become vested,
convertible or exercisable within 60 days of July 9,
2021.
|
|
|
|
|
(2)
|
Percentages are rounded to the nearest one-tenth of one percent.
Percentages are based on 331,392,419 shares of Common
Stock outstanding as of July 9, 2021. Options,
warrants, and other convertible securities that are presently
convertible or exercisable, or convertible or exercisable within 60
days of July 9, 2021 are deemed to be beneficially
owned by the shareholder holding the options, warrants, or other
convertible securities for the purpose of computing the percentage
ownership of that shareholder, but are not treated as outstanding
for the purpose of computing the percentage of any other
shareholder.
|
|
|
|
|
(3)
|
Represents 2,700,000 shares of Common Stock issuable upon the
conversion of stock options.
|
|
|
|
|
(4)
|
Represents 1,050,000 shares of Common Stock issuable upon the
conversion of stock options.
|
|
|
|
|
(5)
|
Represents 1,050,000 shares of Common Stock issuable upon the
conversion of stock options.
|
|
|
|
|
(6)
|
Represents 375,000 shares of Common Stock issuable upon the
conversion of stock options.
|
|
|
|
|
(7)
|
Includes 1,801,029 shares issuable upon the conversion
of approximately 105 shares of Series D Preferred,
2,802,133 shares of Common Stock owned by James Sight, and
125,000 shares of Common Stock
issuable upon the conversion of stock options.
|
|
|
|
|
(8)
|
Includes 42,396,226 shares issuable upon the
conversion of approximately 2,471.7 shares of Series D
Preferred issued in the Series D Financing, of which 1,280 shares
of Series D Preferred were received in exchange for 128 shares of
Series C Preferred on November 12, 2020.
|
|
|
|
|
(9)
|
Nantahala Capital Management, LLC is a Registered Investment
Adviser and has been delegated the legal power to vote and/or
direct the disposition of securities on behalf of this entity as a
General Partner or Investment Manager and would be considered the
beneficial owner of such securities. Wilmot B. Harkley and Daniel
Mack, as principles of Nantahala Capital Management, LLC, may be
deemed to hold voting and dispositive power over the shares
identified herein. The above shall not be deemed to be an admission
by the record owners or these selling shareholders that they are
themselves beneficial owners of these shares of securities for
purposes of Section 13(d) of the Exchange Act or any other
purpose.
|
|
(10)
|
Includes 16,559,177 shares issuable upon the
conversion of approximately 965.4 shares of Series D
Preferred.
|
|
(11)
|
Includes 48,231,561 shares issuable upon the
conversion of approximately 2,811.9 shares of Series D
Preferred.
|
|
(12)
|
Includes 125,075,472 shares issuable upon the
conversion of approximately 7,291.9 shares of Series D
Preferred issued in the Series D Financing, of which 3,970 shares
of Series D Preferred were received in exchange for 397 shares of
Series C Preferred on November 12, 2020.
|
|
(13)
|
Includes 19,185,249 shares issuable upon the
conversion of approximately 1,118.5 shares of Series D
Preferred.
|
|
(14)
|
Includes 2,358,500
shares issuable upon the conversion of Series A Preferred,
2,358,500 shares issuable
upon the conversion of Series A-1 Preferred, 4,109,777
shares issuable upon the conversion of Series D Preferred, and
18,806 shares issuable upon the exercise of warrants
exercisable within 60 days of July 9, 2021. Mr.
Goldman exercises sole voting and dispositive power over
77,980,848 shares, including the aforementioned Series
A conversion shares, Series A-1 conversion shares, Series D
conversion shares, stock options and warrants, and shared voting
and dispositive power over 14,508,777 reported shares, of which
3,000,000 shares are owned by the Goldman Family 2012 GST Trust,
11,361,077 are held in an individual retirement account, and
147,700 shares are owned by The Neal and Marlene Goldman
Foundation.
|
|
(15)
|
Includes 26,432,247 shares issuable upon the
conversion of 1,541 shares of Series D Preferred. Tom
Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold voting
and dispositive power over the shares identified
herein.
|
|
(16)
|
Includes 12,651,801 shares issuable upon the
conversion of approximately 737.6 shares of Series D
Preferred.
|
|
(17)
|
Includes 17,512,864 shares issuable upon the
conversion of approximately 1,021 shares of Series D
Preferred.
|
|
|
|
|
(18)
|
Includes 17,632,933 shares issuable upon the
conversion of approximately 1,028 shares of Series D
Preferred.
|
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Notes Payable
Factoring Agreement
On February 12, 2020, the Company entered into a
factoring agreement (the "Factoring
Agreement") with a former
member of the Company’s Board of Directors (the
"Factoring
Lender"). Under the Factoring
Agreement, the Company received $350,000 in proceeds (the
"Factoring
Principal") in the form of a
loan, bearing interest at a rate of 1% for every seven days until
the Factoring Principal and accrued interest are paid in full, with
a maturity date of March 4, 2020. Pursuant to the Factoring
Agreement, repayment of the Factoring Principal and accrued
interest was secured by certain of the Company’s trade
accounts receivable approximating $500,000 (the
"Factoring
Collateral"). During the twelve
months ended December 31, 2020, the Company recorded approximately
$45,000 in interest expense related to the Factoring Agreement. In
May 2020, the Company repaid $35,000 in accrued interest to the
Factoring Lender. As a condition to the consummation of the
Company's offer and sale (the "Closing") of shares of its Series D Convertible Preferred
Stock, par value $0.01 ("Series D
Preferred") (the
"Series D
Financing"), the Factoring
Lender agreed to settle the entire Factoring Principal plus accrued
interest and release the Company from liabilities due under the
Factoring Agreement in exchange for a one-time payment of $360,000
(the "Factoring
Settlement") to be made upon
the Closing, and out of the proceeds, of the Series D Financing. On
November 16, 2020, the Company fulfilled its obligation under the
Factoring Settlement, thereby releasing it from its obligation
under the Factoring Agreement.
Convertible Promissory Notes
During the
year ended December 31, 2020, the Company received advances from
another former member of the Board of Directors (the
"Board
Lender") in the aggregate
amount of $450,000. On June 29, 2020, the Company executed a
promissory note (the "Board Note") in the favor of the Board Lender in the
principal amount of $450,000 (the "Board Note
Principal"), pursuant to which
the Board Note Principal accrued simple interest at the rate of 5%
per annum and was convertible into shares of the Company's Common
Stock at $0.16 per share of Common Stock at the election of the
Board Lender. The Board Note was to mature on the earlier to occur
of (i) October 13, 2020, or (ii) on such date that the Company
consummates a debt and/or equity financing resulting in net
proceeds to the Company of at least $3.0
million.
Also, during the year ended December 31, 2020, the
Company received advances from an additional former member of the
Board of Directors (the "Second Board
Lender") in the aggregate
amount of $100,000. On June 29, 2020, the Company executed a
promissory note (the "Second Board
Note", and collectively with
the Board Note, the "Board Notes") in the principal amounts of $100,000 (the
"Second
Board Note Principal"),
pursuant to which the Second Board Note Principal accrued simple
interest at the rate of 5% per annum and was convertible into
shares of the Company’s Common Stock at $0.16 per share of
Common Stock at the election of the Second Board Lender. The Second
Board Note was to mature on the earlier to occur of (i) October 13,
2020, or (ii) on such date that the Company consummates a debt
and/or equity financing resulting in net proceeds to the Company of
at least $3.0 million.
On November 12, 2020, in connection with the
Closing of the Series D Financing, the Board Lenders entered into
(i) Debt Exchange Agreements (collectively, the
"Debt
Exchange Agreements"), and (ii)
Satisfaction and Release Agreements (collectively, the
"Release
Agreements"), for the purpose
of satisfying certain obligations of the Company arising under (i)
the Board Note, and (ii) the Second Board Note. Pursuant to the
Debt Exchange Agreements and Release Agreements: (a) one-half of
the Board Note Principal plus accrued interest, totaling
approximately $232,000 was converted into 231.6 shares of Series D
Preferred at a rate of $1,000 per share of Series D Preferred, with
the remaining one-half of the Board Note Principal plus accrued
interest, totaling approximately $232,000, to be paid to the Board
Lender in cash out of proceeds of the Series D Financing, in full
satisfaction of the Company's obligations under the Board Note; and
(b) the entire Second Board Note Principal plus accrued interest,
totaling approximately $103,000, was converted into 102.8 shares of
Series D Preferred at a rate of $1,000 per share of Series D
Preferred, in full satisfaction of the Company's obligations under
the Second Board Note.
Professional Services Agreement
During the year
ended December 31, 2020, the Company entered into professional
services agreement with a firm affiliated with a member of the
Company’s Board at the time the parties entered into the
agreement. The Company made no payments pursuant to this agreement
during the twelve months ended December 31, 2020 and made payment
of approximately $34,000 during three months ended March 31, 2021.
The Company has the right to terminate the agreement on thirty days
written notice at any time.
Review, Approval or Ratification of Transactions with Related
Persons
As
provided in the charter of our Audit Committee, it is our policy
that we will not enter into any transactions required to be
disclosed under Item 404 of the SEC’s Regulation S-K unless
the Audit Committee or another independent body of our Board first
reviews and approves the transactions.
In
addition, pursuant to our Code of Ethical Conduct and Business
Practices, all employees, officers and directors of ours and our
subsidiaries are prohibited from engaging in any relationship or
financial interest that is an actual or potential conflict of
interest with us without approval. Employees, officers and
directors are required to provide written disclosure to the Chief
Executive Officer as soon as they have any knowledge of a
transaction or proposed transaction with an outside individual,
business or other organization that would create a conflict of
interest or the appearance of one.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our
Common Stock does not trade on an established securities exchange.
Our Common Stock is quoted under the symbol “IWSY” on
the OTCQB marketplace. Any OTCQB marketplace quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
We have filed an application to list our Common Stock on the NASDAQ
Capital Market.
The
following table sets forth the high and low sale prices for our
Common Stock for each quarter in 2021, 2020, and 2019:
|
2021 Fiscal Quarters
|
|
|
|
First
Quarter
|
$0.19
|
$0.08
|
|
Second Quarter (through
July 12, 2021)
|
$0.08
|
$ 0.049
|
|
2020 Fiscal Quarters
|
|
|
|
First
Quarter
|
$0.54
|
$0.10
|
|
Second
Quarter
|
$0.50
|
$0.13
|
|
Third
Quarter
|
$0.44
|
$0.08
|
|
Fourth
Quarter
|
$0.13
|
$0.07
|
|
2019 Fiscal Quarters
|
|
|
|
First
Quarter
|
$1.80
|
$0.75
|
|
Second
Quarter
|
$1.60
|
$0.88
|
|
Third
Quarter
|
$0.95
|
$0.38
|
|
Fourth
Quarter
|
$0.50
|
$0.23
|
Holders
As of July 9, 2021, we had approximately 283 registered holders of record of our Common Stock.
A significant number of our shares of Common Stock were held in
street name and, as such, we believe that the actual number of
beneficial owners of our Common Stock is significantly
higher.
Dividends
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 December 31, 2020 and 2019, we had no cumulative undeclared
dividends on our Series A Preferred, Series A-1 Preferred, and
Series D Preferred. As of March 31, 2021 and December 31, 2020, we
had cumulative undeclared dividends of approximately $21,000 and
$8,000, respectively, relating to our Series B
Preferred.
Recent Sales of Unregistered Securities
We
issued certain equity securities in unregistered transactions
during fiscal year 2020 and 2019. All securities issued in
non-registered transactions were issued in reliance on Section
3(a)(9) and/or Section 4(a)(2) of the Securities Act and were
reported in our Quarterly Reports on Form 10-Q and in our Current
Reports on Form 8-K filed with the Securities and Exchange
Commission during the fiscal year ended December 31, 2020 and 2019
and through the date of this prospectus.
The validity of the
securities offered hereby will be passed upon for us by Disclosure
Law Group, a Professional Corporation, San Diego, California
(“DLG”).
EXPERTS
The consolidated financial statements of ImageWare Systems, Inc. as
of December 31, 2020 and 2019 and for each of the two years in the
period ended December 31, 2020, included in this registration
statement, of which this prospectus forms a part, have been audited
by Mayer Hoffman McCann P.C., independent registered public
accounting firm, as set forth in their report (which includes an
explanatory paragraph related to the existence of substantial doubt
about the Company’s ability to continue as a going concern)
appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in auditing
and accounting in giving said report.
WHERE
YOU CAN FIND MORE INFORMATION
We make available,
free of charge, at our corporate website www.iwsinc.com copies of our
annual reports filed with the SEC on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy
statements, and all amendments to these reports, as soon as
reasonably practicable after such material is electronically filed
with or furnished to the SEC pursuant to Section 13(a) or
15(d) of the Exchange Act. We also provide copies of our
Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to
investors upon request. Additionally, all reports filed by us with
the SEC are available free of charge via EDGAR through the SEC
website at www.sec.gov.
We have filed with
the Commission a registration statement under the Securities Act of
1933, as amended, relating to the offering of these securities. The
registration statement, including the attached exhibits, contains
additional relevant information about us and the securities. This
prospectus does not contain all of the information set forth in the
registration statement. You can obtain a copy of the registration
statement for free at www.sec.gov.
IMAGEWARE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
PAGE
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2021 (unaudited) and
December 31, 2020
|
|
F-2
|
|
Condensed
Consolidated Statements of Operations for the three months ended
March 31, 2021 and 2020 (unaudited)
|
|
F-3
|
|
Condensed
Consolidated Statements of Comprehensive Loss for the three months
ended March 31, 2021 and 2020 (unaudited)
|
|
F-4
|
|
Condensed
Consolidated Statements of Shareholders’ Deficit for the
three months ended March 31, 2021 and 2020 (unaudited)
|
|
F-5
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31, 2021 and 2020 (unaudited)
|
|
F-7
|
|
Notes
to unaudited Condensed Consolidated Financial
Statements
|
|
F-8
|
|
|
|
|
|
Fiscal Year Ended December 31, 2020
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-32
|
|
Consolidated
Balance Sheets as of December 31, 2020 and 2019
|
|
F-34
|
|
Consolidated
Statements of Operations for the years ended December 31, 2020 and
2019
|
|
F-35
|
|
Consolidated
Statements of Comprehensive Loss for the years ended December 31,
2020 and 2019
|
|
F-36
|
|
Consolidated
Statements of Shareholders’ Deficit for the years ended
December 31, 2020 and 2019
|
|
F-37
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2020 and
2019
|
|
F-38
|
|
Notes
to Consolidated Financial Statements
|
|
F-39
|
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(In Thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash and cash equivalents
|
$5,056
|
$8,345
|
|
Accounts
receivable, net of allowance for doubtful accounts of $5 at March
31, 2021 and December 31, 2020.
|
493
|
577
|
|
Inventory,
net
|
88
|
40
|
|
Other
current assets
|
625
|
196
|
|
Total
Current Assets
|
6,262
|
9,158
|
|
|
|
|
|
Property
and equipment, net
|
112
|
155
|
|
Other
assets
|
525
|
458
|
|
Operating
lease right-of-use assets
|
1,462
|
1,557
|
|
Intangible
assets, net of accumulated amortization
|
55
|
58
|
|
Goodwill
|
3,416
|
3,416
|
|
Total Assets
|
$11,832
|
$14,802
|
|
|
|
|
|
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$974
|
$1,007
|
|
Deferred
revenue
|
777
|
903
|
|
Accrued
expense
|
1,006
|
1,130
|
|
Operating
lease liabilities, current portion
|
435
|
421
|
|
Derivative
liabilities
|
22,850
|
24,128
|
|
Note
payable, current portion
|
1,107
|
918
|
|
Total
Current Liabilities
|
27,149
|
28,507
|
|
|
|
|
|
Other
long-term liabilities
|
65
|
65
|
|
Note
payable, net of current portion
|
464
|
653
|
|
Lease
liabilities, net of current portion
|
1,178
|
1,297
|
|
Pension
obligation
|
2,518
|
2,531
|
|
Total
Liabilities
|
31,374
|
33,053
|
|
|
|
|
|
Mezzanine
Equity:
|
|
|
|
Series D
Convertible Redeemable Preferred Stock, $0.01 par value, designated
26,000 shares, 23,111 and 22,863 shares issued at March 31, 2021
(unaudited) and December 31, 2020, respectively and 22,757 and
22,863 shares outstanding at March 31, 2021 (unaudited) and
December 31, 2020, respectively; liquidation preference $22,757 and
$22,863 at March 31, 2021 (unaudited) and December 31, 2020,
respectively.
|
3,391
|
1,572
|
|
|
|
|
|
Shareholders’
Deficit:
|
|
|
|
Preferred
stock, authorized 5,000,000 shares:
|
|
|
|
Series A Convertible Redeemable Preferred Stock,
$0.01 par value; designated 38,000 shares, 37,467 shares issued
at March 31, 2021 (unaudited) and December 31,
2020, and 6,149 and 14,911 shares
outstanding at March 31, 2021 (unaudited) and December 31,
2020, respectively; liquidation
preference $6,149 and $14,911 at March 31, 2021 (unaudited)
and December 31, 2020,
respectively.
|
—
|
—
|
|
Series A-1 Convertible Redeemable Preferred Stock,
$0.01 par value; designated 38,000 shares, 37,467 shares issued
at March 31, 2021 (unaudited) and December 31, 2020,
and 5,922 and 14,782 shares
outstanding at March 31, 2021 (unaudited) and December 31,
2020, respectively; liquidation
preference $5,922 and $14,782 at March 31, 2021 (unaudited)
and December 31, 2020, respectively.
|
—
|
—
|
|
Series B Convertible Redeemable Preferred Stock,
$0.01 par value; designated 750,000 shares, 389,400 shares issued
and 239,400 shares outstanding at March 31, 2021 (unaudited)
and December 31, 2020, respectively;
liquidation preference $620 and $607 at March 31, 2021
(unaudited) and December 31, 2020, respectively.
|
2
|
2
|
|
Common Stock, $0.01 par value, 1,000,000,000
shares authorized; 276,749,448 and 180,096,317 shares issued
at March 31, 2021 (unaudited) and December 31,
2020, respectively, and 276,742,744
and 180,089,613 shares outstanding at March 31, 2021
(unaudited) and December 31, 2020,
respectively.
|
2,766
|
1,801
|
|
Additional
paid-in capital
|
191,585
|
193,652
|
|
Treasury
stock, at cost 6,704 shares
|
(64)
|
(64)
|
|
Accumulated
other comprehensive loss
|
(1,935)
|
(1,989)
|
|
Accumulated
deficit
|
(215,287)
|
(213,225)
|
|
Total
Shareholders’ Deficit
|
(22,933)
|
(19,823)
|
|
Total Liabilities, Mezzanine Equity and Shareholders’
Deficit
|
$11,832
|
$14,802
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(In Thousands, except share and per share amounts)
(Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
Revenue:
|
|
|
|
Product
|
$56
|
$150
|
|
Maintenance
|
677
|
646
|
|
|
733
|
796
|
|
Cost
of revenue:
|
|
|
|
Product
|
9
|
21
|
|
Maintenance
|
110
|
98
|
|
Gross
profit
|
614
|
677
|
|
|
|
|
|
Operating
expense:
|
|
|
|
General and
administrative
|
1,347
|
983
|
|
Sales and
marketing
|
724
|
1,058
|
|
Research and
development
|
1,168
|
1,868
|
|
Depreciation and
amortization
|
18
|
18
|
|
|
3,257
|
3,927
|
|
Loss from
operations
|
(2,643)
|
(3,250)
|
|
|
|
|
|
Interest (income)
expense, net
|
—
|
24
|
|
(Gain) loss on
change in fair value of derivative liabilities
|
(1,172)
|
(197)
|
|
Loss on
extinguishment of derivative liabilities
|
335
|
—
|
|
Other (income)
expense, net
|
25
|
—
|
|
Other components of
net periodic pension expense
|
54
|
47
|
|
Loss before income
taxes
|
(1,885)
|
(3,124)
|
|
Income tax
expense
|
—
|
—
|
|
Net
loss
|
(1,885)
|
(3,124)
|
|
Preferred dividends
and preferred stock discount accretion
|
(2,255)
|
(1,374)
|
|
Net loss available
to common shareholders
|
$(4,140)
|
$(4,498)
|
|
|
|
|
|
Basic
and diluted loss per common share - see Note 3:
|
|
|
|
Basic and diluted
loss per share available to common shareholders
|
$(0.02)
|
$(0.04)
|
|
Basic and diluted
weighted-average shares outstanding
|
245,829,914
|
116,196,197
|
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)
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
Net
loss
|
$(1,885)
|
$(3,124)
|
|
Other comprehensive
income (loss):
|
|
|
|
Foreign currency
translation adjustment
|
54
|
31
|
|
Comprehensive
loss
|
$(1,831)
|
$(3,093)
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(In Thousands, except share amounts)
(Unaudited)
|
|
Series
A Convertible, Redeemable Preferred
|
Series
A-1 Convertible, Redeemable Preferred
|
Series
B Convertible, Redeemable Preferred
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
14,911
|
$-
|
14,782
|
$-
|
239,400
|
$2
|
180,096,317
|
$1,801
|
(6,704)
|
$(64)
|
$193,652
|
$(1,989)
|
$(213,225)
|
$(19,823)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of Preferred Stock discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,817)
|
-
|
-
|
(1,817)
|
|
Stock-based
compensation expense and issuance of RSUs
|
-
|
-
|
-
|
-
|
-
|
-
|
161,168
|
2
|
-
|
-
|
76
|
-
|
-
|
78
|
|
Issuance
of common stock in lieu of cash
|
-
|
-
|
-
|
-
|
-
|
-
|
242,647
|
2
|
-
|
-
|
19
|
-
|
-
|
21
|
|
Issuance
of common stock pursuant to warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
400
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Conversion
of Series A Preferred to Common Stock
|
(8,762)
|
-
|
-
|
-
|
-
|
-
|
43,819,500
|
438
|
-
|
-
|
(438)
|
-
|
-
|
-
|
|
Conversion
of Series A-1 Preferred to Common Stock
|
-
|
-
|
(8,860)
|
-
|
-
|
-
|
44,300,000
|
443
|
-
|
-
|
(443)
|
-
|
-
|
-
|
|
Conversion
of Series D Preferred to Common Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
6,115,324
|
59
|
-
|
-
|
630
|
-
|
(2)
|
687
|
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
54
|
-
|
54
|
|
Dividends
on Series A Preferred stock, $(10.50)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
1,050,826
|
11
|
-
|
-
|
81
|
-
|
(92)
|
-
|
|
Dividends
on Series A-1 Preferred stock, $(9.75)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
963,266
|
10
|
-
|
-
|
73
|
-
|
(83)
|
-
|
|
Dividends
on Series D Preferred stock, $(90.90)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(248)
|
-
|
-
|
(248)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,885)
|
(1,885)
|
|
Balance
at March 31, 2021
|
6,149
|
$-
|
5,922
|
$-
|
239,400
|
$2
|
276,749,448
|
$2,766
|
(6,704)
|
$(64)
|
$191,585
|
$(1,935)
|
(215,287)
|
(22,933)
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(In Thousands, except share amounts)
(Unaudited)
|
|
Series A
Convertible, Redeemable Preferred
|
Series B
Convertible, Redeemable Preferred
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
37,467
|
$-
|
239,400
|
$2
|
113,353,176
|
$1,133
|
(6,704)
|
$(64)
|
$195,079
|
$(1,741)
|
$(203,171)
|
$(8,762)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of Preferred Stock discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(175)
|
-
|
-
|
(175)
|
|
Issuance
of common stock net of financing costs
|
-
|
-
|
-
|
-
|
10,000,000
|
100
|
-
|
-
|
1,287
|
-
|
-
|
1,387
|
|
Stock-based
compensation expense
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
124
|
-
|
-
|
124
|
|
Common
stock issued in exchange for unexercised options
|
-
|
-
|
-
|
-
|
400,000
|
4
|
-
|
-
|
58
|
-
|
-
|
62
|
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
31
|
-
|
31
|
|
Dividends
on Series A Preferred stock, $(25.01)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(937)
|
(937)
|
|
Dividends
on Series C Preferred stock, $(250.00)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(250)
|
(250)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,124)
|
(3,124)
|
|
Balance
at March 31, 2020
|
37,467
|
$-
|
239,400
|
$2
|
123,753,176
|
$1,237
|
(6,704)
|
$(64)
|
$196,373
|
$(1,710)
|
$(207,482)
|
$(11,644)
|
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)
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
Net
loss
|
$(1,885)
|
$(3,124)
|
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
|
Depreciation and
amortization
|
18
|
18
|
|
Loss on disposal of
fixed assets
|
82
|
—
|
|
Stock-based
compensation
|
78
|
124
|
|
Issuance of common
stock in exchange for unexercised options
|
—
|
62
|
|
Issuance of common
stock as compensation in lieu of cash
|
21
|
—
|
|
Change in fair
value of derivative liabilities
|
(1,172)
|
(197)
|
|
Loss on
extinguishment of derivative liabilities
|
335
|
—
|
|
Change in assets
and liabilities:
|
|
|
|
Accounts
receivable
|
84
|
168
|
|
Inventory
|
(48)
|
(64)
|
|
Other
assets
|
(495)
|
30
|
|
Operating
lease right-of-use assets
|
(10)
|
(3)
|
|
Accounts
payable
|
(33)
|
662
|
|
Deferred
revenue
|
(129)
|
234
|
|
Accrued
expense
|
(123)
|
102
|
|
Pension
obligation
|
(13)
|
8
|
|
Total
adjustments
|
(1,405)
|
1,144
|
|
Net cash used in
operating activities
|
(3,290)
|
(1,980)
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
Purchase of
property and equipment
|
(53)
|
—
|
|
Net cash used in
investing activities
|
(53)
|
—
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
Proceeds from
issuance of common stock, net
|
—
|
622
|
|
Proceeds from
issuance of related party notes payable
|
—
|
350
|
|
Net cash provided
by financing activities
|
—
|
972
|
|
|
|
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
54
|
31
|
|
Net decrease in
cash and cash equivalents
|
(3,289)
|
(977)
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
8,345
|
1,030
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
$5,056
|
$53
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid for
interest
|
$—
|
$—
|
|
Cash paid for
income taxes
|
$—
|
$—
|
|
Summary of non-cash
investing and financing activities:
|
|
|
|
Stock dividends on
Series A Convertible Redeemable Preferred Stock
|
$92
|
$937
|
|
Stock dividends on
Series A-1 Convertible Redeemable Preferred Stock
|
$83
|
$250
|
|
Stock dividends on
Series D Convertible Redeemable Preferred Stock
|
$248
|
—
|
|
Accretion of
discount on Series C Convertible Redeemable Preferred
Stock
|
$—
|
$175
|
|
Accretion of
discount on Series D Convertible Redeemable Preferred
Stock
|
$1,817
|
$—
|
|
Conversion of
Series A Convertible Redeemable Preferred Stock into Common
Stock
|
$438
|
—
|
|
Conversion of
Series A-1 Convertible Redeemable Preferred Stock into Common
Stock
|
443
|
—
|
|
Stock subscription
receivable
|
$—
|
765
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND
OPERATIONS
Overview
As
used in this Quarterly Report, “we”, “us”,
“our”, “ImageWare”, “ImageWare
Systems” or the “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 the products are
integrated into the IWS Biometric Engine.
The Company's common stock, par value $0.01 per
share (the "Common
Stock"), trades under the
symbol "IWSY" on the OTCQB Marketplace.
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. Our principal uses of cash have included cash
used in operations, product development, and payments relating to
purchases of property and equipment. 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 requirements. Management expects
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 positive cash flows from operations.
Historically the Company has not been able to generate sufficient
net revenue to achieve and sustain positive cash flows from
operations and management has determined that there is substantial
doubt about the Company’s ability to continue as a going
concern.
At March 31, 2021 and December 31, 2020, we had
negative working capital of $20,887,000 and $19,349,000,
respectively. Included in our
negative working capital as of March 31, 2021 are $22,850,000 of
derivative liabilities which are not required to be settled in cash
except in the event of the consummation of a Change of Control or
at any time after the fourth anniversary of the Series D Preferred
issuance, at which time the holders of the Series D Preferred may
require the Company to redeem in cash any or all of the
holder’s outstanding Series D Preferred at an amount equal to
the Series D Liquidation Preference Amount. At March 31, 2021 the
Liquidation Preference Amount totaled $22,757,000. Considering the
financings consummated in 2020, as well as our projected cash
requirements, and assuming we are unable to generate incremental
revenue, our available cash will be insufficient to satisfy our
cash requirements for the next twelve months from the date of this
filing. At May 14, 2021, cash on hand approximated $3,661,000.
Based on the Company’s rate of cash consumption in the first
quarter of 2021 and the last quarter of 2020, the Company estimates
it will need additional capital in the third quarter of 2021 and
its prospects for obtaining that capital are uncertain. As a result
of the Company’s historical losses and financial condition,
there is substantial doubt about the Company’s ability to
continue as a going concern.
On
March 11, 2020, the World Health Organization declared
the COVID-19 outbreak a pandemic.
The COVID-19 pandemic is affecting the United States and
global economies and may affect the Company's operations and those
of third parties on which the Company relies. Additionally, as the
duration of the COVID-19 pandemic is difficult to assess
or predict, the impact of the COVID-19 pandemic on the
financial markets may reduce our ability to access capital, which
could negatively impact the Company's short-term and long-term
liquidity. These effects could have a material impact on the
Company's liquidity, capital resources, operations and business and
those of the third parties on which the Company
relies.
To
address our working capital requirements, management has begun
instituting several cost cutting measures and may seek additional
equity and/or debt financing through the issuance of additional
debt and/or equity securities. Other than the Lincoln Purchase
Agreement, there are currently no financing arrangements to support
our projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, or other agreements, and
no assurances can be given that we will be successful in raising
additional debt and/or equity securities, or entering into any
other transaction that addresses our ability to continue as a going
concern.
In view of the matters described in the preceding
paragraph, recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheet is
dependent upon continued operations of the Company, which, in turn,
is dependent upon the Company’s ability to continue to raise
capital and generate positive cash flows from operations. However,
the Company operates in markets that are emerging and highly
competitive. There is no assurance that the Company will be able to
obtain additional capital, operate at a profit or generate positive
cash flows in the future. Therefore, management’s plans do
not alleviate the substantial doubt of the Company’s ability
to continue as a going concern.
The
condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a
going concern.
Recent Developments
Charter Amendment
Our
Certificate of Incorporation as of March 31, 2021 authorizes a
total of 1.0 billion shares of Common Stock for issuance. Effective
as of January 28, 2021 and February
16, 2021, respectively, our Board of Directors and the
Majority Shareholders approved and authorized an amendment to our
Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 1.0 billion shares to 2.0 billion shares, resulting in a total
increase of 1.0 billion
authorized shares of Common Stock. The increase in the number
of authorized shares of Common Stock became effective upon filing
the Certificate of Amendment with the Delaware Division of
Corporations on April 21, 2021.
Coronavirus (COVID-19) Pandemic
On
March 11, 2020, the World Health Organization declared the novel
strain of coronavirus (“COVID-19”) a global pandemic and
recommended containment and mitigation measures worldwide. As of
May 2021, the global outbreak of COVID-19 continues to rapidly
evolve, and the extent to which COVID-19 may impact our business
and markets we serve will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, such as
the duration of the outbreak, travel restrictions and social
distancing in the United States and other countries, business
closures or business disruptions, and the effectiveness of actions
taken both in the United States and other countries. We are
continuing to vigilantly monitor the situation with our primary
focus on health and safety of our employees and
clients.
The Series D Financing
On
November 12, 2020 and December 23, 2020, the Company consummated
private placements of 12,060 shares of its Series D Convertible
Preferred Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds include approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Purchase Agreement"), by and between
the Company and certain accredited investors (the "Purchasers"), for the sale of the
Series D Preferred at a purchase price of $1,000 per share of
Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of shares of Series D
Preferred.
On the
fourth anniversary of the Issuance Date (as defined in the Series D
Certificate), or in the event of the consummation of a Change of
Control (as defined in the Series D Certificate), if any shares of
Series D Preferred are outstanding, then each holder of Series D
Preferred shall have the right (the “Holder Redemption
Right”), at such holder’s option, to
require the Company to redeem all or any portion of such
holder’s shares of Series D Preferred at the Liquidation
Preference Amount per share of Series D Preferred plus an amount
equal to all accrued but unpaid dividends, if any, (such price, the
“Holder Redemption
Price”), which Holder Redemption Price
shall be paid in cash.
In connection with the sale of the Series D
Preferred, we granted certain registration rights to the Investors
with respect to the Conversion Shares and Dividend Shares, pursuant
to a Registration Rights Agreement by and among us and the
Investors. The registration statement registering the Conversion
Shares and Dividend Shares was declared effective by the United
States Securities and Exchange Commission (the
“SEC”) on February 12, 2021.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF
PRESENTATION
Basis of Presentation
The accompanying
condensed consolidated balance sheet as of December 31, 2020, 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 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, 2020, which are included in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2020 as filed with the SEC on April 5,
2021.
Operating
results for the three months ended March 31, 2021 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2021, or any other future
periods.
Significant Accounting Policies
Principles of Consolidation
The
condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. 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, 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.
Operating Cycle
Assets
and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying
condensed consolidated balance sheets, although they will be
liquidated in the normal course of contract completion which may
take more than one operating cycle.
Use of Estimates
The
preparation of the condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements, and
the reported amounts of revenue and expense during the reporting
period. Significant estimates include the evaluation of our ability
to continue as a going concern, the allowance for doubtful accounts
receivable, assumptions used in the Black-Scholes model to
calculate the fair value of share based payments, fair value of
financial instruments issued with and affected by the Series D
Preferred Financing, assumptions used in the application of revenue
recognition policies, 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 net realizable value. See Note
4.
Property, Equipment and Leasehold Improvements
Property
and equipment, consisting of furniture and equipment, are stated at
cost and are being depreciated on a straight-line basis over the
estimated useful lives of the assets, which generally range from
three to five years. Maintenance and repairs are charged to expense
as incurred. Major renewals or improvements are capitalized. When
assets are sold or abandoned, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain
or loss is recognized. Expenditures for leasehold improvements are
capitalized. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining
lease term or the estimated useful lives of the
improvements.
Fair Value of Financial Instruments
For
certain of the Company’s financial instruments, including
accounts receivable, accounts payable, accrued expense, and
deferred revenue, the carrying amounts approximate fair value due
to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use
Assets
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under Accounting
Standards Codification (“ASC”) Topic 842 – Leases
(“ASC 842”). In
accordance with ASC 842, the Company has determined that such
arrangements are operating leases and accordingly the Company has,
as of January 1, 2019, initially recorded operating lease
right-of-use assets and related lease liability for the present
value of the lease payments over the lease terms using the
Company’s estimated weighted-average incremental borrowing
rate of approximately 14.5% using a capital asset pricing model.
The Company has utilized the practical expedient regarding lease
and nonlease components and has combined such items into a single
combined component. The Company has also utilized the practical
expedient regarding leases of twelve months or less and has
excluded such leases from its computation of lease liability and
related right-of-use assets.
Revenue Recognition
In
accordance with ASC 606, revenue is recognized when control of the
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services.
The
core principle of the standard is that we should recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which we expect to
be entitled in exchange for those goods or services. To achieve
that core principle, we apply the following five step
model:
|
1.
|
Identify
the contract with the customer;
|
|
2.
|
Identify
the performance obligation in the contract;
|
|
3.
|
Determine
the transaction price;
|
|
4.
|
Allocate
the transaction price to the performance obligations in the
contract; and
|
|
5.
|
Recognize
revenue when (or as) each performance obligation is
satisfied.
|
At
contract inception, we assess the goods and services promised in a
contract with a customer and identify as a performance obligation
each promise to transfer to the customer either: (i) a good or
service (or a bundle of goods or services) that is distinct, or
(ii) a series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the
customer. We recognize revenue only when we satisfy a performance
obligation by transferring a promised good or service to a
customer.
Determining
the timing of the satisfaction of performance obligations as well
as the transaction price and the amounts allocated to performance
obligations requires judgement.
We
disclose disaggregation of our customer revenue by classes of
similar products and services as follows:
●
Software
licensing and royalties;
●
Sales
of computer hardware and identification media;
●
Post-contract
customer support.
Software Licensing and Royalties
Software licenses
consist of revenue from the sale of software for identity
management applications. Our software licenses are functional
intellectual property and typically provide customers with the
right to use our software in perpetuity as it exists when made
available to the customer. We recognize revenue from software
licensing at a point in time upon delivery, provided all other
revenue recognition criteria are met.
Royalties
consist of revenue from usage-based arrangements and guaranteed
minimum-based arrangements. We recognize revenue for royalty
arrangements at the later of (i) when the related sales occur, or
(ii) when the performance obligation to which some or all of the
royalty has been allocated has been satisfied.
Computer Hardware and Identification Media
We
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, provided all other
revenue recognition criteria are met.
Services
Services
revenue is comprised primarily of software customization services,
software integration services, system installation services and
customer training. Revenue is generally recognized upon completion
of services and customer acceptance provided all other revenue
recognition criteria are met.
Post-Contract Customer Support (“PCS”)
Post contract customer support consists of
maintenance on software and hardware for our identity management
solutions. We recognize PCS revenue from periodic maintenance
agreements. Revenue is generally recognized ratably over the
respective maintenance periods provided no significant obligations
remain. Costs related to such contracts are expensed as
incurred.
Arrangements with Multiple Performance Obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer. In addition to selling
software licenses, hardware and identification media, services and
post-contract customer support on a standalone basis, certain
contracts include multiple performance obligations. For such
arrangements, we allocate revenue to each performance obligation
based on our best estimate of the relative standalone selling
price. The standalone selling price for a performance obligation is
the price at which we would sell a promised good or service
separately to a customer. The primary methods used to estimate
standalone selling price are as follows: (i) the expected cost-plus
margin approach, under which we forecast our expected costs of
satisfying a performance obligation and then add an appropriate
margin for that distinct good or service, and (ii) the percent
discount off of list price approach.
Contract Costs
We
recognize an asset for the incremental costs of obtaining a
contract with a customer if we expect the benefit of those costs to
be longer than one year. We apply a practical expedient to expense
costs as incurred for costs to obtain a contract when the
amortization period is one year or less. At March 31, 2021 and
December 31, 2020, we had capitalized incremental costs of
obtaining a contract with a customer of approximately $65,000. We
recorded no additional contract costs during the three months ended
March 31, 2021. Additionally, we recognized approximately $80,000
in revenue during the three months ended March 31, 2021 that was
related to contract costs at the beginning of the
period.
Other Items
We
do not offer rights of return for our products and services in the
normal course of business.
Sales
tax collected from customers is excluded from revenue.
The
following table sets forth our disaggregated revenue for the three
months ended March 31, 2021 and 2020:
|
|
Three
Months Ended
March
31,
|
|
Net
Revenue
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
Software and
royalties
|
$39
|
$125
|
|
Hardware and
consumables
|
13
|
14
|
|
Services
|
4
|
11
|
|
Maintenance
|
677
|
646
|
|
Total
revenue
|
$733
|
$796
|
Customer Concentration
For the
three months ended March 31, 2021, two customers accounted for
approximately 45% or $333,000 of our total revenue and had trade
receivables at March 31, 2021 of $249,000 of which approximately
$171,000 was collected as of the date of this Quarterly
Report.
For the
three months ended March 31, 2020, one customer accounted for
approximately 27% or $216,000 of our total revenue and had trade
receivables at March 31, 2020 of $0.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board
(“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 Accounting Standards
Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06
“Debt—Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging— Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity”. This ASU simplifies
accounting for convertible instruments by removing major separation
models required under current U.S. GAAP. Consequently, more
convertible debt instruments will be reported as a single liability
instrument and more convertible preferred stock as a single equity
instrument with no separate accounting for embedded conversion
features. The ASU removes certain settlement conditions that are
required for equity contracts to qualify for the derivative scope
exception, which will permit more equity contracts to qualify for
it. The ASU also simplifies the diluted earnings per share (EPS)
calculation in certain areas. This ASU is effective for public
business entities, excluding entities eligible to be smaller
reporting companies, for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years. For all
other entities, the standard will be effective for fiscal years
beginning after December 15, 2023, including interim periods within
those fiscal years. Early adoption will be permitted. The Company
is currently evaluating the impact ASU 2020-06 will have 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
March
31,
|
|
|
|
|
|
Numerator for basic
and diluted loss per share:
|
|
|
|
Net
loss
|
$(1,885)
|
$(3,124)
|
|
Preferred dividends
and preferred stock discount accretion
|
(2,255)
|
(1,374)
|
|
Net loss available
to common shareholders
|
$(4,140)
|
$(4,498)
|
|
|
|
|
|
Denominator for
basic and dilutive loss per share — weighted-average shares
outstanding
|
245,829,914
|
116,196,197
|
|
|
|
|
|
Basic and diluted
loss per share available to common shareholders
|
$(0.02)
|
$(0.04)
|
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:
|
Common Share Equivalents at
March 31, 2021
|
Common Share Equivalents at
December 31, 2020
|
|
Convertible
redeemable preferred stock – Series A
|
30,743,500
|
74,555,000
|
|
Convertible
redeemable preferred stock – Series A-1
|
29,610,000
|
73,910,000
|
|
Convertible
redeemable preferred stock – Series B
|
46,980
|
46,029
|
|
Convertible
redeemable preferred stock – Series D
|
390,348,199
|
392,166,023
|
|
Stock
options
|
2,574,669
|
2,585,500
|
|
Restricted
stock units (RSUs)
|
618,004
|
845,106
|
|
Warrants
|
393,589
|
753,775
|
|
Total
Potential Dilutive Securities
|
454,334,941
|
544,861,433
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories
of $88,000
as of March
31, 2021 were comprised of work in process of $78,000, representing direct
labor costs on in-process projects and finished goods of
$10,000 net of reserves for
obsolete and slow-moving items of $3,000.
Inventories
of $40,000
as of
December 31, 2020 were comprised of work in process of
$26,000, representing direct
labor costs on in-process projects and finished goods of
$14,000 net of reserves for
obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive
levels, deterioration and other factors in evaluating net
realizable value and required reserve levels.
Intangible Assets
The
carrying amounts of the Company’s patent intangible assets
were $55,000 and $58,000 as of March 31, 2021 and December 31,
2020, respectively, which includes accumulated amortization of
$604,000 and $601,000 as of March 31, 2021 and December 31, 2020,
respectively. Amortization expense for patent intangible
assets was $3,000 for the three months ended March 31, 2021 and
2020, respectively. Patent intangible assets are being amortized on
a straight-line basis over their remaining life of approximately
4.58 years. There was no impairment of the Company’s
intangible assets during the three months ended March 31, 2021 and
2020.
The
estimated intangible amortization expense for the next five fiscal
years is as follows:
|
Fiscal
Year Ended December 31,
|
Estimated
Amortization
Expense
($ in thousands)
|
|
2021 (nine
months)
|
$9
|
|
2022
|
12
|
|
2023
|
12
|
|
2024
|
12
|
|
2025
|
10
|
|
Thereafter
|
—
|
|
Total
|
$55
|
Goodwill
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. In December 2018, the Company adopted the provisions
of ASU 2017-04, "Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment". The provisions of
ASU 2017-04 eliminate the requirement to calculate the implied fair
value of goodwill to measure a goodwill impairment
charge. Instead, entities will record an impairment charge based on
the excess of a reporting unit's carrying amount over its fair
value. Entities that have reporting units with zero or negative
carrying amounts, will no longer be required to perform a
qualitative assessment assuming they pass the simplified impairment
test. The Company continues to have only one reporting unit,
Identity Management which, at March 31, 2021, had a negative
carrying amount of approximately $22,933,000. Based on the results
of the Company's impairment testing, the Company determined that
its goodwill was not impaired as of March 31, 2021 and
December 31, 2020.
Other Assets
In
conjunction with the Lincoln Purchase Agreement, the Company issued
to Lincoln Park, in May 2020, 2,500,000 shares of Common Stock as
consideration for entering into the Lincoln Purchase Agreement.
Pursuant to this issuance, the Company recorded $400,000 as a
deferred stock issuance cost. Such deferred stock issuance costs
will be recognized as a charge against paid in capital in
proportion to securities sold under the Lincoln Purchase Agreement.
At March 31, 2021 and December 31, 2020, the Company had
approximately $364,000 in deferred stock issuance costs included in
the caption “Other assets” in its condensed
consolidated balance sheets. During the three months ended March
31, 2021, there were no securities sold by the Company under the
Lincoln Park Purchase Agreement. For more information on the
Lincoln Purchase Agreement, see our Annual Report on Form 10-K for
the fiscal year ended December 31, 2020, as filed with the SEC on
April 5, 2021.
NOTE 5. LEASES
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under ASC 842 –
Leases. In accordance with ASC 842, the Company has determined that
such arrangements are operating leases and accordingly the Company
has, as of January 1, 2019, initially recorded operating lease
right-of-use assets and related lease liability for the present
value of the lease payments over the lease terms using the
Company’s estimated weighted-average incremental borrowing
rate of approximately 14.5% as the discount rates implicit in the
Company’s leases cannot be readily determined. At December
31, 2020, such assets and liabilities aggregated approximately
$1,557,000 and $1,718,000, respectively. At March 31, 2021, such
assets and liabilities aggregated approximately $1,462,000 and
$1,613,000, respectively. The Company determined that it had no
arrangements representing finance leases.
Our
corporate headquarters is located in San Diego, California, where
we now occupy approximately 500 square feet of office space at a
cost of approximately $2,000 per month. We entered into this
facility’s lease in February 2021, with the new lease
commencing on March 1, 2021 on a month-to-month basis. In addition
to our corporate headquarters, we also occupied the following
spaces at March 31, 2021:
|
●
|
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. The Company extended this lease for a 30-day
period and is currently evaluating alternative premises which the
Company believes are readily available;
|
|
●
|
9,720 square feet in Portland, Oregon, at a cost of approximately
$23,000 per month until the expiration of the lease on February 28,
2023; and
|
|
●
|
183 square feet of office space in Mexico City, Mexico, at a cost
of approximately $2,000 per month until September 30, 2021.
|
Prior to entering into our current lease agreement
in January 2021 and moving our corporate headquarters to a new
location, we occupied 8,511 square feet of office space in San
Diego, at a cost of approximately $28,000 per month.
In January 2021, we entered in a
subleasing agreement for our previously occupied corporate
headquarters located in San Diego, California. The term of the
sublease commenced on April 1, 2021 and expires on April 30, 2025
coterminous with the expiration of the Company’s master
lease. Sublease payments due the Company approximate $26,000 per
month over the term of the sublease.
The
above leases contain no residual value guarantees provided by the
Company and there are no options to either extend or terminate the
leases.
For the
three months ended March 31, 2021 and 2020, the Company recorded
approximately $154,000 in lease expense using the straight-line
method. Under the provisions of ASC 842, lease expense is comprised
of the total lease payments under the lease plus any initial direct
costs incurred less any lease incentives received by the lessor
amortized ratably using the straight-line method over the lease
term. The weighted-average remaining lease term of the
Company’s operating leases as of March 31, 2021 is 2.0 years.
Cash payments under operating leases aggregated approximately
$166,000 for the three months ended March 31, 2021 and $161,000 for
the comparable period in 2020 and are included in operating cash
flows.
The
Company’s lease liability was computed using the present
value of future lease payments. The Company has utilized the
practical expedient regarding lease and non-lease components and
combined such components into a single combined component in the
determination of the lease liability. The Company has excluded the
lease of its office space in Mexico City, Mexico in the
determination of the lease liability as its term is less than 12
months.
At
March 31, 2021, future minimum undiscounted lease payments are as
follows:
|
($ in thousands)
|
|
|
2021
(nine months)
|
$491
|
|
2022
|
653
|
|
2023
|
424
|
|
2024
|
387
|
|
2025
|
128
|
|
Thereafter
|
—
|
|
Total
|
$2,083
|
|
Short-term
leases not included in lease liability
|
(14)
|
|
Present
Value effect on future minimum undiscounted lease payments at March
31, 2021
|
(456)
|
|
Lease
liability at March 31, 2021
|
$1,613
|
|
Less
current portion
|
(435)
|
|
Non-current
lease liability at March 31, 2021
|
$1,178
|
NOTE 6. MEZZANINE EQUITY
Series C Convertible Redeemable Preferred Stock
On
September 18, 2020, the Company filed the Series C Certificate with
the Secretary of State for the State of Delaware designating 1,000
shares of the Company’s preferred stock, par value $0.01 per
shares, as Series C Preferred, each share with a stated value of
$10,000 per share. The Company noted that the Series C Preferred
instruments were hybrid instruments that contained several embedded
features. The Company evaluated the identified embedded features of
the Series C Preferred host instrument and determined that certain
features met the definition of and contained the characteristics of
derivative financial instruments requiring bifurcation at fair
value from the host instrument. The Company has bifurcated from the
Series C Preferred host instrument the conversion options,
redemption option and participating dividend feature in accordance
with the guidance in ASC 815. These bifurcated features aggregated
approximately $833,000 at issuance and were recorded by the Company
as a discount to the Series C.
During
the three months ended March 31, 2020, the Company recorded
$250,000 as accrued Series C Preferred dividends and recorded the
accretion of debt issuance costs and derivative liabilities of
approximately $175,000. Concurrently with the issuance of Series D
Convertible Redeemable Preferred Stock (described below), all
holders of Series C exchanged their shares for shares of Series D
Preferred.
Series D Convertible Redeemable Preferred Stock
On
November 12, 2020, the Company filed the Series D Certificate with
the Secretary of State for the State of Delaware. Pursuant to the
Series D Certificate, the Series D Preferred ranks senior to all
Common Stock and all other present and future classes or series of
capital stock, except for Series B Preferred, and upon liquidation
will be entitled to receive the Liquidation Preference Amount (as
defined in the Series D Certificate) plus any accrued and unpaid
dividends, before the payment or distribution of the
Company’s assets or the proceeds thereof is made to the
holders of any junior securities. Additionally, dividends on shares
of Series D Preferred will be paid prior to any junior securities,
and are to be paid at the rate of 4% of the Stated Value (as
defined in the Series D Certificate) per share per annum in the
form of shares of Series D Preferred. Holders of Series D Preferred
shall vote together with holders of Common Stock on an as-converted
basis, and not as a separate class, except (i) the holders of
Series D Preferred, voting as a separate class, shall be entitled
to elect two directors, (ii) the holders of Series D Preferred have
the right to vote as a separate class regarding the waiver of
certain protective provisions set forth in the Series D
Certificate, and (iii) as otherwise required by law.
The
holders of Series D Preferred may voluntarily convert their shares
of Series D Preferred into Common Stock at any time that is at
least ninety days following the issuance date, at the conversion
price calculated by dividing the Stated Value by the conversion
price of $0.0583 per share of Common Stock, subject to adjustments
as set forth in Section 5(e) of the Series D Certificate. The
shares of Common Stock issuable upon conversion of the Series D
Preferred shall be subject to the following registration rights:
(i) one demand registration starting three months after the
Closing, (ii) two demand registrations starting one year after the
Closing, and (iii) unlimited piggy-back and Form S-3 registration
rights with reasonable and customary terms.
If, on
any date that is at least five (5) years following the Issuance
Date, (i) the Common Stock is registered pursuant to Section 12(b)
or (g) under the Exchange Act; (ii) there are sufficient authorized
but unissued shares of Common Stock (which have not otherwise been
reserved or committed for issuance) to permit the issuance of all
Common Shares issuable upon conversion of all outstanding shares of
Series D Preferred; (iii) upon issuance, the Common Shares will be
either (A) covered by an effective registration statement under the
Securities Act, which is then available for the immediate
resale of such Common
Shares by the recipients thereof, and the Board reasonably believes
that such effectiveness will continue uninterrupted for the
foreseeable future, or (B) freely tradable without restriction
pursuant to Rule l44 promulgated under the Securities Act without
volume or manner-of-sale restrictions or current public information
requirements, as determined by the counsel to the Company as set
forth in a written opinion letter to such effect, addressed and acceptable
to the Transfer Agent and the affected holders; and (iv) the VWAP
of a share of Common Stock is greater than 300% of the Conversion
Price (as defined in Section 5(d) below) then
in effect for a period of at least twenty (20) Trading Days in any
period of thirty (30) consecutive Trading Days, then the Company
shall have the right, subject to the terms and conditions, to
convert (a “Mandatory
Conversion”) all, but not less than all, of the issued
and outstanding shares of Series D Preferred into Common
Stock.
On the
fourth anniversary of the Issuance Date, or in the event of the
consummation of a Change of Control, if any shares of Series D
Preferred are outstanding, then each holder of Series D Preferred
shall have the right (the “Holder Redemption
Right”), at such holder’s option, to
require the Company to redeem all or any portion of such
holder’s shares of Series D Preferred at the Liquidation
Preference Amount per share of Series D Preferred plus an amount
equal to all accrued but unpaid dividends, if any, (such price, the
“Holder Redemption
Price”), which Holder Redemption Price
shall be paid in cash.
On
November 12, 2020 (“Closing
Date”), the Company consummated the Series D
Financing, resulting in the sale of 11,560 shares of its Series D
Preferred, resulting in gross proceeds to the Company of $11.56
million, less fees and expenses. The gross proceeds include
approximately $2.2 million in principal amount due and payable
under the terms of certain term loans issued by the Company on
September 29, 2020 (“Bridge
Note”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance and
sale of the Series D Preferred was made pursuant to that certain
Securities Purchase Agreement, dated September 28, 2020 (the
"Purchase Agreement"), by
and between the Company and the Investors, for the purchase price
of $1,000 per share of Series D Preferred. The Conversion and
Series D Financing was undertaken pursuant to Section 3(a)(9)
and/or Rule 506 promulgated under the Securities Act of 1933, as
amended (the "Securities
Act"). On December 23, 2020, the Company sold an additional
500 shares of Series D Preferred resulting in gross proceeds to the
Company of $500,000 less fees and expenses.
On the
Closing Date, the Company exchanged approximately $661,000 of
liabilities of the Company for 661.3 shares of Series D Preferred,
and received notice from the holders of a majority of the Series C
Preferred (the “Series C
Exchange Notice”) of their election to convert all of
their shares of Series C Preferred into Series D Preferred, and
further exercising their right to require all other holders of
Series C Preferred to convert their shares of Series C Preferred
into Series D Preferred (the “Series C Exchange”). Upon the
consummation of the Series C Exchange in accordance with the terms
of the Series C Exchange Notice, the Company issued an additional
10,000 shares of Series D Preferred in exchange for all 1,000
issued and outstanding shares of the Company’s Series C
Preferred.
On
December 31, 2020, the Company issued 142 shares of Series D
Preferred Stock as payment of dividends due to the Series D
Preferred stockholders. During the three months ended March 31,
2021, the Company issued 248 shares of Series D Preferred Stock as
payment of dividends due to the Series D Preferred stockholders.
During the three months ended March 31, 2021, certain holders of
Series D Preferred converted 354 shares of Series D into 6,115,324
shares of Common Stock which includes 42,283 shares of common stock
issued for dividends up to the date of conversion.
Guidance for
accounting for freestanding financial instruments that contain
characteristics of both liabilities and equity are contained in ASC
480, Distinguishing Liabilities
From Equity and Accounting
Series Release 268 (“ASR 268”) Redeemable Preferred
Stocks. The Company evaluated
the provisions of the Series D Preferred and determined that the
provisions of the Series D Preferred grant the holders of the
Series D Preferred a redemption right whereby the holders of the
Series D Preferred may, at any time after the fourth anniversary of
the Series D Preferred issuance, require the Company to redeem in
cash any or all of the holder’s outstanding Series D
Preferred at an amount equal to the Liquidation Preference Amount
(“Liquidation Preference
Amount”). The Liquidation
Preference Amount is defined as the greater of the stated value of
the Series D Preferred plus any accrued unpaid interest or such
amount per share as would have been payable had each such share
been converted into Common Stock. In the event of a Change of
Control, the holders of Series D Preferred shall have the right to
require the Company to redeem in cash all or any portion of such
holder’s shares at the Liquidation Preference Amount. The
Company has concluded that because the redemption features of the
Series D Preferred are outside of the control of the Company, the
instrument is to be recorded as temporary or mezzanine equity in
accordance with the provisions of ASR 268.
The
Company noted that the Series D Preferred instruments were hybrid
instruments that contain several embedded features. In November
2014, the FASB issued ASU 2014-16 to amend ASC 815,
“Derivatives and
Hedging”, (“ASC
815”) and require the use of the whole instrument
approach (described below) to determine whether the nature of the
host contract in a hybrid instrument issued in the form of a share
is more akin to debt or to equity.
The
whole instrument approach requires an issuer or investor to
consider the economic characteristics and risks of the entire
hybrid instrument, including all of its stated and implied
substantive terms and features. Under this approach, all stated and
implied features, including the embedded feature being evaluated
for bifurcation, must be considered. Each term and feature should
be weighed based on the relevant facts and circumstances to
determine the nature of the host contract. This approach results in
a single, consistent determination of the nature of the host
contract, which is then used to evaluate each embedded feature for
bifurcation. That is, the host contract does not change as each
feature is evaluated.
The
revised guidance further clarifies that the existence or omission
of any single feature, including an investor-held, fixed-price,
noncontingent redemption option, does not determine the economic
characteristics and risks of the host contract. Instead, an entity
must base that determination on an evaluation of the entire hybrid
instrument, including all substantive terms and
features.
However, an
individual term or feature may be weighed more heavily in the
evaluation based on facts and circumstances. An evaluation of all
relevant terms and features, including the circumstances
surrounding the issuance or acquisition of the equity share, as
well as the likelihood that an issuer or investor is expected to
exercise any options within the host contract, to determine the
nature of the host contract, requires judgement.
Using
the whole instrument approach, the Company concluded that the host
instrument of the Series D Preferred was more akin to debt than
equity as the majority of identified features contain more
characteristics of debt.
The
Company evaluated the identified embedded features of the Series D
Preferred host instrument and determined that certain features meet
the definition of and contained the characteristics of derivative
financial instruments requiring bifurcation at fair value from the
host instrument.
The
Company has bifurcated from the Series D Preferred host instrument
the conversion options, redemption option and participating
dividend feature in accordance with the guidance in ASC 815. These
bifurcated features aggregated approximately $26,011,000 at
issuance and have been recorded as a discount to the Series D.
During the three months ended March 31, 2021, the Company recorded
the accretion of debt issuance costs and derivative liabilities
aggregating approximately $1,817,000 using the effective interest
rate method as a deemed dividend.
The
following table summarizes the share activity of Series D Preferred
for the three months ended March 31, 2021:
|
|
Series
D Convertible Redeemable Preferred
|
|
|
|
|
Total
shares of Series D Preferred Stock - December 31, 2020
|
22,863
|
|
Conversion
of Series D Preferred into Common Stock
|
(354)
|
|
Issuance
of Series D Preferred as payment of dividends due
|
248
|
|
Total
shares of Series D Preferred Stock - March 31, 2021
|
22,757
|
The
carrying value of the Company’s Series D Preferred was
approximately $3,391,000 and $1,572,000 net of discount of
approximately $19,366,000 and $21,291,000 as of March 31, 2021 and
December 31, 2020, respectively.
NOTE 7. DERIVATIVE LIABILITIES
The Company accounts
for its derivative instruments under the provisions of ASC
815, “Derivatives
and Hedging”. Under the
provisions of ASC 815, the Company identified embedded features
within the Series D Preferred host contracts that qualify
as derivative instruments and require
bifurcation.
The
Company determined that the conversion option, redemption option
and participating dividend feature contained in the Series D
Preferred host instrument required bifurcation. The Company valued
the bifurcatable features at fair value. Such liabilities
aggregated approximately $22,850,000 and $24,128,000 at March 31,
2021 and December 31, 2020, respectively, and are classified as
current liabilities on the Company’s condensed consolidated
balance sheets under the caption “Derivative
liabilities”. The Company will revalue these features at each
balance sheet date and record any change in fair value in the
determination of period net income or loss.
The
change in fair value of such amounts are recorded in the caption
“Change in fair value of derivative liabilities” in the
Company’s condensed consolidated statements of operations.
For the three months ended March 31, 2021, the Company recorded a
decrease to its derivative liabilities using fair value
methodologies of approximately $1,172,000 related to Series D
embedded derivatives. In conjunction with the conversion of 354
shares of the Company’s Series D Preferred into Common Stock
during the three months ended March 31, 2021, the Company
recognized a loss on the extinguishment of derivative liabilities
of approximately $335,000.
The
Company determined that the conversion option, redemption option
and participating dividend feature contained in the Series C
Preferred host instrument required bifurcation. The Company valued
these bifurcatable features at fair value and such liabilities
aggregated approximately $172,000 at March 31, 2020. There is no
Series C Preferred outstanding at March 31, 2021. The change in
fair value of such amounts are recorded in the caption
“Change in fair value of derivative liabilities” in the
Company’s condensed consolidated statements of operations.
For the three months ended March 31, 2020, the Company recorded a
decrease to these derivative liabilities using fair value
methodologies of approximately $197,000 related to Series C
embedded derivatives.
NOTE 8. NOTES PAYABLE
On March 27, 2020, President Trump signed into law
the “Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”). On May 4, 2020, the Company entered into
a loan agreement (the “PPP Loan”) with Comerica Bank
(“Comerica”) under the Paycheck Protection Program
(the “PPP”), which is part of the CARES Act
administered by the United States Small Business Administration
(“SBA”). As part of the application for these
funds, the Company in good faith, has certified that the current
economic uncertainty made the loan request necessary to support the
ongoing operations of the Company. This certification further
requires the Company to take into account our current business
activity and our ability to access other sources of liquidity
sufficient to support ongoing operations in a manner that is not
significantly detrimental to the business. Under the PPP, the
Company received proceeds of approximately $1,571,000. In
accordance with the requirements of the PPP, the Company utilized
the proceeds from the PPP Loan primarily for payroll costs, rent
and utilities. The PPP Loan has a 1.00% interest rate per annum,
matures on May 4, 2022 and is subject to the terms and conditions
applicable to loans administered by the SBA under the PPP. Under
the terms of PPP, all or certain amounts of the PPP Loan may be
forgiven if they are used for qualifying expenses as described in
the CARES Act, which the Company continues to evaluate. While no
determination has been made at the time of the filing of this
Quarterly Report, the Series D Financing may affect the Company's
ability to have the PPP Loan forgiven under the PPP. The Company
has recorded the entire amount of the PPP Loan as debt. Under the
terms of the PPP Loan, monthly payments of principal and interest
were due to commence November 1, 2020, however the SBA is deferring
loan payments for borrowers who apply for loan forgiveness until
the SBA remits the borrower’s loan forgiveness amount to the
lender. The Company plans to file for loan forgiveness within 30
days of the filing of this Quarterly Report. At March 31, 2021, the
Company has recorded the current portion of the PPP Loan of
approximately $1,107,000 as a current liability under the caption
“Notes payable, current portion” in its condensed
consolidated March 31, 2021 balance sheet. The remaining portion of
approximately $464,000 is recorded as a long-term liability under
the caption “Note payable, net of current portion” in
its condensed consolidated March 31, 2021 balance sheet. At
December 31, 2020, the Company has recorded the current portion of
the PPP Loan of approximately $918,000 as a current liability under
the caption “Notes payable, current portion” in its
condensed consolidated December 31, 2020 balance sheet. The
remaining portion of approximately $653,000 is recorded as a
long-term liability under the caption “Note payable, net of
current portion” in its condensed consolidated December 31,
2020 balance sheet.
NOTE 9. EQUITY
The
Company’s Certificate of Incorporation, as amended,
authorizes 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.
On
June 9, 2020, the Company amended its Certificate of Incorporation
to increase the number of shares of the Company’s Common
Stock and the number of shares of the Company’s Preferred
Stock authorized thereunder from an aggregate of 179 million to 350
million, consisting of 345 million shares of Common Stock and 5
million shares of Preferred Stock. On September 28, 2020, the
Company received executed written consents from the requisite
holders of the Company's voting securities, voting on an
as-converted basis, approving an increase in the authorized number
of shares of Common Stock from 345 million shares to 1.0 billion
shares, with no change to the number of authorized shares of
Preferred Stock, which action became effective October 13, 2020. On
February 16, 2021, the Company received executed written consents
from the requisite holders of the Company's voting securities,
voting on an as-converted basis, approving an increase in the
authorized number of shares of Common Stock from 1.0 billion shares
to 2.0 billion shares, with no change to the number of authorized
shares of Preferred Stock, which action became effective April 21,
2021.
Series A Convertible Preferred Stock
On September 15, 2017, the Company filed the
Certificate of Designations of the Series A Preferred with the
Delaware Secretary of State (the “Series A
Certificate”),
designating 38,000 shares of the Company’s preferred stock,
par value $0.01 per share, as Series A Preferred. The Company had
37,467 shares of Series A Preferred outstanding as of December 31,
2019.
During July
2020, the Company entered into the Series A Exchange Agreement with
the Series A Holders, pursuant to which such Series A Holders
exchanged 18,828 shares of Series A Preferred for an equivalent
number of Series A-1 Preferred in consideration for their waiver of
approximately $1,849,000 in dividends payable.
On
September 28, 2020, the Company received executed written consents
from (i) the requisite holders of the Company’s voting
securities, voting on an as-converted basis, and (ii) the requisite
holders of Series A Preferred, voting as a separate class,
approving the Amended Series A Certificate, which, among other
things, provides for (i) the automatic conversion of all Series A
Preferred into Common Stock at a rate of 10% per month following
the Closing of the Series D Financing, with the conversion price
for such conversion reduced from $1.15 per share of Common Stock,
to $0.20 per share of Common Stock, and (ii) a reduction of the
dividend rate from 8% of the stated Series A Liquidation Preference
Amount if paid in cash and 10% of the stated Series A Liquidation
Preference Amount if paid in Common Stock, to 4% of the Series A
Liquidation Preference Amount, with the dividends being paid only
in shares of Common Stock.
The Company had 6,149 and 14,911 shares of Series A Preferred outstanding as
of March 31, 2021 and December 31, 2020, respectively. At
March 31, 2021 and December 31, 2020, the Company had cumulative
undeclared dividends of $0. During the three
months ended March 31, 2021, the Company issued the
holders of Series A Preferred 1,050,826 shares of Common Stock
as payment of dividends due. During the three
months ended March 31, 2021, the Company issued
43,819,500 shares of Common Stock upon the conversion of 8,762
shares of Series A Preferred Stock. During the three months ended
March 31, 2020, the Company recorded accrued unpaid dividends of
approximately $937,000 on its Series A Preferred Stock. There were
no conversions of Series A Preferred into Common Stock during the
three months ended March 31, 2020.
Series A-1 Convertible Preferred Stock
In
July 2020, the Company filed the Series A-1 Certificate with the
Secretary of State for the State of Delaware – Division of
Corporations, designating 31,021 shares of the Company’s
Preferred Stock as Series A-1 Preferred. Shares of Series A-1
Preferred accrue cumulative dividends and are payable quarterly
beginning March 31, 2021 at a rate of 8% per annum if paid in cash,
or 10% per annum if paid by the issuance of shares of the
Company’s Common Stock.
Shares
of Series A-1 Preferred rank senior to the Company’s Common
Stock, pari-passu to the Company's Series A Preferred, and are
subordinate and rank junior to Series B Preferred and Series D
Preferred.
Each
share of Series A-1 Preferred has a liquidation preference equal to
the greater of (i) $1,000 per share plus all accrued and unpaid
dividends, or (ii) such amount per share as would have been payable
had each such share been converted into Common Stock immediately
prior to such liquidation, dissolution or winding up (the amount
payable pursuant to the foregoing is referred to herein as the
“Series A-1 Liquidation Preference Amount”) before any
payment shall be made or any assets distributed to the holders of
the Common Stock or any other classes and series of equity
securities of the Company which by their terms rank junior to the
Series A-1 Preferred.
Each share of Series A-1 Preferred was convertible
into that number of shares of the Company’s Common Stock
(“Series A-1 Conversion
Shares”) equal to that
number of shares of Series A-1 Preferred being converted multiplied
by $1,000, divided by $0.65, or the conversion price as defined in
the Series A-1 Certificate in effect as of the date the holder
delivers to the Company their notice of election to convert.
Holders of Series A-1 Preferred may elect to convert shares of
Series A-1 Preferred into Common Stock at any time. In addition to
the aforementioned holder conversion option, if the volume weighted
average closing price (VWAP) of the Company’s Common Stock is
at least $1.00 per share for 20 consecutive trading days, then the
Company has the right to convert one-half of the issued and
outstanding shares of Series A-1 Preferred into Common Stock. In
the event of a Change of Control, the Company will have the option
to redeem all issued and outstanding shares of Series A-1 Preferred
for 115% of the Liquidation Preference per
share.
During July 2020, the Company entered into an
Exchange Agreement, Consent and Waiver (“Exchange
Agreement”) with certain
holders of its Series A Preferred (the "Series A
Holders"), pursuant to which
such Series A Holders exchanged 18,828 shares of Series A Preferred
for an equivalent number of Series A-1
Preferred.
On September 28, 2020, the Company's holders of
Common Stock and Preferred Stock voted to revise the Series A-1
Certificate by i) amending and restating the Series A-1
Certificate to, without limitation, provide for (i) the voluntary
conversion of all outstanding shares of the Company's Series A-1
Preferred into shares of the Company’s Common Stock at a
reduced conversion price of $0.20 per share of Common Stock, and
(ii) the automatic conversion of all issued and outstanding shares
of Series A Preferred and Series A-1 Preferred into shares of
Common Stock at a rate of 10% per month, beginning on November 1,
2020, and ending on August 1, 2021, at the reduced conversion price
of $0.20 per share of Common Stock;
The Company had 5,922 and 14,782 shares of Series
A-1 Preferred outstanding as of March 31, 2021 and December 31,
2020, respectively. During the three months ended
March 31, 2021, the Company issued the holders of Series A-1
Preferred 963,266 shares of Common Stock as payment of dividends
due. During the three months ended March 31, 2021,
the Company
issued 44,300,000 shares of Common Stock upon the conversion of
8,860 shares of Series A-1 Preferred.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares
of Series B Convertible Preferred Stock (“Series B
Preferred”) outstanding
as of March 31, 2021 and December 31, 2020. At March 31, 2021 and
December 31, 2020, the Company had cumulative undeclared dividends
of approximately $21,000 and $8,000, respectively. There were no
conversions of Series B Preferred into Common Stock during the
three months ended March 31, 2021 and 2020.
Common Stock
As
of March 31, 2021, we had 276,749,448 and 276,742,744 shares of
Common Stock issued and outstanding, respectively. Our authorized
but unissued shares of Common Stock are available for issuance
without action by our shareholders.
The
following table summarizes outstanding Common Stock activity during
the three months ended March 31, 2021:
|
|
|
|
Shares
outstanding at December 31, 2020
|
180,089,613
|
|
Shares issued pursuant to payment of stock dividend on Series A
Preferred
|
1,050,826
|
|
Shares
issued pursuant to payment of stock dividend on Series A-1
Preferred
|
963,266
|
|
Shares
issued pursuant to Series D conversion to Common Stock
|
6,115,324
|
|
Shares
issued pursuant to Series A conversion to Common Stock
|
43,819,500
|
|
Shares
issued pursuant to Series A-1 conversion to Common
Stock
|
44,300,000
|
|
Shares
issued pursuant to warrant exercises
|
400
|
|
Shares
issued as compensation in lieu of cash
|
242,647
|
|
Shares issued pursuant to RSU vesting
|
161,168
|
|
Shares
outstanding at March 31, 2021
|
276,742,744
|
Warrants
As
of March 31, 2021, warrants to purchase 393,589 shares of Common
Stock at prices ranging from $0.01 to $0.80 were outstanding. At
March 31, 2021, no warrants are exercisable and become exercisable
only upon the attainment of specified events. All warrants expire
on September 19, 2028 with the exception of 150,000 warrants whose
expiration date is 3 years from initial vesting, such vesting based
on certain events. The intrinsic value of warrants outstanding at
March 31, 2021 was $0. The Company has excluded from this
computation any intrinsic value of the 243,589 warrants issued to
the Series A Preferred stockholders due to the conversion exercise
contingency associated with these warrants.
The
following table summarizes warrant activity for the following
periods:
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
Balance
at December 31, 2020
|
753,775
|
$0.17
|
|
Granted
|
—
|
$—
|
|
Expired
/ Canceled
|
(359,786)
|
$0.01
|
|
Exercised
|
(400)
|
$0.01
|
|
Balance
at March 31, 2021
|
393,589
|
$0.31
|
There
were no warrants issued during the three months ended March 31,
2021. During the three months ended March 31, 2021, 359,786
warrants were cancelled pursuant to the mandatory conversion of
Series A Preferred Stock into Common Stock and 400 warrants were
exercised at $0.01 per warrant.
NOTE 10. STOCK-BASED COMPENSATION
Stock Options
As of March 31, 2021, the Company had one active
stock-based compensation plan: the 2020 Omnibus Stock Incentive
Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization
obtained from the Company’s stockholders, the Company adopted
the 2020 Omnibus Stock Incentive Plan (the
“2020
Plan”). Such plan had
been previously unanimously approved by the Company’s Board.
The purposes of our 2020 Plan are to enhance our ability to attract
and retain highly qualified officers, non-employee directors, key
employees and consultants, and to motivate those service providers
to serve the Company and to expend maximum effort to improve our
business results by providing to those service providers an
opportunity to acquire or increase a direct proprietary interest in
our operations and future success. The 2020 Plan also will allow us
to promote greater ownership in our Company by the service
providers in order to align the service providers’ interests
more closely with the interests of our stockholders. Awards granted
under the 2020 Plan are designed to qualify for special tax
treatment under Section 422 of the Code.
Pursuant
to the adoption of the 2020 Plan, such plan will supersede and
replace the Company’s 1999 Plan and no new awards will be
granted under the 1999 Plan thereafter. Any awards outstanding
under the 1999 Plan on the date of approval of the 2020 Plan will
remain subject to the 1999 Plan. Upon approval of our 2020 Plan,
all shares of Common Stock remaining authorized and available for
issuance under the 1999 Plan and any shares subject to outstanding
awards under the 1999 Plan that subsequently expire, terminate, or
are surrendered or forfeited for any reason without issuance of
shares will automatically become available for issuance under our
2020 Plan. As of the March 31, 2021, there were 26,511,811 shares
available for issuance under the 2020 Plan. The Company amended the
2020 Plan to increase the number of shares of Common Stock
available for issuance to 145.0 million shares. Such amendment
became effective on April 21, 2021.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “Compensation – Stock
Compensation”. 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 operating expense based upon the departments to which
substantially all the associated employees report and credited to
additional paid-in-capital.
ASC
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-pricing 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-pricing 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. 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 Topic 14. There were no options granted during the three
months ended March 31, 2021 and 2020.
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 adopted the provisions of ASU
2016-09 and will continue to use an estimated annualized forfeiture
rate of approximately 0% for corporate officers, 4.1% for members
of the Board of Directors and 15.0% for all other employees. The
Company is currently in the process of reviewing the expected
forfeiture rate to determine if that percent is still reasonable
based on recent historical experience.
A summary of the activity
under the Company’s stock option plans is as
follows:
|
|
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
Balance
at December 31, 2020
|
2,585,500
|
$0.19
|
9.2
|
|
Granted
|
—
|
|
|
|
Expired/Cancelled
|
(10,831)
|
$0.78
|
|
|
Exercised
|
—
|
|
|
|
Balance at March
31, 2021
|
2,574,669
|
$0.18
|
8.9
|
There
were no issuances of options to purchase Common Stock during the
three months ended March 31, 2021
During the three months ended March 31,
2021, an aggregate of 10,381 options expired
unexercised.
At March 31, 2021, a total of 2,574,669
options were outstanding, of which 110,091 were exercisable at a
weighted average price of $1.09 per share with a remaining weighted
average contractual term of 6.06 years. The Company expects
that, in addition to the 110,091 options that were exercisable as
of March 31, 2021, another 2,464,578 will ultimately vest resulting
in a combined total of 2,574,669. Those 2,574,669
shares have a weighted average exercise price of $0.18 and an
aggregate intrinsic value of approximately $0 as of March 31,
2021. Stock-based compensation expense related to equity options
was approximately $32,000 for the three months ended March
31, 2021.
The intrinsic value of options exercisable and
outstanding at March 31, 2020 was $0. The aggregate
intrinsic value for all options outstanding as of March 31,
2020 was $0. The
weighted-average grant-date per share fair value of options granted
during the three months ended March 31, 2020 was $0 as there were
no option grants during this period. At March 31, 2020, the total
remaining unrecognized compensation cost related to unvested stock
options amounted to approximately $558,000, which will be
recognized over a weighted-average period of 1.5
years.
The Company
periodically issues Restricted Stock Units (“RSUs”) to
certain employees which vest over time. When vested, each RSU
represents the right to that number of shares of Common Stock equal
to the number of RSUs granted. The grant date fair value for
RSU’s is based upon the market price of the Company's Common
Stock on the date of the grant. The fair value is then amortized to
compensation expense over the requisite service period or vesting
term.
A
summary of the activity related to RSUs is as follows:
|
|
|
Weighted-Average
Issuance
Price
|
|
Balance at December
31, 2020
|
845,106
|
$0.14
|
|
Granted
|
—
|
$—
|
|
Expired/Cancelled
|
(150,935)
|
$0.13
|
|
Vested
|
(76,167)
|
$0.13
|
|
Balance at March
31, 2021
|
618,004
|
$0.14
|
There
were no RSUs granted to employees during the three months ended March 31, 2021.
During the
three months ended March 31,
2021, 76,167 RSUs vested
with the remainder of outstanding RSUs vesting at various times
through September 29, 2022.
During the three months ended March 31, 2021 and 2020, the Company
recorded compensation expense of approximately $15,000 and $0
related to RSUs. During the three months ended March 31, 2021 and
2020, the Company issued 161,168 and 0 shares of its Common Stock
pursuant to the vesting of RSUs.
As
of March 31, 2021, the Company has not issued the Common Stock
shares pursuant to the vesting of the 808,859 RSUs.
Stock-based Compensation
Stock-based
compensation related to equity options and RSUs has been classified
as follows in the accompanying consolidated statements of
operations (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Cost
of revenue
|
$1
|
$2
|
|
General
and administrative
|
37
|
67
|
|
Sales
and marketing
|
21
|
29
|
|
Research
and development
|
19
|
26
|
|
Total
|
$78
|
$124
|
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “Fair Value Measurements and
Disclosures”, which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other
than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
|
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
|
Fair Value at March 31, 2021
|
|
($ in thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,800
|
$—
|
$—
|
$1,800
|
|
Totals
|
$1,800
|
$—
|
$—
|
$1,800
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liabilities
|
$22,850
|
$—
|
$—
|
$22,850
|
|
Totals
|
$22,850
|
$—
|
$—
|
$22,850
|
|
|
Fair Value at December 31, 2020
|
|
($ in thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,881
|
$—
|
$—
|
$1,881
|
|
Totals
|
$1,881
|
$—
|
$—
|
$1,881
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liabilities
|
$24,128
|
$—
|
$—
|
$24,128
|
|
Totals
|
$24,128
|
$—
|
$—
|
$24,128
|
The
Company’s German pension plan is funded by insurance contract
policies whereby the insurance company guarantees a fixed minimum
return. The Company has determined that the pension assets are
appropriately classified within Level 3 of the fair value hierarchy
because they are valued using actuarial valuation methodologies
which approximate cash surrender value that cannot be corroborated
with observable market data. All plan assets are managed in a
policyholder pool in Germany by outside investment managers. The
investment manager is responsible for the investment strategy of
the insurance premiums that Company submits and does not hold
individual assets per participating employer. The German Federal
Financial Supervisory oversees and supervises the insurance
contracts.
As of March 31, 2021, the Company had embedded
features contained in the Series D Preferred host instrument that
qualified for derivative liability
treatment. The recorded fair market value of these
features was approximately $22,850,000 and $24,128,000 at March 31,
2021 and December 31, 2020, respectively, and are classified as a
current liability in the condensed consolidated balance sheets as
of March 31, 2021 and December 31, 2020. The fair value of the
Company’s derivative liabilities is classified
within Level 3 of the fair value hierarchy because they are valued
using pricing models that incorporate management assumptions that
cannot be corroborated with observable market data. The
Company uses Monte-Carlo simulations in the determination of the
fair value of derivative liabilities.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events. Significant assumptions used in the fair value
methodologies during the three months ended March 31, 2021 are a
risk-free rate of 0.56%, equity volatility of 103.6%, effective
life of 3.75 years and a preferred stock dividend rate of 4%. These
assumptions incorporate management’s estimate of the
probability of future financings (Series D Financing) and the
timing of potential change of control events. The primary
assumptions impacted by Series D Financing were the effective life
of 3.75 years and equity volatility.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
The
reconciliations of Level 3 pension assets measured at fair value
during the three months ended March 31, 2021 and 2020 are presented
below:
|
($
in thousands)
|
Three
months ended March 31, 2021
|
Three
months ended March 31, 2020
|
|
|
|
|
|
Pension
assets:
|
|
|
|
Fair
value at beginning of period
|
$1,881
|
$1,713
|
|
Return
on plan assets
|
15
|
14
|
|
Company
contributions and benefits paid, net
|
2
|
(10)
|
|
Effect
of rate changes
|
(98)
|
(42)
|
|
Fair
value at end of period
|
$1,800
|
$1,675
|
The
reconciliations of Level 3 derivative liabilities measured at fair
value for Series D Preferred Stock during the three months ended
March 31, 2021 and for Series C Preferred Stock during the three
months ended March 31, 2020 are presented below:
|
($
in thousands)
|
Three
months ended March 31, 2021
|
Three
months ended March 31, 2020
|
|
|
|
|
|
Derivative
liabilities
|
|
|
|
Fair
value at beginning of period
|
$24,128
|
$369
|
|
Derivative
liability from issuance of Preferred Series D
|
248
|
—
|
|
Decrease
in derivative liability from conversions of Preferred Series
D
|
(354)
|
—
|
|
Change
in fair value included in earnings
|
(1,172)
|
(197)
|
|
Fair
value at end of period
|
$22,850
|
$172
|
NOTE 11. RELATED PARTY TRANSACTIONS
Professional Services Agreement
During
the year ended December 31, 2020, the Company entered into
professional services agreement with a firm affiliated with a
member of the Company’s Board at the time the parties entered
into the agreement. The Company made no payments pursuant to this
agreement during the twelve months ended December 31, 2020 and made
payment of approximately $34,000 during three months ended March
31, 2021. The Company has the right to terminate the agreement on
thirty days written notice at any time.
NOTE 12. CONTINGENT LIABILITIES
Employment Agreements
The
Company has an employment agreement with its Chief Executive
Officer, which expires on March 2, 2022. The Company may terminate
the agreement with or without cause. Subject to the conditions and
other limitations set forth in the employment agreement, the
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 agreement) 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 their
employment without cause or in the event of an involuntary
termination: (i) severance payments equal to the lesser of twelve
months’ base salary or the remaining period prior to the
expiration of the Employment Period; (ii) continuation of fringe
benefits and medical insurance for a period of twelve months. 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.
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.
NOTE 13. SUBSEQUENT EVENTS
Issuance of Common Stock due to Conversions and Vesting of
Restricted Stock Units (“RSUs”)
During
the period April 1, 2021 through May 20, 2021, the Company issued
an aggregate 26,550,242 shares of its Common Stock including
25,950,904 shares of Common Stock for conversions of its Preferred
Stocks and 599,338 pursuant to RSU vestings.
Amendment to Certificate of Incorporation
Our
Certificate of Incorporation as of March 31, 2021 authorizes a
total of 1.0 billion shares of Common Stock for issuance. Effective
as of January 28, 2021 and February
16, 2021, respectively, our Board of Directors and the
Majority Shareholders approved and authorized an amendment to our
Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 1.0 billion shares to 2.0 billion shares, resulting in a total
increase of 1.0 billion
authorized shares of Common Stock. Contemporaneous with this
action, the Company amended the 2020 Omnibus Incentive Plan to
increase the number of shares of Common Stock available for
issuance under the 2020 Plan to 145.0 million shares. These actions
became effective on April 21, 2021.
Creation of Advisory Board and Issuance of Warrants
In
April 2021, the Company created an advisory board to the Board of
Directors comprised of 3 individuals. As compensation for advisory
board services, the Company granted each member warrants to
purchase 200,000 shares of the Company’s Common Stock. Such
warrants have an exercise price of $0.07 per share and will vest
over a one-year period beginning on April 19, 2021.
Issuance of Options
In
April 2021, the Company granted an aggregate of 54,050,000 options
to purchase shares of Common Stock including 50,700,000 to certain
officers and employees and 3,350,000 to certain members of the
Company’s Board of Directors. Such options have an exercise
price of $0.067 and vest at various times through April 16, 2023.
As a condition of issuance of these options, certain employees
surrendered an aggregate of 6,520,000 previously issued or
contractually promised equity awards and certain members of the
Company’s Board of Directors surrendered the right to an
initial grant of options to purchase that number of shares of
Common Stock equal to $120,000 divided by the fair market value of
the Company’s Common Stock as determined on the date of grant
as reported on the OTC Markets, and further surrendered an option
to purchase that number of shares of Common Stock equal to $60,000
divided by the fair market value of the Company’s Common
Stock as determined on the date of grant beginning on the first
anniversary and on each annual anniversary thereafter.
Entry into Second Lincoln Park Purchase Agreement
On May
17, 2021 (the "Execution
Date"), the Company entered into a purchase agreement, dated
as of the Execution Date (the "Purchase Agreement"), and a
registration rights agreement, dated as of the Execution Date (the
"Registration Rights
Agreement"), with Lincoln Park Capital Fund, LLC
("Lincoln Park"), pursuant
to which Lincoln Park has committed to purchase up to $15,100,000
of the Company's Common Stock, $0.01 par value per
share.
Under
the terms and subject to the conditions of the Purchase Agreement,
the Company has the right, but not the obligation, to sell to
Lincoln Park, and Lincoln Park is obligated to purchase up to
$15,100,000 worth of shares of Common Stock. Such sales of Common
Stock by the Company, if any, will be subject to certain
limitations, and may occur from time to time, at the Company's sole
discretion, over the 24-month period commencing on the date that a
registration statement covering the resale of shares of Common
Stock that have been and may be issued under the Purchase
Agreement, which the Company agreed to file with the Securities and
Exchange Commission (the "SEC") pursuant to the Registration
Rights Agreement, is declared effective by the SEC and a final
prospectus in connection therewith is filed and the other
conditions set forth in the Purchase Agreement are satisfied, all
of which are outside the control of Lincoln Park (such date on
which all of such conditions are satisfied, the "Commencement Date"). The Company has
until May 31, 2021 to file the registration statement.
Under
the Purchase Agreement, on any business day over the term of the
Purchase Agreement, the Company has the right, in its sole
discretion, to present Lincoln Park with a purchase notice (each, a
"Purchase Notice")
directing Lincoln Park to purchase up to 250,000 shares of Common
Stock per business day (“Regular Purchase”), which (i)
increases to up to 300,000 shares in the event the price of the
Company’s Common Stock is not below $0.10 per share, (ii)
increases to 350,000 shares of Common Stock per Business Day in the
event the price of the Company’s Common Stock is not below
$0.25 per share, and (iii) increases to 500,000 shares in the event
the price of the Company’s Common Stock is not below $0.50
per share (in each case, subject to adjustment for any
reorganization, recapitalization, non- cash dividend, stock split,
reverse stock split or other similar transaction as provided in the
Purchase Agreement). In each case, Lincoln Park's maximum
commitment in any single Regular Purchase may not exceed $500,000.
The Purchase Agreement provides for a purchase price per Purchase
Share (the "Purchase
Price") equal to the lesser of:
|
●
|
the
lowest sale price of the Company's Common Stock on the purchase
date; and
|
|
●
|
the
average of the three lowest closing sale prices for the Company's
Common Stock during the fifteen consecutive business days ending on
the business day immediately preceding the purchase date of such
shares.
|
In
addition, on any date on which the Company submits a Purchase
Notice to Lincoln Park, the Company also has the right, in its sole
discretion, to present Lincoln with an accelerated purchase notice
(each, an "Accelerated Purchase
Notice") directing Lincoln Park to purchase an amount of
stock (the "Accelerated
Purchase") equal to up to the lesser of (i) three times the
number of shares of Common Stock purchased pursuant to such Regular
Purchase; and (ii) 30% of the aggregate shares of the Company's
Common Stock traded during all or, if certain trading volume or
market price thresholds specified in the Purchase Agreement are
crossed on the applicable Accelerated Purchase Date, the portion of
the normal trading hours on the applicable Accelerated Purchase
Date prior to such time that any one of such thresholds is crossed
(such period of time on the applicable Accelerated Purchase Date,
the "Accelerated Purchase
Measurement Period"), provided that Lincoln Park will not be
required to buy shares of Common Stock pursuant to an Accelerated
Purchase Notice that was received by Lincoln Park on any business
day on which the last closing trade price of the Company's Common
Stock on the OTC Markets (or alternative national exchange in
accordance with the Purchase Agreement) is below $0.25 per share.
The purchase price per share of Common Stock for each such
Accelerated Purchase will be equal to the lesser of:
|
●
|
95% of
the volume weighted average price of the Company's Common Stock
during the applicable Accelerated Purchase Measurement Period on
the applicable Accelerated Purchase Date; and
|
|
●
|
the
closing sale price of the Company's Common Stock on the applicable
Accelerated Purchase Date.
|
The
Company may also direct Lincoln Park on any business day on which
an Accelerated Purchase has been completed and all of the shares to
be purchased thereunder have been properly delivered to Lincoln
Park in accordance with the Purchase Agreement, to purchase an
amount of stock (the "Additional
Accelerated Purchase") equal to up to the lesser of (i)
three times the number of shares purchased pursuant to such Regular
Purchase; and (ii) 30% of the aggregate number of shares of the
Company's Common Stock traded during a certain portion of the
normal trading hours on the applicable Additional Accelerated
Purchase date as determined in accordance with the Purchase
Agreement (such period of time on the applicable Additional
Accelerated Purchase date, the "Additional Accelerated Purchase Measurement
Period"). Additional Accelerated Purchases will be equal to
the lower of:
|
●
|
95% of
the volume weighted average price of the Company's Common Stock
during the applicable Additional Accelerated Purchase Measurement
Period on the applicable Additional Accelerated Purchase date;
and
|
|
●
|
the
closing sale price of the Company's Common Stock on the applicable
Additional Accelerated Purchase date.
|
The
aggregate number of shares that the Company can sell to Lincoln
Park under the Purchase Agreement may in no case exceed that number
which, together with Lincoln Park’s then current holdings of
Common Stock, exceed 4.99% of the Common Stock outstanding
immediately prior to the delivery of the Purchase
Notice.
Lincoln
Park has no right to require the Company to sell any shares of
Common Stock to Lincoln Park, but Lincoln Park is obligated to make
purchases as the Company directs, subject to certain conditions.
There are no upper limits on the price per share that Lincoln Park
must pay for shares of Common Stock.
The
Company has agreed with Lincoln Park that it will not enter into
any "variable rate" transactions with any third party for a period
defined in the Purchase Agreement.
The
Company has agreed to issue to Lincoln Park 1,000,000 shares of
Common Stock as commitment shares in consideration for entering
into the Purchase Agreement on the Execution Date.
The
Purchase Agreement and the Registration Rights Agreement contain
customary representations, warranties, agreements and conditions to
completing future sale transactions, indemnification rights and
obligations of the parties. The Company has the right to terminate
the Purchase Agreement at any time, at no cost or penalty, subject
to the survival of certain provisions set forth in the Purchase
Agreement. During any "event of default" under the Purchase
Agreement, all of which are outside of Lincoln Park's control,
Lincoln Park does not have the right to terminate the Purchase
Agreement; however, the Company may not initiate any regular or
other purchase of shares by Lincoln Park, until such event of
default is cured. In addition, in the event of bankruptcy
proceedings by or against the Company, the Purchase Agreement will
automatically terminate.
Actual
sales of shares of Common Stock to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by
the Company from time to time, including, among others, market
conditions, the trading price of the Common Stock and
determinations by the Company as to the appropriate sources of
funding for the Company and its operations. Lincoln Park has no
right to require any sales by the Company but is obligated to make
purchases from the Company as it directs in accordance with the
Purchase Agreement. Lincoln Park has covenanted not to cause or
engage in any manner whatsoever, any direct or indirect short
selling or hedging of the Company's shares.
In
connection with the execution of the Purchase Agreement, the
Company has agreed to sell, and Lincoln Park has agreed to
purchase, 1.0 million shares of Common Stock for a purchase price
of $100,000 (“Original
Purchase”).
Due to
the terms of the Purchase Agreement as described above, management
is not currently expecting the related proceeds from this agreement
to be sufficient to sustain operations for an extended period of
time.
The May
17, 2021 Purchase Agreement supersedes and terminates the previous
agreement between the Company and Lincoln Park entered into on June
11, 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of:
ImageWare Systems, Inc.
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheets of
ImageWare Systems, Inc.
(“Company”) as of December 31, 2020 and 2019, and the
related consolidated statements of operations, comprehensive
loss, shareholders’ deficit and cash flows for each of the
two years in the period ended December 31, 2020, and the related
notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”).
Going Concern Uncertainty
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company does not generate
sufficient cash flows from operations to maintain operations and,
therefore, is dependent on additional financing to fund
operations. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 1 to the financial statements. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matters
The
critical audit matters communicated below are matters arising from
the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee
and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Convertible Preferred Shares
As
described further in Note 13 to the financial statements, the
Company issued 22,863 shares of Series D Convertible Preferred
Stock during the year ended December 31, 2020. The accounting for
the transaction was complex, as it required the identification and
assessment as to whether embedded features were required to be
recognized separately and therefore, also were required to be
recorded at fair value. The Company determined that the embedded
conversion option, redemption option and participating dividend
feature contained in the Series D Convertible Preferred Stock host
instrument were required to be recognized separately as derivative
liabilities at fair value. The determination of fair
value involved using complex valuation methodologies that
incorporate significant assumptions which include the expected
volatility of the Company’s common stock and the probability
of certain conditions or events occurring.
We identified auditing the Company’s evaluation of the
accounting for the embedded features included in the Series
D Convertible Preferred Stock and the methods and assumptions used
to estimate the fair value of
the resulting derivative liability as a critical audit matter. The principal
consideration for this determination was the degree of judgment
involved by management in determining if the host contract was more
akin to debt or equity and the development of the assumptions
necessary to estimate the fair value of the derivative
liability which in turn led to
significant auditor judgment, subjectivity and effort in performing
procedures and evaluating audit evidence for the accounting and
estimated fair value.
The
primary procedures we performed to address this critical audit
matter included:
●
Reading
the underlying Series D Convertible Preferred Stock agreements to
understand the terms and conditions, economic substance, and
identify embedded features requiring evaluation.
●
Testing
management’s application of the relevant accounting guidance
to assess if the embedded features require accounting as derivative
financial instruments and applying our understanding of
each.
●
Obtaining
an understanding of management’s process for developing the
estimated fair value, including understanding the reasons the
method was selected by the Company, identifying the significant
assumptions used to determine the fair value estimate, and the
application of those assumptions in the related method, and
evaluating the appropriateness of each.
●
Testing the data used in
developing the fair value estimate, including procedures to
determine whether the data was complete and accurate and
sufficiently precise.
●
Evaluating
the significant assumptions used in developing the fair value
estimate, including:
o
Evaluating
whether management’s estimation of the probability of whether
certain conditions or events were reasonable as of each valuation
date.
o
Comparing
the forecasted volatility of the Company’s common stock price
to its historical volatility.
●
Involving
the use of valuation professionals with specialized skill and
knowledge to assist in the evaluation of management’s
process, selected method, and inputs and assumptions used in the
method.
Modification of Preferred
Shares
As
described in Note 2 and Note 14 to the financial statements, during
the year ended December 31, 2020 the Company amended the terms of
its Series A and Series A-1 Preferred Stock. In addition, the
Company converted the Series C Preferred Stock into shares of
Series D Preferred Stock. The accounting for the transactions was
complex due to a lack of authoritative guidance on the accounting
for preferred stock modifications and extinguishments within US
GAAP. Additionally, the transactions required an estimation of the
fair value of Series A, Series A-1, and Series D Preferred
Stock.
We
identified auditing the
Company’s accounting for the modification of the
Series A and A-1 preferred shares, the conversion of the Series C
Preferred Stock into Series D Preferred Stock, and the
corresponding fair value estimates of the Series A, Series A-1, and
Series D Preferred Stock as a critical audit matter. The principal
consideration for this determination was a combination of the lack
of authoritative guidance on accounting for the modification or
extinguishment of preferred shares and the judgment involved by
management in developing the model and assumptions necessary to
estimate of the fair value of the Series A, Series A-1, and Series
D Preferred Stock. This in turn led to significant auditor
judgment, subjectivity and effort in performing procedures and
evaluating audit evidence related to management’s accounting
conclusions and the reasonableness of the significant assumptions
used by the Company to estimate each fair value and the application
of those assumptions within the valuation methods.
The
primary procedures we performed to address this critical audit
matter included:
●
Reading
the underlying preferred share agreements to understand the terms,
conditions and economic substance of the transactions.
●
Evaluating
whether management’s selection and application of the
relevant accounting guidance was reasonable and supportable,
applying our understanding of the agreements.
●
Obtaining
an understanding of management’s process for developing the
estimated fair value of the Series A, Series A-1, and Series D
Preferred Stock, including understanding the reasons the methods
were selected by the Company, identifying the significant
assumptions used to determine the fair value estimates and the
application of those assumptions in the related models, and
evaluating the appropriateness of each.
●
Testing
the data used in developing the fair value estimates, including
procedures to determine whether the data was complete and accurate
and sufficiently precise.
●
Involving
the use of valuation professionals with specialized skill and
knowledge to assist in the evaluation of management’s
process, selected methods, and inputs and assumptions used in the
methods.
/s/ Mayer
Hoffman McCann P.C.
We have served as the Company's
auditor since 2011.
San
Diego, California
April 2,
2021
IMAGEWARE
SYSTEMS, INC.
CONSOLIDATED BALANCE
SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$8,345
|
$1,030
|
|
Accounts receivable, net of allowance for doubtful accounts of $5
and $7 at December 31, 2020 and 2019, respectively.
|
577
|
657
|
|
Inventory, net
|
40
|
615
|
|
Other current assets
|
196
|
243
|
|
Total Current Assets
|
9,158
|
2,545
|
|
|
|
|
|
Property and equipment, net
|
155
|
216
|
|
Other assets
|
458
|
257
|
|
Operating lease right-of-use assets
|
1,557
|
1,906
|
|
Intangible assets, net of accumulated amortization
|
58
|
70
|
|
Goodwill
|
3,416
|
3,416
|
|
Total Assets
|
$14,802
|
$8,410
|
|
|
|
|
|
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
Accounts payable
|
$1,007
|
$515
|
|
Deferred revenue
|
903
|
1,629
|
|
Accrued expense
|
1,130
|
1,312
|
|
Operating lease liabilities, current portion
|
421
|
373
|
|
Derivative liabilities
|
24,128
|
369
|
|
Note payable, current portion
|
918
|
—
|
|
Total Current Liabilities
|
28,507
|
4,198
|
|
|
|
|
|
Other long-term liabilities
|
65
|
118
|
|
Note payable, net of current portion
|
653
|
—
|
|
Lease liabilities, net of current portion
|
1,297
|
1,716
|
|
Pension obligation
|
2,531
|
2,256
|
|
Total Liabilities
|
33,053
|
8,288
|
|
|
|
|
|
Mezzanine
Equity:
|
|
|
|
Series C
Convertible Redeemable Preferred Stock, $0.01 par value, designated
1,000 shares, 0 and 1,000 shares issued and outstanding at December
31, 2020 and December 31, 2019, respectively; liquidation
preference $0 and $10,000 at December 31, 2020 and December 31,
2019, respectively.
|
—
|
8,884
|
|
Series D
Convertible Redeemable Preferred Stock, $0.01 par value,
designated
|
|
|
|
26,000 shares,
22,863 and 0 shares issued and outstanding at December 31, 2020 and
December 31, 2019, respectively; liquidation preference $22,863 and
$0 at December 31, 2020 and 2019, respectively.
|
1,572
|
—
|
|
|
|
|
|
Shareholders’ Deficit:
|
|
|
|
Preferred stock, authorized 5,000,000 shares:
|
|
|
|
Series A Convertible Redeemable Preferred Stock, $0.01 par value;
designated 38,000 shares, 37,467 shares issued and 14,911 and
37,467 shares outstanding at December 31, 2020 and 2019,
respectively; liquidation preference $14,911 and $37,467 at
December 31, 2020 and 2019, respectively.
|
—
|
—
|
|
Series A-1 Convertible Redeemable Preferred Stock, $0.01 par value;
designated 38,000 shares, 37,467 shares issued and 14,782 and 0
shares outstanding at December 31, 2020 and 2019, respectively;
liquidation preference $14,782 and $0 at December 31, 2020 and
2019, respectively.
|
—
|
—
|
|
Series B Convertible Redeemable Preferred Stock, $0.01 par value;
designated 750,000 shares, 389,400 shares issued and 239,400 shares
outstanding at December 31, 2020 and 2019, respectively;
liquidation preference $607 at December 31, 2020 and 2019,
respectively.
|
2
|
2
|
|
Common Stock, $0.01 par value, 1,000,000,000 shares authorized;
180,096,317 and 113,353,176 shares issued at December 31, 2020 and
2019, respectively, and 180,089,613 shares and 113,346,472 shares
outstanding at December 31, 2020 and 2019,
respectively.
|
1,801
|
1,133
|
|
Additional paid-in capital
|
193,652
|
195,079
|
|
Treasury stock, at cost 6,704 shares
|
(64)
|
(64)
|
|
Accumulated other comprehensive loss
|
(1,989)
|
(1,741)
|
|
Accumulated deficit
|
(213,225)
|
(203,171)
|
|
Total Shareholders’ Deficit
|
(19,823)
|
(8,762)
|
|
Total Liabilities, Mezzanine Equity and Shareholders’
Deficit
|
$14,802
|
$8,410
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Product
|
$2,231
|
$923
|
|
Maintenance
|
2,554
|
2,583
|
|
|
4,785
|
3,506
|
|
Cost of revenue:
|
|
|
|
Product
|
800
|
218
|
|
Maintenance
|
448
|
425
|
|
Gross profit
|
3,537
|
2,863
|
|
|
|
|
|
Operating expense:
|
|
|
|
General and administrative
|
4,102
|
3,614
|
|
Sales and marketing
|
2,936
|
3,937
|
|
Research and development
|
5,706
|
7,488
|
|
Depreciation and amortization
|
72
|
71
|
|
|
12,816
|
15,110
|
|
Loss from operations
|
(9,279)
|
(12,247)
|
|
|
|
|
|
Interest (income) expense, net
|
102
|
(90)
|
|
Gain on change in fair value of derivative liabilities
|
(2,252)
|
(696)
|
|
Other components of net periodic pension expense
|
115
|
109
|
|
Other expense
|
2
|
1
|
|
Loss before income taxes
|
(7,246)
|
(11,571)
|
|
|
|
|
|
Income tax expense
|
7
|
10
|
|
Net loss
|
$(7,253)
|
$(11,581)
|
|
Preferred dividends, deemed dividends and accretion
|
(3,695)
|
(5,670)
|
|
Net loss available to common shareholders
|
$(10,948)
|
$(17,251)
|
|
|
|
|
|
Basic and diluted loss per common share — see Note
2:
|
|
|
|
Basic and diluted loss per share available to common
shareholders
|
$(0.08)
|
$(0.17)
|
|
Basic and diluted weighted-average shares outstanding
|
133,346,309
|
104,372,048
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$(7,253)
|
$(11,581)
|
|
Other comprehensive income (loss):
|
|
|
|
Increase in additional minimum pension liability
|
(97)
|
(312)
|
|
Foreign currency translation adjustment
|
(151)
|
(1)
|
|
Comprehensive loss
|
$(7,501)
|
$(11,894)
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ DEFICIT
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2019
|
37,467
|
$-
|
-
|
$-
|
239,400
|
$2
|
113,353,176
|
$1,133
|
(6,704)
|
$(64)
|
$195,079
|
$(1,741)
|
$(203,171)
|
$(8,762)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Preferred Stock discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,688)
|
-
|
-
|
(2,688)
|
|
Issuance of common stock net of financing costs
|
-
|
-
|
-
|
-
|
-
|
-
|
15,700,000
|
157
|
-
|
-
|
2,103
|
-
|
-
|
2,260
|
|
Stock-based compensation expense and issuance of Restricted Stock
Units
|
-
|
-
|
-
|
-
|
-
|
-
|
1,883,248
|
19
|
-
|
-
|
843
|
-
|
-
|
862
|
|
Issuance of common stock for financing facility
|
-
|
-
|
-
|
-
|
-
|
-
|
2,500,000
|
25
|
-
|
-
|
375
|
-
|
-
|
400
|
|
Modification of Series A Preferred Stock from issuance of Series
A-1 Preferred Stock
|
(18,828)
|
-
|
18,828
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,849
|
-
|
-
|
1,849
|
|
Conversion of Series A Preferred to Common Stock
|
(3,728)
|
-
|
-
|
-
|
-
|
-
|
18,640,000
|
186
|
-
|
-
|
(186)
|
-
|
-
|
-
|
|
Conversion of Series A-1 Preferred to Common Stock
|
-
|
-
|
(4,046)
|
-
|
-
|
-
|
19,016,452
|
190
|
-
|
-
|
(190)
|
-
|
-
|
-
|
|
Dividends on
Series B preferred stock, $(0.21)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(51)
|
(51)
|
|
Additional minimum
pension liability
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(97)
|
-
|
(97)
|
|
Foreign currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(151)
|
-
|
(151)
|
|
Dividends on
Series A preferred stock, $256.89/share
|
-
|
-
|
-
|
-
|
-
|
-
|
1,388,876
|
14
|
-
|
-
|
104
|
-
|
(1,967)
|
(1,849)
|
|
Dividends on
Series A-1 preferred stock, $867.20/share
|
-
|
-
|
-
|
-
|
-
|
-
|
1,159,416
|
12
|
-
|
-
|
81
|
-
|
(93)
|
-
|
|
Dividends on
Series C preferred stock, $(1,422.31)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
6,455,149
|
65
|
-
|
-
|
625
|
-
|
(690)
|
-
|
|
Dividends on
Series D preferred stock, $(45.70)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(142)
|
-
|
-
|
(142)
|
|
Deemed dividend
from issuance of Series D preferred stock
$(1859.80)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,201)
|
-
|
-
|
(4,201)
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,253)
|
(7,253)
|
|
Balance at
December 31, 2020
|
14,911
|
$-
|
14,782
|
$-
|
239,400
|
$2
|
180,096,317
|
$1,801
|
(6,704)
|
$(64)
|
$193,652
|
$(1,989)
|
$(213,225)
|
$(19,823)
|
|
|
Series A Convertible,
Redeemable Preferred
|
Series B Convertible,
Redeemable Preferred
|
|
|
|
Accumulated Other Comprehensive
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
37,467
|
$-
|
239,400
|
$2
|
98,230,336
|
$981
|
(6,704)
|
$(64)
|
$184,130
|
$(1,428)
|
$(186,648)
|
$(3,027)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Preferred Stock discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(728)
|
-
|
-
|
(728)
|
|
Issuance of common stock net of financing costs
|
-
|
-
|
-
|
-
|
5,954,545
|
60
|
-
|
-
|
6,060
|
-
|
-
|
6,120
|
|
Issuance of common stock pursuant to option exercises
|
-
|
-
|
-
|
-
|
351,334
|
4
|
-
|
-
|
162
|
-
|
-
|
166
|
|
Stock-based compensation expense
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
643
|
-
|
-
|
643
|
|
Warrants issued in lieu of cash as compensation for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
9
|
-
|
-
|
9
|
|
Foreign currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
-
|
(1)
|
|
Additional minimum pension liability
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(312)
|
-
|
(312)
|
|
Dividends on Series A preferred stock, $(103.03)/share
|
-
|
-
|
-
|
-
|
6,959,523
|
70
|
-
|
-
|
3,791
|
-
|
(3,861)
|
-
|
|
Dividends on Series B preferred stock, $(0.21)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(51)
|
(51)
|
|
Dividends on Series C preferred stock,
$(1,030.28)/share
|
-
|
-
|
-
|
-
|
1,857,438
|
18
|
-
|
-
|
1,012
|
-
|
(1,030)
|
-
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(11,581)
|
(11,581)
|
|
Balance at December 31, 2019
|
37,467
|
$-
|
239,400
|
$2
|
113,353,176
|
$1,133
|
(6,704)
|
$(64)
|
$195,079
|
$(1,741)
|
$(203,171)
|
$(8,762)
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS,
INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
|
|
|
|
Cash flows from operating activities
|
|
|
|
Net loss
|
$(7,253)
|
$(11,581)
|
|
Adjustments to reconcile net loss to net cash used by operating
activities:
|
|
|
|
Depreciation and amortization
|
72
|
71
|
|
Stock-based compensation
|
862
|
643
|
|
Warrants issued in lieu of cash as compensation for
services
|
—
|
9
|
|
Application of rent deposit in lieu of cash payments
|
124
|
—
|
|
Gain from change in fair value of derivative
liabilities
|
(2,252)
|
(696)
|
|
Change in assets and liabilities
|
|
|
|
Accounts receivable
|
81
|
311
|
|
Inventory
|
576
|
(586)
|
|
Other assets
|
33
|
66
|
|
Operating lease right-of-use assets
|
(20)
|
168
|
|
Accounts payable
|
491
|
(162)
|
|
Accrued expense
|
(175)
|
37
|
|
Deferred revenue
|
(726)
|
415
|
|
Contract costs
|
—
|
(29)
|
|
Pension obligation
|
178
|
67
|
|
Total adjustments
|
(756)
|
314
|
|
|
|
|
|
Net cash used by operating activities
|
(8,009)
|
(11,267)
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
Purchase of property and equipment
|
—
|
(31)
|
|
Net cash used by investing activities
|
—
|
(31)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Proceeds from issuance of common stock, net
|
2,296
|
6,520
|
|
Proceeds from issuance of notes payable
|
4,658
|
—
|
|
Repayment of notes payable
|
(575)
|
—
|
|
Proceeds from exercise of stock options
|
—
|
166
|
|
Proceeds from issuance of preferred stock, net of issuance
costs
|
9,147
|
—
|
|
Dividends paid to preferred stockholders
|
(51)
|
(51)
|
|
|
|
|
|
Net cash provided by financing activities
|
15,475
|
6,635
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
(151)
|
(1)
|
|
Net increase (decrease) in cash and cash equivalents
|
7,315
|
(4,664)
|
|
Cash and cash
equivalents at beginning of year
|
1,030
|
5,694
|
|
Cash and cash
equivalents at end of year
|
$8,345
|
$1,030
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash paid for
interest
|
$52
|
$—
|
|
Cash paid for
income taxes
|
$—
|
$—
|
|
Summary of non-cash investing and financing
activities:
|
|
|
|
Issuance of common stock for financing facility
|
$400
|
$—
|
|
Stock dividends on Series A Convertible Redeemable Preferred
Stock
|
$1,849
|
$3,861
|
|
Stock dividends on Series A-1 Convertible Redeemable Preferred
Stock
|
$93
|
$—
|
|
Stock dividends on Series C Convertible Redeemable Preferred
Stock
|
$690
|
$1,030
|
|
Stock dividends on Series D Convertible Redeemable Preferred
Stock
|
$142
|
$—
|
|
Recognition of operating lease right-of-use assets from adoption of
ASC 842
|
$—
|
$2,265
|
|
Recognition of lease liabilities of ASC 842
|
$—
|
$(2,280)
|
|
Conversion of Series A Convertible Redeemable Preferred Stock into
Common Stock
|
$190
|
$—
|
|
Conversion of Series A-1 Convertible Redeemable Preferred Stock
into Common Stock
|
$186
|
$—
|
|
Conversion of bridge loan into Series D Convertible Redeemable
Preferred Stock
|
$2,187
|
$—
|
|
Conversion of related party notes payable and accrued interest into
Series D Convertible Redeemable Preferred Stock
|
$334
|
$—
|
|
Recognition of derivative liabilities on preferred stock
issuance
|
$26,011
|
$—
|
|
Deemed dividend from holder on preferred stock extinguishment and
modification
|
$6,136
|
$—
|
|
Exchange of Series C Convertible Redeemable Preferred Stock for
Series D Convertible Redeemable Preferred Stock
|
$10,000
|
$—
|
|
Accretion of discount on Series C Convertible Redeemable Preferred
Stock
|
$1,116
|
$728
|
|
Accretion of discount on Series D Convertible Redeemable Preferred
Stock
|
$1,572
|
$—
|
|
Reduction in additional minimum pension liability
|
$97
|
$312
|
|
Accrued financing costs
|
$—
|
$400
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
1. DESCRIPTION OF BUSINESS AND OPERATIONS
Overview
As used in this Report, “we”, “us”,
“our”, “ImageWare”, “ImageWare
Systems” or the “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 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. Our principal uses of cash have included cash
used in operations, product development, and payments relating to
purchases of property and equipment. 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 requirements. Management expects
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 positive cash flows from operations.
Historically the Company has not been able to generate sufficient
net revenue to achieve and sustain positive cash flows from
operations and management has determined that there is substantial
doubt about the Company’s ability to continue as a going
concern.
At December 31, 2020 and 2019, we
had negative working capital of $19,349,000 and $1,653,000,
respectively. Included in our
negative working capital as of December 31, 2020 are $24,128,000 of
derivative liabilities which are not required to be settled in cash
except in the event of the consummation of a Change of Control or
at any time after the fourth anniversary of the Series D Preferred
issuance, at which time the holders of the Series D Preferred may
require the Company to redeem in cash any or all of the
holder’s outstanding Series D Preferred at an amount equal to
the Series D Liquidation Preference Amount. At December 31, 2020
the Liquidation Preference Amount totaled
$22,863,000.
Considering the financings consummated in 2020, as well as our
projected cash requirements, and assuming we are unable to generate
incremental revenue, our available cash will be insufficient to
satisfy our cash requirements for the next twelve months from the
date of this filing. At March 26, 2021, cash on hand approximated
$5,178,000. Based on the Company’s rate of cash consumption
in the first quarter of 2021 and the last quarter of 2020, the
Company estimates it will need additional capital in the third
quarter of 2021 and its prospects for obtaining that capital are
uncertain. As a result of the Company’s historical losses and
financial condition, there is substantial doubt about the
Company’s ability to continue as a going
concern.
To address our working capital requirements, management has begun
instituting several cost cutting measures and may seek additional
equity and/or debt financing through the issuance of additional
debt and/or equity securities. Other than the Lincoln Purchase
Agreement, there are currently no financing arrangements to support
our projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, or other agreements, and
no assurances can be given that we will be successful in raising
additional debt and/or equity securities, or entering into any
other transaction that addresses our ability to continue as a going
concern.
In view of the matters described in the preceding
paragraph, recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheet is
dependent upon continued operations of the Company, which, in turn,
is dependent upon the Company’s ability to continue to raise
capital and generate positive cash flows from operations. However,
the Company operates in markets that are emerging and highly
competitive. There is no assurance that the Company will be able to
obtain additional capital, operate at a profit or generate positive
cash flows in the future. Therefore, management’s plans do
not alleviate the substantial doubt of the Company’s ability
to continue as a going concern.
The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a
going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The financial statements are prepared under the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 105-10, Generally Accepted Accounting
Principles, in accordance with
accounting principles generally accepted in the U.S.
(“GAAP”).
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, 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.
Operating Cycle
Assets and liabilities related to long-term contracts are included
in current assets and current liabilities in the accompanying
consolidated balance sheets, although they will be liquidated in
the normal course of contract completion which may take more than
one operating cycle.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the 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, assumptions used in the Black-Scholes model to
calculate the fair value of share-based payments, fair value of
Series D Preferred and financial instruments issued with and
affected by the Series D Preferred Financing (defined below), fair
value of financial instruments with and affected by the Series C
Preferred (defined below), fair value of Series A Preferred
(defined below), fair value of Series A-1 Preferred (defined
below), assumptions used in the application of revenue recognition
policies, assumptions used in the derivation of the Company’s
incremental borrowing rate used in the computation of the
Company’s operating lease liabilities 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 net realizable value.
See Note 6.
Property, Equipment and Leasehold Improvements
Property and equipment, consisting of furniture and equipment, are
stated at cost and are being depreciated on a straight-line basis
over the estimated useful lives of the assets, which generally
range from three to five years. Maintenance and repairs are charged
to expense as incurred. Major renewals or improvements are
capitalized. When assets are sold or abandoned, the cost and
related accumulated depreciation are removed from the accounts and
the resulting gain or loss is recognized. Expenditures for
leasehold improvements are capitalized. Amortization of leasehold
improvements is computed using the straight-line method over the
shorter of the remaining lease term or the estimated useful lives
of the improvements.
Revenue
Recognition
In accordance with ASC 606, revenue is recognized when control of
the promised goods or services is transferred to our customers, in
an amount that reflects the consideration we expect to be entitled
to in exchange for those goods or services.
The core principle of the standard is that we should recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which we
expect to be entitled in exchange for those goods or services. To
achieve that core principle, we apply the following five step
model:
1.
Identify the contract with the customer;
2.
Identify the performance obligation in the contract;
3.
Determine the transaction price;
4.
Allocate the transaction price to the performance obligations in
the contract; and
5.
Recognize revenue when (or as) each performance obligation is
satisfied.
At contract inception, we assess the goods and services promised in
a contract with a customer and identify as a performance obligation
each promise to transfer to the customer either: (i) a good or
service (or a bundle of goods or services) that is distinct or (ii)
a series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the customer. We
recognize revenue only when we satisfy a performance obligation by
transferring a promised good or service to a customer.
Determining the timing of the satisfaction of performance
obligations as well as the transaction price and the amounts
allocated to performance obligations requires
judgement.
We disclose disaggregation of our customer revenue by classes of
similar products and services as follows:
●
Software licensing and royalties;
●
Computer hardware and identification media;
●
Post-contract customer support.
Software licensing and royalties
Software licenses consist of revenue from the sale of software for
identity management applications. Our software licenses are
functional intellectual property and typically provide customers
with the right to use our software in perpetuity as it exists when
made available to the customer. We recognize revenue from software
licensing at a point in time upon delivery, provided all other
revenue recognition criteria are met.
Royalties consist of revenue from usage-based arrangements and
guaranteed minimum-based arrangements. We recognize revenue for
royalty arrangements at the later of (i) when the related sales
occur, or (ii) when the performance obligation to which some or all
of the royalty has been allocated has been satisfied.
Computer hardware and identification media
We 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, provided all other
revenue recognition criteria are met.
Services
Services revenue is comprised primarily of software customization
services, software integration services, system installation
services and customer training. Revenue is generally recognized
upon completion of services and customer acceptance provided all
other revenue recognition criteria are met.
Post-contract customer support (“PCS”)
Post contract customer support consists of
maintenance on software and hardware for our identity management
solutions. We recognize PCS revenue from periodic maintenance
agreements. Revenue is generally recognized ratably over the
respective maintenance periods provided no significant obligations
remain. Costs related to such contracts are expensed as
incurred.
Arrangements with multiple performance obligations
A performance obligation is a promise in a contract to transfer a
distinct good or service to the customer. In addition to selling
software licenses, hardware and identification media, services and
post-contract customer support on a standalone basis, certain
contracts include multiple performance obligations. For such
arrangements, we allocate revenue to each performance obligation
based on our best estimate of the relative standalone selling
price. The standalone selling price for a performance obligation is
the price at which we would sell a promised good or service
separately to a customer. The primary methods used to estimate
standalone selling price are as follows: (i) the expected cost-plus
margin approach, under which we forecast our expected costs of
satisfying a performance obligation and then add an appropriate
margin for that distinct good or service and (ii) the percent
discount off of list price approach.
Contract costs
We recognize an asset for the incremental costs of obtaining a
contract with a customer if we expect the benefit of those costs to
be longer than one year. We apply a practical expedient to expense
costs as incurred for costs to obtain a contract when the
amortization period is one year or less. At December 31, 2019, we
had recorded approximately $118,000 in contract costs relating to
capitalized commissions. During the years ended December 31, 2020
and 2019, we recognized approximately $53,000 and $18,000,
respectively, of capitalized contract costs as expense. Such
expense is included as a component of operating expense and is
included under the caption “Sales and marketing” in our
consolidated statement of operations for the years ended December
31, 2020 and 2019. We recorded no additional capitalized contract
costs in the year ended December 31, 2020. We recognized
approximately $1,594,000 of revenue during the year ended December
31, 2020 that was related to contract costs at the beginning of the
period.
Other items
We do not offer rights of return for our products and services in
the normal course of business.
Sales tax collected from customers is excluded from
revenue.
The
following table sets forth our disaggregated revenue for the years
ended December 31, 2020 and 2019:
|
|
|
|
Net Revenue
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Software and
royalties
|
$872
|
$489
|
|
Hardware and
consumables
|
84
|
96
|
|
Services
|
1,275
|
338
|
|
Maintenance
|
2,554
|
2,583
|
|
Total net
revenue
|
$4,785
|
$3,506
|
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including
accounts receivable, accounts payable, accrued expense, and
deferred revenue, the carrying amounts approximate fair value due
to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use
Assets
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under Accounting
Standards Codification (“ASC”) Topic 842 – Leases
(“ASC 842”). In
accordance with ASC 842, the Company has determined that such
arrangements are operating leases and accordingly the Company has,
as of January 1, 2019, recorded operating lease right-of-use assets
and related lease liability for the present value of the lease
payments over the lease terms using the Company’s estimated
weighted-average incremental borrowing rate of approximately 14.5%.
The Company has utilized the practical expedient regarding lease
and nonlease components and has combined such items into a single
combined component. The Company has also utilized the practical
expedient regarding leases of twelve months or less and has
excluded such leases from its computation of lease liability and
related right-of-use assets. The Company has also elected the
optional transition package of practical expedients which
include:
A package of
practical expedient to not reassess:
●
Whether a contract
is or contains a lease
Goodwill
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 simplified impairment
test in the fourth quarter of each year. In December 2018, the
Company adopted the provisions of ASU 2017-04, “Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.” The provisions of ASU 2017-04 eliminate the
requirement to calculate the implied fair value of goodwill to
measure a goodwill impairment charge. Instead, entities will record
an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value. Entities that
have reporting units with zero or negative carrying amounts, will
no longer be required to perform a qualitative assessment assuming
they pass the simplified impairment test. The Company continues to
have only one reporting unit, Identity Management, which at
December 31, 2020, had a negative carrying amount of approximately
$19,823,000. Based on the results of the Company’s impairment
testing, the Company determined that its goodwill was not impaired
as of December 31, 2020 and December 31, 2019.
Intangible and Long-Lived Assets
Intangible assets are carried at their cost less any accumulated
amortization. Any costs incurred to renew or extend the
life of an intangible or long-lived asset are reviewed for
capitalization. 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. As of December 31, 2020, and through the date of this Annual
Report, the Company’s management believes there is no
impairment of its long-lived assets. There can be no assurance,
however, that market conditions will not change or demand for the
Company’s products under development will continue. Either of
these could result in future impairment of long-lived
assets.
Derivative Liabilities
The Company accounts
for its derivative instruments under the provisions of ASC
815, “Derivatives
and Hedging”. Under the
provisions of ASC 815, the Company identified embedded features
within the Series C Preferred and Series D Preferred host contracts
that qualify as derivative instruments and require
bifurcation.
The
Company determined that the conversion option, redemption option
and participating dividend feature contained in the Series C
Preferred host instrument required bifurcation. The Company valued
the bifurcatable features at fair value. Such liabilities
aggregated approximately $833,000 at inception and are classified
as current liabilities on the Company’s consolidated balance
sheets under the caption “Derivative liabilities”. The
Company will revalue these features at each balance sheet date and
record any change in fair value in the determination of period net
income or loss. Due to the exchange of all outstanding shares of
Series C Preferred Stock into shares of Series D Preferred Stock,
the fair value of the embedded derivative liabilities contained in
the Series C host instrument was $0 at the date of exchange. The
change in fair value of such amounts are recorded in the caption
“Change in fair value of derivative liabilities” in the
Company’s consolidated statements of operations. For the
period January 1, 2020 through the November 12, 2020 date of
exchange, the Company recorded a decrease to these derivative
liabilities using fair value methodologies of approximately
$369,000. As a result of this decrease, such liabilities aggregated
approximately $0 at their November 12, 2020 date of exchange.
During the twelve months ended December 31, 2019, the Company
recorded a decrease to these derivative liabilities using fair
value methodologies of approximately $696,000. As a result of this
decrease, such liabilities aggregated approximately $369,000 at
December 31, 2019.
The
Company determined that the conversion option, redemption option
and participating dividend feature contained in the Series D
Preferred host instrument required bifurcation. The Company valued
the bifurcatable features at fair value. Such liabilities
aggregated approximately $26,011,000 at inception and are
classified as current liabilities on the Company’s
consolidated balance sheets under the caption “Derivative
liabilities”. The excess of the derivative fair value over
the carrying amount of the Series D Preferred was recorded as a
deemed dividend of approximately $4,201,000. The Series D Preferred financing was approved
by the Company’s Board of Directors to provide for an
immediate need of capital, to allow the Company to continue as a
going concern and to execute the Company’s business plan
after consultation with several of the Company’s largest
shareholders and a review of financing alternatives. The
Company will revalue these features at each balance sheet date and
record any change in fair value in the determination of period net
income or loss. The change in fair value of such amounts are
recorded in the caption “Change in fair value of derivative
liabilities” in the Company’s consolidated statements
of operations. For the year ended December 31, 2020, the Company
recorded a decrease to its derivative liabilities using fair value
methodologies of approximately $2,252,000 ($369,000 relating to
Series C embedded derivatives and $1,883,000 related to Series D
embedded derivatives) . As a result of this decrease, such
liabilities aggregated approximately $24,128,000 at December 31,
2020.
Modification of Preferred Stock
The following Preferred Stock modifications were consummated in
connection with the Series D Financing:
●
Series C Preferred Stock Exchange into Series D Preferred
Stock
●
Series A Preferred Stock Modification
●
Series A-1 Preferred Stock Modification
The Company is required to analyze preferred stock modifications to
determine the proper method of accounting to apply to properly
record and reflect the transactions. While guidance exists in ASC
470-50 to address the accounting for debt modifications, including
preferred stock that is accounted for as a liability, there is no
comparable guidance to address the accounting for modifications to
preferred stock instruments that are accounted for as equity or
temporary equity, which necessitates the subjective determination
of whether a modification or exchange represents an extinguishment.
Current accounting guidance permits the analysis of preferred stock
modifications by using either the qualitative approach, the fair
value approach or the cash flow approach. Due to the nature of the
preferred stock modifications that the Company consummated in 2020,
the Company determined that the fair value approach was the most
appropriate methodology.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
accounts receivable. The Company places its cash with high quality
financial institutions and at times during the years ended December
31, 2020 and 2019, exceeded the FDIC insurance limits of $250,000.
Sales are typically made on credit and the Company generally does
not require collateral. The Company performs ongoing credit
evaluations of its customers’ financial condition and
maintains an allowance for doubtful accounts. 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 presented net of an allowance for doubtful accounts of
approximately $5,000 and $7,000 at December 31, 2020 and 2019,
respectively.
For the year ended December 31, 2020, two customers accounted
for approximately 61% or $2,921,000 of total revenue and had trade
receivables of approximately $250,000 as of the end of the
year. For the year ended December 31, 2019, two
customers accounted for approximately 37% or $1,301,000 of total
revenue and had trade receivables of approximately $161,000 as of
the end of the year.
Stock-Based Compensation
At December 31, 2020, the Company had one stock-based compensation
plan for employees and nonemployee directors, which authorizes the
granting of various equity-based incentives including stock options
and restricted stock.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “Compensation – Stock
Compensation”. 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 operating expense based upon the departments to which
substantially all of the associated employees report and credited
to additional paid-in-capital.
ASC 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-pricing 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-pricing 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 options granted
during the years ended December 31, 2020 and 2019 ranged from 57%
to 83%. 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 Topic 14.
The expected term used by the Company during the years ended
December 31, 2020 and 2019 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 years ended December 31, 2020 and 2019
averaged 2.58%. Dividend yield is zero as the Company does not
expect to declare any dividends on the Company’s common
shares 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 adopted the provisions of ASU
2016-09 and will continue to use an estimated annualized forfeiture
rate of approximately 5.0% for corporate officers, 4.1% for members
of the Board of Directors and 15.0% for all other employees. The
Company reviews the expected forfeiture rate annually to determine
if that percent is still reasonable based on historical
experience.
Restricted stock units are recorded at the grant date fair value
with corresponding compensation expense recorded ratably over the
requisite service period.
Stock-based compensation expense related to equity options was
approximately $862,000 and $643,000 for the years ended December
31, 2020 and 2019, respectively.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income
Taxes, (ASC
740).Current income tax expense
or benefit is the amount of income taxes expected to be payable or
refundable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences
between the financial reporting and tax bases of assets and
liabilities and for the expected future tax benefit to be derived
from tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
ASC 740 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. The amount accrued for uncertain tax
positions was $0 at December 31, 2020 and 2019.
The Company’s uncertain tax position
relative to unrecognized tax benefits and any potential increase in
these liabilities relates primarily to the allocations of revenue
and costs among the Company’s global operations and the
impact of tax rulings made during the period affecting its tax
positions. The Company’s existing tax positions could result
in liabilities for unrecognized tax benefits. The Company
recognizes interest and/or penalties related to uncertain tax
positions in income tax expense. The amount of interest and
penalties accrued as of December 31, 2020 and 2019 was
$0.
Significant judgment is required in evaluating the Company’s
uncertain tax positions and determining the Company’s
provision for income taxes. No assurance can be given that the
final tax outcome of these matters will not be different from that
which is reflected in the Company’s historical income tax
provisions and accruals. 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.
Foreign Currency Translation
The financial position and results of operations of the
Company’s foreign subsidiaries are measured using the foreign
subsidiary’s local currency as the functional currency.
Revenue and expense of such subsidiaries have been translated into
U.S. dollars at weighted-average exchange rates prevailing
during the period. Assets and liabilities have been translated at
the rates of exchange on the balance sheet date. The resulting
translation gain and loss adjustments are recorded directly as a
separate component of shareholders’ equity, unless there is a
sale or complete liquidation of the underlying foreign investments.
The Company translates foreign currencies of its German, Canadian
and Mexican subsidiaries. The cumulative translation adjustment,
which is recorded in accumulated other comprehensive loss,
decreased approximately $151,000 and $1,000 for the years ended
December 31, 2020 and 2019, respectively.
Comprehensive Loss
Comprehensive loss consists of net gains and
losses affecting shareholders’ deficit that, under generally
accepted accounting principles, are excluded from net loss. For the
Company, the only items are the cumulative translation adjustment
and the additional minimum liability related to the Company’s
defined benefit pension plan, recognized pursuant to ASC 715-30,
“Compensation - Retirement
Benefits - Defined Benefit Plans – Pension”.
Advertising Costs
The Company expenses advertising costs as incurred. The Company
incurred approximately $5,000 in advertising expense during the
years ended December 31, 2020 and December 31, 2019.
Loss Per 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 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
in the consolidated statements of operations for the respective
periods.
|
(Amounts in thousands, except share and per share
amounts)
|
|
|
|
|
|
|
Numerator for basic and diluted loss per share:
|
|
|
|
Net loss
|
$(7,253)
|
$(11,581)
|
|
Preferred dividends, deemed dividends and accretion
|
(3,695)
|
(5,670)
|
|
Net loss available to common shareholders
|
$(10,948)
|
$(17,251)
|
|
|
|
|
|
Denominator for basic and diluted loss per share —
weighted-average shares outstanding
|
133,346,309
|
104,372,048
|
|
Basic and diluted loss per share:
|
|
|
|
Net loss
available to common shareholders
|
$ (0.08)
|
$(0.17)
|
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:
|
Common Share Equivalents at
December 31, 2020
|
Common Share Equivalents at
December 31, 2019
|
|
Convertible redeemable preferred stock – Series
A
|
74,555,000
|
32,580,000
|
|
Convertible redeemable preferred stock – Series
A-1
|
73,910,000
|
—
|
|
Convertible redeemable preferred stock – Series
B
|
46,029
|
46,029
|
|
Convertible redeemable preferred stock – Series
C
|
—
|
10,000,000
|
|
Convertible redeemable preferred stock – Series
D
|
392,166,023
|
—
|
|
Stock options
|
2,585,500
|
7,204,672
|
|
Restricted stock units (RSUs)
|
845,106
|
—
|
|
Warrants
|
753,775
|
1,733,856
|
|
Total Potential Dilutive Securities
|
544,861,433
|
51,564,557
|
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by 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.
2019-12. In December 2019, the
FASB issued ASU No. 2019-12, “Income Taxes (Topic
740). The amendments in
this update simplify the accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The
amendments also improve consistent application of and simplify GAAP
for other areas of Topic 740 by clarifying and amending existing
guidance. Early adoption of the amendments is
permitted. For public business entities, the amendments in
this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020.
The adoption of this standard will not have a material impact on
the Company’s consolidated financial
statements.
FASB ASU No.
2020-01. In January 2020, the
FASB issued ASU 2020-01 “Investments-Equity Securities (Topic 321),
Investments-Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815)-Clarifying the Interactions
between Topic 321, Topic 323, and Topic
815”, to clarify the
interaction of the accounting for equity securities under ASC 321
and investments accounted for under the equity method of accounting
in ASC 323 and the accounting for certain forward contracts and
purchased options accounted for under ASC 815. With respect to the
interactions between ASC 321 and ASC 323, the amendments clarify
that an entity should consider observable transactions that require
it to either apply or discontinue the equity method of accounting
when applying the measurement alternative in ASC 321, immediately
before applying or upon discontinuing the equity method of
accounting. With respect to forward contracts or purchased options
to purchase securities, the amendments clarify that when applying
the guidance in ASC 815-10-15-141(a), an entity should not consider
whether upon the settlement of the forward contract or exercise of
the purchased option, individually or with existing investments,
the underlying securities would be accounted for under the equity
method in ASC 323 or the fair value option in accordance with ASC
825. The ASU is effective for interim and annual reporting periods
beginning after December 15, 2020. Early adoption is
permitted, including adoption in any interim period. The
adoption of this standard will not have a material impact on the
Company’s consolidated financial
statements.
FASB ASU No.
2020-06. In August 2020, the
FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging—
Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity”. This ASU simplifies
accounting for convertible instruments by removing major separation
models required under current U.S. GAAP. Consequently, more
convertible debt instruments will be reported as a single liability
instrument and more convertible preferred stock as a single equity
instrument with no separate accounting for embedded conversion
features. The ASU removes certain settlement conditions that are
required for equity contracts to qualify for the derivative scope
exception, which will permit more equity contracts to qualify for
it. The ASU also simplifies the diluted earnings per share (EPS)
calculation in certain areas. This ASU is effective for public
business entities, excluding entities eligible to be smaller
reporting companies, for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years. For all
other entities, the standard will be effective for fiscal years
beginning after December 15, 2023, including interim periods within
those fiscal years. Early adoption will be permitted. The Company
is currently evaluating the impact ASU 2020-06 will have on its
consolidated financial statements.
3. 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 December 31, 2020
|
|
($ in thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension assets
|
$1,881
|
$—
|
$—
|
$1,881
|
|
Totals
|
$1,881
|
$—
|
$—
|
$1,881
|
|
Liabilities:
|
|
|
|
|
|
Derivative liabilities
|
$24,128
|
$—
|
$—
|
$24,128
|
|
Totals
|
$24,128
|
$—
|
$—
|
$24,128
|
|
|
Fair Value at December 31, 2019
|
|
($ in thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension assets
|
$1,713
|
$—
|
$—
|
$1,713
|
|
Totals
|
$1,713
|
$—
|
$—
|
$1,713
|
|
Liabilities:
|
|
|
|
|
|
Derivative liabilities
|
$369
|
$—
|
$—
|
$369
|
|
Totals
|
$369
|
$—
|
$—
|
$369
|
The Company’s German pension plan is funded by insurance
contract policies whereby the insurance company guarantees a fixed
minimum return. The Company has determined that the pension assets
are appropriately classified within Level 3 of the fair value
hierarchy because they are valued using actuarial valuation
methodologies which approximate cash surrender value that cannot be
corroborated with observable market data. All plan assets are
managed in a policyholder pool in Germany by outside investment
managers. The investment manager is responsible for the investment
strategy of the insurance premiums that Company submits and does
not hold individual assets per participating employer. The German
Federal Financial Supervisory oversees and supervises the insurance
contracts.
As of December 31, 2020, the Company had embedded
features contained in the Series D Preferred host instrument
(issued in November 2020) that qualified
for derivative liability treatment. The
recorded fair market value of these features was approximately
$24,128,000 at December 31, 2020, and are classified as a current
liability in the consolidated balance sheet as of December 31,
2020. The fair value of the
Company’s derivative liabilities are classified
within Level 3 of the fair value hierarchy because they are valued
using pricing models that incorporate management assumptions that
cannot be corroborated with observable market data. The
Company uses Monte-Carlo simulations and other fair value
methodologies in the determination of the fair value of
derivative liabilities. Considering the various path
dependencies for the Series D Preferred Stock, Monte-Carlo
simulations were deemed the most appropriate
methodology.
At
December 31, 2019, the Company had embedded features contained in
the Series C Preferred host instrument that qualified for
derivative liability treatment. The recorded fair market value of
these features was $369,000 at December 31, 2019. Due to the
exchange of the Series C Preferred into Series D Preferred, the
value of the Series C derivative liabilities was $0 at December 31,
2020. Such liabilities are classified within Level 3 of the fair
value hierarchy because they were valued using pricing models that
incorporate management assumptions that cannot be corroborated with
observable data.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events. Significant assumptions used in the application of
fair value methodologies for the Series D Preferred are a risk-free
rate of 0.26% to 0.31%, equity volatility of 96.9% to 98.0%,
effective life of 4.0 years, and a preferred stock dividend rate of
4.0%. Additionally, management has made certain estimates regarding
the timing of potential change of control events.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
The
reconciliations of Level 3 pension assets measured at fair value in
2020 and 2019 are presented below:
|
($ in
thousands)
|
|
|
|
Pension
assets:
|
|
|
|
Fair value at
beginning of year
|
$1,713
|
$1,734
|
|
Return on plan
assets
|
92
|
80
|
|
Company
contributions and benefits paid, net
|
(82)
|
(68)
|
|
Effect of rate
changes
|
158
|
(33)
|
|
Fair value at end
of year
|
$1,881
|
$1,713
|
The
reconciliations of Level 3 derivative liabilities measured at fair
value in 2020 and 2019 are presented below:
|
($ in
thousands)
|
|
|
|
Derivative
liabilities
|
|
|
|
Fair value at
beginning of year
|
$369
|
$1,065
|
|
Issuances from
Preferred Stock Financing
|
26,011
|
-
|
|
Change in fair
value included in earnings
|
(2,252)
|
(696)
|
|
Fair value at end
of year
|
$24,128
|
$369
|
4. INTANGIBLE ASSETS AND GOODWILL
The carrying amounts of the Company’s patent intangible
assets were $58,000 and $70,000 as of December 31, 2020 and
2019, respectively, which includes accumulated amortization of
$601,000 and $589,000 as of December 31, 2020 and 2019,
respectively. Amortization expense for patent intangible
assets was $12,000 for the years ended December 31, 2020 and 2019.
Patent intangible assets are being amortized on a straight-line
basis over their remaining life of approximately 5.5 years. There
was no impairment of the Company’s intangible assets during
the years ended December 31, 2020 and 2019.
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 simplified impairment test in the fourth
quarter of each year. In December 2020, the Company adopted the
provisions of ASU 2017-04, "Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment". The provisions of
ASU 2017-04 eliminate the requirement to calculate the implied fair
value of goodwill to measure a goodwill impairment charge. Instead,
entities will record an impairment charge based on the excess of a
reporting unit's carrying amount over its fair value. Entities that
have reporting units with zero or negative carrying amounts, will
no longer be required to perform a qualitative assessment assuming
they pass the simplified impairment test. The Company continues to
have only one reporting unit, Identity Management which, at
December 31, 2020, had a negative carrying amount of approximately
$19,823,000. Based on the results of the Company's impairment
testing, the Company determined that its goodwill was not impaired
during the years ended December 31, 2020 and
2019.
The estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
|
Fiscal Year Ended December 31,
|
Estimated Amortization
Expense
($ in thousands)
|
|
2021
|
$12
|
|
2022
|
12
|
|
2023
|
12
|
|
2024
|
12
|
|
2025
|
10
|
|
Thereafter
|
-
|
|
Totals
|
$58
|
5. RELATED PARTIES
Notes Payable
Factoring Agreement
On February 12, 2020, the Company entered into a
factoring agreement (the "Factoring
Agreement") with a former
member of the Company’s Board of Directors (the
"Factoring
Lender"). Under the Factoring
Agreement, the Company received $350,000 in proceeds (the
"Factoring
Principal") in the form of a
loan, bearing interest at a rate of 1% for every seven days until
the Factoring Principal and accrued interest are paid in full, with
a maturity date of March 4, 2020. Pursuant to the Factoring
Agreement, repayment of the Factoring Principal and accrued
interest was secured by certain of the Company’s trade
accounts receivable approximating $500,000 (the
"Factoring
Collateral"). During the twelve
months ended December 31, 2020, the Company recorded approximately
$45,000 in interest expense related to the Factoring Agreement. In
May 2020, the Company repaid $35,000 in accrued interest to the
Factoring Lender. As a condition to the consummation of the
Company's offer and sale (the "Closing") of shares of its Series D Convertible Preferred
Stock, par value $0.01 ("Series D
Preferred") (the
"Series D
Financing"), the Factoring
Lender agreed to settle the entire Factoring Principal plus accrued
interest and release the Company from liabilities due under the
Factoring Agreement in exchange for a one-time payment of $360,000
(the "Factoring
Settlement") to be made upon
the Closing, and out of the proceeds, of the Series D Financing. On
November 16, 2020, the Company fulfilled its obligation under the
Factoring Settlement, thereby releasing it from its obligation
under the Factoring Agreement.
Convertible Promissory Notes
During the
year ended December 31, 2020, the Company received advances from a
second former member of the Board of Directors (the
"Board
Lender") in the aggregate
amount of $450,000. On June 29, 2020, the Company executed a
promissory note (the "Board Note") in the favor of the Board Lender in the
principal amount of $450,000 (the "Board Note
Principal"), pursuant to which
the Board Note Principal accrued simple interest at the rate of 5%
per annum, and was convertible into shares of the Company's Common
Stock at $0.16 per share of Common Stock at the election of the
Board Lender. The Board Note was to mature on the earlier to occur
of (i) October 13, 2020, or (ii) on such date that the Company
consummates a debt and/or equity financing resulting in net
proceeds to the Company of at least $3.0
million.
Also during the year ended December 31, 2020, the
Company received advances from a third former member of the Board
of Directors (the "Second Board
Lender") in the aggregate
amount of $100,000. On June 29, 2020, the Company executed a
promissory note (the "Second Board
Note", and collectively with
the Board Note, the "Board Notes") in the principal amounts of $100,000 (the
"Second
Board Note Principal"),
pursuant to which the Second Board Note Principal accrued simple
interest at the rate of 5% per annum, and was convertible into
shares of the Company’s Common Stock at $0.16 per share of
Common Stock at the election of the Second Board Lender. The Second
Board Note was to mature on the earlier to occur of (i) October 13,
2020, or (ii) on such date that the Company consummates a debt
and/or equity financing resulting in net proceeds to the Company of
at least $3.0 million.
On November 12, 2020, in connection with the
Closing of the Series D Financing, the Board Lenders entered into
(i) Debt Exchange Agreements (collectively, the
"Debt
Exchange Agreements"), and (ii)
Satisfaction and Release Agreements (collectively, the
"Release
Agreements"), for the purpose
of satisfying certain obligations of the Company arising under (i)
the Board Note, and (ii) the Second Board Note. Pursuant to the
Debt Exchange Agreements and Release Agreements: (a) one-half of
the Board Note Principal plus accrued interest, totaling
approximately $232,000 was converted into 231.6 shares of Series D
Preferred at a rate of $1,000 per share of Series D Preferred, with
the remaining one-half of the Board Note Principal plus accrued
interest, totaling approximately $232,000, to be paid to the Board
Lender in cash out of proceeds of the Series D Financing, in full
satisfaction of the Company's obligations under the Board Note; and
(b) the entire Second Board Note Principal plus accrued interest,
totaling approximately $103,000, was converted into 102.8 shares of
Series D Preferred at a rate of $1,000 per share of Series D
Preferred, in full satisfaction of the Company's obligations under
the Second Board Note.
Professional Services Agreement
During the year
ended December 31, 2020, the Company entered into professional
services agreement with a firm affiliated with a member of the
Company’s Board at the time the parties entered into the
agreement. The Company made no payments pursuant to this agreement
during the twelve months ended December 31, 2020 and has made
approximately $34,000 during 2021. The Company has the right to
terminate the agreement on thirty days written notice at any
time.
6. INVENTORY
Inventories
of $40,000
as of
December 31, 2020 were comprised of work in process of
$26,000, representing direct
labor costs on in-process projects and finished goods of
$14,000 net of reserves for
obsolete and slow-moving items of $3,000.
Inventories
of $615,000
as of
December 31, 2019 were comprised of work in process of
$608,000, representing direct
labor costs on in-process projects and finished goods
of $7,000
net of
reserves for obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive
levels, deterioration and other factors in evaluating net
realizable value and required reserve levels.
7. PROPERTY AND EQUIPMENT
Property and equipment at consist of:
|
($ in thousands)
|
|
|
|
|
|
|
|
Equipment
|
$996
|
$996
|
|
Leasehold improvements
|
77
|
77
|
|
Furniture
|
257
|
257
|
|
|
1,330
|
1,330
|
|
Less accumulated depreciation
|
(1,175)
|
(1,114)
|
|
|
$155
|
$216
|
Total depreciation expense for the years ended December 31, 2020
and 2019 was approximately $60,000 and $59,000,
respectively.
8. ACCRUED EXPENSE
Principal components of accrued expense consist of:
|
($ in thousands)
|
|
|
|
|
|
|
|
Compensated absences
|
$182
|
$385
|
|
Wages, payroll taxes and sales commissions
|
13
|
6
|
|
Customer deposits
|
131
|
18
|
|
Interest
|
10
|
—
|
|
Royalties
|
72
|
72
|
|
Pension and employee benefit plans
|
—
|
58
|
|
Accrued financing fees
|
500
|
500
|
|
Professional services
|
—
|
121
|
|
Income and sales taxes
|
95
|
50
|
|
Dividends
|
49
|
40
|
|
Other
|
78
|
62
|
|
|
$1,130
|
$1,312
|
9. NOTES PAYABLE
Concurrently with the execution of the Series D
Purchase Agreement, the Company and certain Series D Preferred
investors executed the Series D Bridge Loan Agreement
(“the
Bridge Loan”), pursuant
to which each Investor signatory thereto agreed to the Bridge Loan,
secured by all assets of the Company, in an amount equal to 20% of
such Investor’s purchase commitment as set forth in the
Purchase Agreement, which Bridge Loan, plus accrued interest, will
roll into, and be used to purchase, Series D Preferred at
Closing.
Pursuant to the Bridge Loan, the Company received proceeds of
$2,187,000 in September 2020. The Bridge Loan bears interest
at a fixed rate of 12% and is due and payable in arrears on the
earlier of the Loan Conversion Date, as such term is defined in the
Loan Agreement, or six months after the disbursement of the Bridge
Loan. All amounts due and payable pursuant to the Bridge Loan are
automatically convertible, without further action by the Investors,
into shares of Series D Preferred at Closing at a purchase price of
$1,000 for each share of Series D Preferred. The repayment of all
amounts due under the terms of the Loan Agreement are secured by
all assets of the Company. On November 12, 2020, contemporaneously
with the closing of the Series D Preferred Financing, all amounts
due under the Bridge Loan were converted into shares of Series D
Preferred Stock.
On March 27, 2020, President Trump signed into law
the “Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”). On May 4, 2020, the Company entered into
a loan agreement (the “PPP Loan”) with Comerica Bank
(“Comerica”) under the Paycheck Protection Program
(the “PPP”), which is part of the CARES Act
administered by the United States Small Business Administration
(“SBA”). As part of the application for these
funds, the Company in good faith, has certified that the current
economic uncertainty made the loan request necessary to support the
ongoing operations of the Company. This certification further
requires the Company to take into account our current business
activity and our ability to access other sources of liquidity
sufficient to support ongoing operations in a manner that is not
significantly detrimental to the business. Under the PPP, the
Company received proceeds of approximately $1,571,000. In
accordance with the requirements of the PPP, the Company utilized
the proceeds from the PPP Loan primarily for payroll costs, rent
and utilities. The PPP Loan has a 1.00% interest rate per annum,
matures on May 4, 2022 and is subject to the terms and conditions
applicable to loans administered by the SBA under the PPP. Under
the terms of PPP, all or certain amounts of the PPP Loan may be
forgiven if they are used for qualifying expenses as described in
the CARES Act, which the Company continues to evaluate. While no
determination has been made at the time of the filing of this
Annual Report, the Series D Financing may affect the Company's
ability to have the PPP Loan forgiven under the PPP. The Company
has recorded the entire amount of the PPP Loan as debt. Under the
terms of the PPP Loan, monthly payments of principal and interest
were due to commence November 1, 2020, however the SBA is deferring
loan payments for borrowers who apply for loan forgiveness until
the SBA remits the borrower’s loan forgiveness amount to the
lender. The Company plans to file for loan forgiveness and at the
time of the filing of this Annual Report, no amounts have been
repaid. At December 31, 2020, the Company has recorded the current
portion of the PPP Loan of approximately $918,000 as a current
liability under the caption “Notes payable, current
portion” in its consolidated balance sheet. The remaining
portion of approximately $653,000 is recorded as a long-term
liability under the caption “Note payable, net of current
portion” in its consolidated December 31, 2020 balance
sheet.
10. INCOME TAXES
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income
Taxes, (ASC
740). Deferred income taxes are
recognized for the tax consequences related to temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for tax
purposes at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is
established when necessary based on the weight of available
evidence, if it is considered more likely than not that all or some
portion of the deferred tax assets will not be realized. Income tax
expense is the sum of current income tax plus the change in
deferred tax assets and liabilities. The Company has
established a valuation allowance against its deferred tax asset
due to the uncertainty surrounding the realization of such
asset.
The significant components of the income tax provision are as
follows:
|
($ in thousands)
|
|
|
Current
|
|
|
|
Federal
|
$ —
|
$—
|
|
State
|
—
|
—
|
|
Foreign
|
7
|
10
|
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
—
|
—
|
|
State
|
—
|
—
|
|
Foreign
|
—
|
—
|
|
|
|
|
|
|
$7
|
$10
|
The following is a schedule of the deferred tax assets and
liabilities as of December 31, 2020 and 2019:
|
($ in thousands)
|
|
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss carryforwards
|
$23,327
|
$21,981
|
|
Stock based compensation
|
1,626
|
1,678
|
|
Reserves , loans and accrued expense
|
421
|
118
|
|
Gross deferred tax assets
|
25,374
|
23,777
|
|
Valuation allowance
|
(25,193)
|
(23,643)
|
|
Gross deferred tax assets after valuation
allowance
|
181
|
134
|
|
Deferred tax liability - Intangible and fixed assets
|
(181)
|
(134)
|
|
|
|
|
|
Net deferred tax liabilities
|
$—
|
$—
|
A reconciliation of the provision for income taxes to the amount
computed by applying the statutory income tax rates to loss before
income taxes is as follows:
|
|
|
|
|
|
|
|
|
Amounts computed at statutory rates
|
$(1,415)
|
$(2,432)
|
|
State income tax, net of federal benefit
|
(551)
|
(579)
|
|
Expiration of net operating loss carryforwards
|
620
|
879
|
|
Equity compensation
|
170
|
617
|
|
Non-deductible interest
|
(581)
|
(146)
|
|
Foreign tax rate differential
|
215
|
184
|
|
Other
|
(1)
|
3
|
|
Net change in valuation allowance on deferred tax
assets
|
1,550
|
1,484
|
|
|
|
|
|
|
$7
|
$10
|
The Company has established a valuation allowance against its
deferred tax assets due to the uncertainty surrounding the
realization of such assets.
At December 31, 2020, the Company had federal net operating loss
carryforwards of approximately $60,035,000 that begin to expire in
2021. The Company has federal net operating losses of approximately
$29,121,000 that arose after the 2017 tax year and will
carryforward indefinitely, the utilization of which is limited to
80% of taxable income in any given year. The Company has net
operating loss carryforwards of approximately $70,436,000 for the
state of California that will begin to expire in 2035.
The Internal Revenue Code (the
“Revenue
Code”) limits
the availability of certain tax credits and net operating losses
that arose prior to certain cumulative changes in a
corporation’s ownership resulting in a change of control of
the Company. The Company’s use of its net operating loss
carryforwards and tax credit carryforwards will be significantly
limited because the Company believes it underwent “ownership
changes”, as defined under Section 382 of the Revenue Code,
in several years, though the Company has not performed a study to
determine the limitation. The Company continues to disclose the tax
effect of the net operating loss carryforwards at their original
amount in the table above as the actual limitation has not yet been
quantified. The Company has also established a full valuation
allowance for substantially all deferred tax assets due to
uncertainties surrounding its ability to generate future taxable
income to realize these assets. Since substantially all deferred
tax assets are fully reserved, future changes in tax benefits will
not impact the effective tax rate. Management periodically
evaluates the recoverability of the deferred tax assets. If it is
determined at some time in the future that it is more likely than
not that deferred tax assets will be realized, the valuation
allowance would be reduced accordingly at that
time.
Tax returns for the years 2016 through 2020 are subject to
examination by taxing authorities. The Company and its subsidiaries
are subject to U.S. federal and state income tax, and in the normal
course of business, its income tax returns are subject to
examination by the relevant taxing authorities. As of December 31,
2020, the 2016 – 2020 tax years remain subject to examination
in the U.S. federal tax state and foreign jurisdictions. However,
to the extent allowed by law, the taxing authorities may have the
right to examine the period from 2000 through 2020 where net
operating losses and income tax credits were generated and carried
forward and make adjustments to the amount of the net operating
loss and income tax credit carryforward amount. The Company is not
currently under examination by federal, state, or foreign
jurisdictions. The Company recognizes the tax benefit from an
uncertain income tax position only 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.
As of December 31, 2020 and 2019 the Company had no liability for
unrecognized tax benefits. The Company’s policy is to record
interest and penalties on uncertain tax positions as income tax
expense. As of December 31, 2020, the Company has no accrued
interest or penalties related to uncertain tax
positions.
On March 27, 2020, President Trump signed into law the Coronavirus
Aid, Relief and Economic Security Act (“CARES Act”).
The CARES Act, among other things, includes provisions
relating to refundable payroll tax credits, deferment of employer
side social security payments, net operating loss carryback
periods, alternative minimum tax credit refunds, modifications to
the net interest deduction limitations and technical corrections to
tax depreciation methods for qualified improvement property. Under
ASC 740, the effects of new legislation are recognized upon
enactment. Accordingly, the CARES Act is effective
beginning in the quarter ended March 31, 2020. The Company does not
currently believe that such provisions will have a material impact
on the Company’s consolidated financial
statements.
11. LEASES
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under ASC 842 –
Leases. In accordance with ASC 842, the Company has determined that
such arrangements are operating leases and accordingly the Company
has, as of January 1, 2019, recorded operating lease right-of-use
assets and related lease liability for the present value of the
lease payments over the lease terms using the Company’s
estimated weighted-average incremental borrowing rate of
approximately 14.5% as the discount rates implicit in the
Company’s leases cannot be readily determined. Such assets
and liabilities aggregated approximately $2,265,000 and $2,280,000
as of January 1, 2019, respectively and $1,906,000 and $2,089,000
as of December 31, 2019, respectively. At December 31, 2020, such
assets and liabilities aggregated approximately $1,557,000 and
$1,718,000, respectively. The Company determined that it had no
arrangements representing finance leases.
The
Company’s operating leasing arrangements are summarized
below:
Our corporate headquarters is located in San Diego, California,
where we now occupy approximately 500 square feet of office space
at a cost of approximately $2,000 per month. We entered into this
facility’s lease in February 2021 and this new lease
commenced on March 1, 2021 and is on a month-to-month basis. In
addition to our corporate headquarters, we also occupied the
following spaces at December 31, 2020:
●
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. The Company extended this lease for a 30-day
period and is currently evaluating alternative premises which the
Company believes is readily available;
●
9,720 square feet in Portland, Oregon, at a cost of approximately
$23,000 per month until the expiration of the lease on February 28,
2023; and
●
183 square feet of office space in Mexico City,
Mexico, at a cost of approximately $2,000 per month
until September 30,
2021.
Prior to entering into our current lease agreement
in January 2021 and moving our corporate headquarters to a new
location, we occupied 8,511 square feet of office space in San
Diego, at a cost of approximately $28,000 per month.
In January 2021, we entered in a
subleasing agreement for our previously occupied corporate
headquarters located in San Diego, California. The term of the
sublease commences on April 1, 2021 and expires on April 30, 2025
coterminous with the expiration of the Company’s master
lease. Sublease payments
due the Company approximate $26,000 per month over the term of the
sublease.
The
above leases contain no residual value guarantees provided by the
Company and there are no options to either extend or terminate the
leases. The Company is not a party to any subleasing
arrangements.
For
the twelve months ended December 31, 2020, the Company recorded
approximately $657,000 in lease expense using the straight-line
method. For the twelve months ended December 31, 2019 the Company
recorded approximately $673,000 in operating lease expense. Under
the provisions of ASC 842, lease expense is comprised of the total
lease payments under the lease plus any initial direct costs
incurred less any lease incentives received by the lessor amortized
ratably using the straight-line method over the lease term. The
weighted-average remaining lease term of the Company’s
operating leases as of December 31, 2020 is 3.64 years. Cash
payments under operating leases aggregated approximately $669,000
for the twelve months ended December 31, 2020 and are included in
operating cash flows.
The
Company’s lease liability was computed using the present
value of future lease payments. The Company has utilized the
practical expedient regarding lease and non-lease components and
combined such components into a single combined component in the
determination of the lease liability. The Company has excluded the
lease of its office space in Mexico City, Mexico in the
determination of the lease liability as of January 1, 2019 as its
term is less than 12 months.
At December 31, 2020, future minimum undiscounted lease payments
are as follows for the years ending:
|
($ in
thousands)
|
|
|
2021
|
$664
|
|
2022
|
$653
|
|
2023
|
$424
|
|
2024
|
$387
|
|
2025
|
$129
|
|
Thereafter
|
$—
|
|
Total
|
$2,257
|
|
Short-term leases not included in lease liability
|
$(22)
|
|
Present Value effect on future minimum undiscounted lease payments
at December 31, 2020
|
$(517)
|
|
Lease liability at December 31, 2020
|
$1,718
|
|
Less current portion
|
$(421)
|
|
Non-current lease liability at December 31, 2020
|
$1,297
|
12. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive
Officer, which expires on March 2, 2022. The Company may terminate
the agreement with or without cause. Subject to the conditions and
other limitations set forth in the employment agreement, the
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 agreement) 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
their employment without cause or in the event of an involuntary
termination: (i) severance payments equal to the lesser of twelve
months’ base salary or the remaining period prior to the
expiration of the Employment Period; (ii) continuation of fringe
benefits and medical insurance for a period of twelve months. 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.
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.
13. MEZZANINE EQUITY
Series C Convertible Redeemable Preferred Stock
On September 10, 2018, the Company filed the
Certificate of Designations, Preferences, and Rights of Series C
Preferred with the Secretary of State for the State of Delaware
– Division of Corporations, as amended November 12, 2020 (the
“Series C
Certificate”) designating
1,000 shares of the Company’s preferred stock, par value
$0.01 per share, as Series C Preferred. Shares of Series C
Preferred accrue dividends
cumulatively and are payable quarterly at a rate of 8% per annum if
paid in cash, or 10% per annum if paid by the issuance of shares of
Common Stock. Each share of Series C Preferred has a liquidation
preference equal to the greater
of (i) the Stated Value plus all accrued and unpaid dividends, and
(ii) such amount per share as would have been payable had each
share been converted into Common Stock immediately prior to the
occurrence of a Liquidation Event or Deemed Liquidation Event. Each
share of Series C Preferred is convertible into that number of
shares of the Company’s Common Stock equal to the Stated
Value, divided by $1.00, which conversion rate is subject to
adjustment in accordance with the terms of the Series C
Certificate. Holders of Series C Preferred may elect to convert
shares of Series C Preferred into Conversion Shares at any time.
Holders of the Series C Preferred may also require the Company to
redeem all or any portion of such holder’s shares of Series C
Preferred at any time from and after the third anniversary of the
issuance date or in the event of the consummation of a Change of
Control (as such term is defined in the Series C Certificate).
Subject to the terms and conditions set forth in the Series C
Certificate, in the event the volume-weighted average price of the
Company’s Common Stock is at least $3.00 per share (subject
to adjustment in accordance with the terms of the Series C
Certificate) for at least 20 consecutive trading days, the Company
may convert all, but not less than all, issued and outstanding
shares of Series C Preferred into Conversion Shares. In addition,
in the event of a Change of Control, the Company will have the
option to redeem all, but not less than all, issued and outstanding
shares of Series C Preferred for 115% of the Liquidation Preference
Amount per share. The Series C Certificate provides for a
drag-along right whereby if at any time one or more holders of
Series C Preferred then holding, in the aggregate, more than 50% of
the outstanding shares of Series C Preferred, exchange all (but not
less than all) of each such exchanging shareholder’s shares
of Series C Preferred for shares of Series D Preferred, then such
initiating shareholder(s), in their sole discretion, shall have the
right to require that all the holders of Series C Preferred
similarly exchange their shares of Series C Preferred into shares
of Series D Preferred on identical terms and conditions to the
majority shareholders that elected to exchange their Series C
Preferred into Series D Preferred. Holders of Series C Preferred will have the right
to vote, on an as-converted basis, with the holders of the
Company’s Common Stock on any matter presented to the
Company’s stockholders for their action or consideration.
Shares of Series C Preferred rank senior to the Company’s
Common Stock and Series A Preferred, and junior to the
Company’s Series B Preferred Stock and Series D
Preferred.
The Company had 0 and 1,000 shares of Series C Preferred outstanding as of
December 31, 2020 and 2019, respectively. There were no issuances
of Series C Preferred during the years ended December 31, 2020 or
2019. In connection with the Series D Financing, the Company
entered into an Exchange Agreement with certain holders of the
Series C Preferred which hold, in the aggregate, more than 50% of
the outstanding shares of Series C Preferred (the “Exchange
Agreement”). As contemplated by the parties thereto, after
the filing of the Amended Series C Certificate and in connection
with the closing of the Purchase Agreement and Exchange Agreement,
such holders exercised their right under the Amended Series C
Certificate to require all holders of Series C Preferred to
similarly exchange their shares of Series C Preferred into shares
of Series D Preferred on identical terms and conditions. On
November 12, 2020 all 1,000 shares of Series C Preferred were
converted into 10,000 shares of Series D
Preferred.
The Company issued the holders of Series C Preferred an aggregate
of 6,455,149 shares of Common Stock during the year ended December
31, 2020 as dividends.
The Company issued the holders of Series C Preferred an aggregate
of 1,857,438 shares of Common Stock during the year ended December
31, 2019 as dividends.
There were no conversions of Series C Preferred into Common Stock
during the year ended December 31, 2020 or 2019.
Series D Convertible Redeemable Preferred Stock
On
November 12, 2020, the Company filed the Series D Certificate with
the Secretary of State for the State of Delaware. Pursuant to the
Series D Certificate, the Series D Preferred ranks senior to all
Common Stock and all other present and future classes or series of
capital stock, except for Series B Preferred, and upon liquidation
will be entitled to receive the Liquidation Preference Amount (as
defined in the Series D Certificate) plus any accrued and unpaid
dividends, before the payment or distribution of the
Company’s assets or the proceeds thereof is made to the
holders of any junior securities. Additionally, dividends on shares
of Series D Preferred will be paid prior to any junior securities,
and are to be paid at the rate of 4% of the Stated Value (as
defined in the Series D Certificate) per share per annum in the
form of shares of Series D Preferred. Holders of Series D Preferred
shall vote together with holders of Common Stock on an as-converted
basis, and not as a separate class, except (i) the holders of
Series D Preferred, voting as a separate class, shall be entitled
to elect two directors, (ii) the holders of Series D Preferred have
the right to vote as a separate class regarding the waiver of
certain protective provisions set forth in the Series D
Certificate, and (iii) as otherwise required by law.
The
holders of Series D Preferred may voluntarily convert their shares
of Series D Preferred into Common Stock at any time that is at
least ninety days following the issuance date, at the conversion
price calculated by dividing the Stated Value by the conversion
price of $0.0583 per share of Common Stock, subject to adjustments
as set forth in Section 5(e) of the Series D Certificate. The
shares of Common Stock issuable upon conversion of the Series D
Preferred shall be subject to the following registration rights:
(i) one demand registration starting three months after the
Closing, (ii) two demand registrations starting one year after the
Closing, and (iii) unlimited piggy-back and Form S-3 registration
rights with reasonable and customary terms.
If, on
any date that is at least five (5) years following the Issuance
Date, (i) the Common Stock is registered pursuant to Section 12(b)
or (g) under the Exchange Act; (ii) there are sufficient authorized
but unissued shares of Common Stock (which have not otherwise been
reserved or committed for issuance) to permit the issuance of all
Common Shares issuable upon conversion of all outstanding shares of
Series D Preferred; (iii) upon issuance, the Common Shares will be
either (A) covered by an effective registration statement under the
Securities Act, which is then available for the immediate
resale of such Common Shares by the
recipients thereof, and the Board reasonably believes that such
effectiveness will continue uninterrupted for the foreseeable
future, or (B) freely tradable without restriction pursuant to Rule
l44 promulgated under the Securities Act without volume or
manner-of-sale restrictions or current public information
requirements, as determined by the counsel to the Company as set
forth in a written opinion letter to such effect, addressed and acceptable
to the Transfer Agent and the affected holders; and (iv) the VWAP
of a share of Common Stock is greater than 300% of the Conversion
Price (as defined in Section 5(d) below) then
in effect for a period of at least twenty (20) Trading Days in any
period of thirty (30) consecutive Trading Days, then the Company
shall have the right, subject to the terms and conditions, to
convert (a “Mandatory
Conversion”) all, but not less than all, of the issued
and outstanding shares of Series D Preferred into Common
Stock.
On the
fourth anniversary of the Issuance Date, or in the event of the
consummation of a Change of Control, if any shares of Series D
Preferred are outstanding, then each holder of Series D Preferred
shall have the right (the “Holder Redemption
Right”), at such holder’s option, to
require the Company to redeem all or any portion of such
holder’s shares of Series D Preferred at the Liquidation
Preference Amount per share of Series D Preferred plus an amount
equal to all accrued but unpaid dividends, if any, (such price, the
“Holder Redemption
Price”), which Holder Redemption Price
shall be paid in cash.
On
November 12, 2020 (“Closing
Date”), the Company consummated the Series D
Financing, resulting in the sale of 11,560 shares of its Series D
Preferred, resulting in gross proceeds to the Company of $11.56
million, less fees and expenses. The gross proceeds include
approximately $2.2 million in principal amount due and payable
under the terms of certain term loans issued by the Company on
September 29, 2020 (“Bridge
Note”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance and
sale of the Series D Preferred was made pursuant to that certain
Securities Purchase Agreement, dated September 28, 2020 (the
"Purchase Agreement"), by
and between the Company and the Investors, for the purchase price
of $1,000 per share of Series D Preferred. The Conversion and
Series D Financing was undertaken pursuant to Section 3(a)(9)
and/or Rule 506 promulgated under the Securities Act of 1933, as
amended (the "Securities
Act"). On December 23, 2020, the Company sold an additional
500 shares of Series D Preferred resulting in gross proceeds to the
Company of $500,000 less fees and expenses.
On the
Closing Date, the Company exchanged approximately $661,000 of
liabilities of the Company for 661.3 shares of Series D Preferred,
and received notice from the holders of a majority of the Series C
Preferred (the “Series C
Exchange Notice”) of their election to convert all of
their shares of Series C Preferred into Series D Preferred, and
further exercising their right to require all other holders of
Series C Preferred to convert their shares of Series C Preferred
into Series D Preferred (the “Series C Exchange”). Upon the
consummation of the Series C Exchange in accordance with the terms
of the Series C Exchange Notice, the Company issued an additional
10,000 shares of Series D Preferred in exchange for all 1,000
issued and outstanding shares of the Company’s Series C
Preferred. The Company determined that the Series C Exchange was a
modification of its Series C preferred stock. Using the fair value
method, the Company concluded that the modification was significant
and will apply the guidance in ASC 260-10-S99 for extinguishments.
Under such guidance, the difference between the consideration paid
(i.e. the fair value of the new or modified preferred shares) and
the carrying value of the original preferred shares was recognized
as a deemed dividend. Pursuant to such guidance the company
recorded approximately $10,206,000 as a deemed dividend in the
computation of Earnings Per Share.
On December 31, 2020, the Company issued 142 shares of Series D
Preferred Stock as payment of dividends due to the Series D
Preferred stockholders.
Guidance for
accounting for freestanding financial instruments that contain
characteristics of both liabilities and equity are contained in ASC
480, Distinguishing Liabilities
From Equity and Accounting
Series Release 268 (“ASR 268”) Redeemable Preferred
Stocks. The Company evaluated
the provisions of the Series C Preferred and determined that the
provisions of the Series C Preferred grant the holders of the
Series C Preferred a redemption right whereby the holders of the
Series C Preferred may, at any time after the third anniversary of
the Series C Preferred issuance, require the Company to redeem in
cash any or all of the holder’s outstanding Series C
Preferred at an amount equal to the Liquidation Preference Amount
(“Liquidation Preference
Amount”). The Liquidation
Preference Amount is defined as the greater of the stated value of
the Series C Preferred plus any accrued unpaid interest or such
amount per share as would have been payable had each such share
been converted into Common Stock. In the event of a Change of
Control, the holders of Series C Preferred shall have the right to
require the Company to redeem in cash all or any portion of such
holder’s shares at the Liquidation Preference Amount. The
Company has concluded that because the redemption features of the
Series C Preferred are outside of the control of the Company, the
instrument is to be recorded as temporary or mezzanine equity in
accordance with the provisions of ASR 268.
Likewise, the Company evaluated the provisions of the Series D
Preferred and determined that the provisions of the Series D
Preferred grant the holders of the Series D Preferred a redemption
right whereby the holders of the Series D Preferred may, at any
time after the fourth anniversary of the Series D Preferred
issuance, require the Company to redeem in cash any or all of the
holder’s outstanding Series D Preferred at an amount equal to
the Series D Liquidation Preference Amount. In the event of a
Change of Control, the holders of Series D Preferred shall have the
right to require the Company to redeem in cash all or any portion
of such holder’s shares at the Series D Liquidation
Preference Amount. The Company has concluded that because the
redemption features of the Series D Preferred are outside of the
control of the Company, the instrument is to be recorded as
temporary or mezzanine equity in accordance with the provisions of
ASR 268.
The
Company noted that the Series C Preferred and Series D Preferred
instruments were hybrid instruments that contain several embedded
features. In November 2014, the FASB issued ASU 2014-16 to amend
ASC 815, “Derivatives and
Hedging”, (“ASC
815”) and require the use of the whole instrument
approach (described below) to determine whether the nature of the
host contract in a hybrid instrument issued in the form of a share
is more akin to debt or to equity.
The
whole instrument approach requires an issuer or investor to
consider the economic characteristics and risks of the entire
hybrid instrument, including all of its stated and implied
substantive terms and features. Under this approach, all stated and
implied features, including the embedded feature being evaluated
for bifurcation, must be considered. Each term and feature should
be weighed based on the relevant facts and circumstances to
determine the nature of the host contract. This approach results in
a single, consistent determination of the nature of the host
contract, which is then used to evaluate each embedded feature for
bifurcation. That is, the host contract does not change as each
feature is evaluated.
The
revised guidance further clarifies that the existence or omission
of any single feature, including an investor-held, fixed-price,
noncontingent redemption option, does not determine the economic
characteristics and risks of the host contract. Instead, an entity
must base that determination on an evaluation of the entire hybrid
instrument, including all substantive terms and
features.
However, an
individual term or feature may be weighed more heavily in the
evaluation based on facts and circumstances. An evaluation of all
relevant terms and features, including the circumstances
surrounding the issuance or acquisition of the equity share, as
well as the likelihood that an issuer or investor is expected to
exercise any options within the host contract, to determine the
nature of the host contract, requires judgement.
Using
the whole instrument approach, the Company concluded that the host
instruments of both the Series C Preferred and Series D Preferred
were more akin to debt than equity as the majority of identified
features contain more characteristics of debt.
The
Company evaluated the identified embedded features of the Series C
Preferred and Series D Preferred host instruments and determined
that certain features meet the definition of and contained the
characteristics of derivative financial instruments requiring
bifurcation at fair value from the host instrument.
Accordingly, the
Company has bifurcated from the Series C Preferred host instrument
the conversion options, redemption option and participating
dividend feature in accordance with the guidance in ASC 815. These
bifurcated features aggregated approximately $833,000 at issuance
and have been recorded as a discount to the Series C Preferred.
Such amount were accreted to the point
of their exchange into shares of Series D Preferred on November 12,
2020 using the effective interest rate method. The accretion of
these features is recorded as a deemed
dividend.
For
the year ended December 31, 2020, the Company recorded the
accretion of Series C Preferred debt issuance costs and derivative
liabilities aggregating approximately $573,000 using the effective
interest rate method. On November 12, 2020, pursuant to the
exchange of the Series C Preferred into Series D Preferred, the
Company recorded approximately $543,000 of remaining unamortized
Series C discount as a deemed dividend. During the year ended
December 31, 2019, the Company recorded the accretion of debt
issuance costs and derivative liabilities aggregating approximately
$728,000 using the effective interest rate method as a deemed
dividend.
The
Company has bifurcated from the Series D Preferred host instrument
the conversion options, redemption option and participating
dividend feature in accordance with the guidance in ASC 815. These
bifurcated features aggregated approximately $26,011,000 at
issuance and have been recorded as a discount to the Series D. As
the fair value of the derivative liabilities was in excess of the
Series D Preferred Stock carrying value, the Company recognized a
deemed dividend of approximately $4,201,000. The Series D Preferred
financing was approved the Company’s Board of Directors to
provide for an immediate need of capital, to allow the Company to
continue as a going concern and to execute the Company’s
business plan after consultation with several of the
Company’s largest shareholders and a review of financing
alternatives. During the year ended December 31, 2020, the Company
recorded the accretion of debt issuance costs and derivative
liabilities aggregating approximately $1,572,000 using the
effective interest rate method as a deemed dividend.
The Company reflected the following in Mezzanine Equity for the
Series C and Series D Preferred Stock as of December 31, 2019 and
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Total Series C Preferred Stock - December 31, 2018
|
1,000
|
$8,156
|
-
|
$-
|
|
|
|
|
|
|
|
Accretion of discount - deemed
dividend for the twelve months ended December 31,
2019
|
-
|
728
|
-
|
-
|
|
|
|
|
|
|
|
Total Series C Preferred Stock - December 31, 2019
|
1,000
|
$8,884
|
-
|
$-
|
|
|
|
|
|
|
|
Accretion of Series C discount -
deemed dividend
|
-
|
573
|
-
|
-
|
|
|
|
|
|
|
|
Deemed dividend of unamortized
discount at date of conversion of Series C
Preferred Stock into Series D Preferred
Stock
|
-
|
543
|
-
|
-
|
|
|
|
|
|
|
|
Issuance of Series D Preferred Stock
|
-
|
-
|
12,060
|
12,060
|
|
|
|
|
|
|
|
Exchange of Series C Preferred
Stock into Series D Preferred
Stock
|
(1,000)
|
(10,000)
|
10,000
|
10,000
|
|
|
|
|
|
|
|
Discount - transaction costs
|
-
|
-
|
-
|
(1,053)
|
|
|
|
|
|
|
|
Issuance of Series D Preferred as payment of
liabilities
|
-
|
-
|
661
|
661
|
|
|
|
|
|
|
|
Issuance of Series D Preferred as payment of dividends
due
|
-
|
-
|
142
|
142
|
|
|
|
|
|
|
|
Discount - bifurcated derivative
|
-
|
-
|
-
|
(21,810)
|
|
|
|
|
|
|
|
Accretion of Series D discount - deemed dividend
|
-
|
-
|
-
|
1,572
|
|
|
|
|
|
|
|
Balance of Preferred Stocks at December 31, 2020
|
-
|
$-
|
22,863
|
$1,572
|
14. EQUITY
The Company’s Certificate of Incorporation, as amended,
authorizes 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.
On June 9, 2020, the Company amended its Certificate of
Incorporation to increase the number of shares of the
Company’s Common Stock and the number of shares of the
Company’s Preferred Stock authorized thereunder from an
aggregate of 179 million to 350 million, consisting of 345 million
shares of Common Stock and 5 million shares of Preferred Stock. On
September 28, 2020, the Company received executed written consents
from the requisite holders of the Company's voting securities,
voting on an as-converted basis, approving the Amended Charter,
which, among other things, will increase the authorized number of
shares of Common Stock from 345 million shares to 1.0 billion
shares, with no change to the number of authorized shares of
Preferred Stock. This action did not become effective until October
13, 2020.
As of December 31, 2020, we had 180,096,317 and 180,089,613 shares
of Common Stock issued and outstanding, respectively. Our
authorized but unissued shares of Common Stock are available for
issuance without action by our shareholders. All shares of Common
Stock now outstanding are fully paid and
non-assessable.
On February 20, 2020, the Company entered into a
securities purchase agreement (the “Triton Purchase
Agreement”) with Triton
Funds LP, a Delaware limited partnership ("Triton"). The Triton Purchase Agreement provides the
Company the right to sell to Triton, and Triton is obligated to
purchase, up to $2.0 million worth of shares of Common Stock under
the Triton Purchase Agreement (the "Triton Offering”). Pursuant to the terms and conditions set
forth in the Triton Purchase Agreement, the purchase price of the
Common Stock will be based on the number of shares of Common Stock
equal to the amount in U.S. Dollars that the Company intends to
sell to Triton to be set forth in each written notice sent to
Triton by the Company (the "Triton Purchase
Notice") and delivered to
Triton (the "Triton Purchase Notice
Amount"), divided by the lowest
daily volume weighted average price of the Company's Common Stock
listed on the OTC Markets during the five business days prior to
closing (the "Triton
Shares"). The closing of the
purchase of the Triton Shares as set forth in the Triton Notice
will occur no later than three business days following receipt of
the Triton Shares by Triton.
In February and March of 2020, the Company sold, and Triton
purchased, an aggregate of 10,000,000 shares of Common Stock for
cash. In February, the Company sold 4,000,000 shares of Common
Stock for $0.16 per share resulting in gross proceeds to the
Company of $640,000. In March 2020, the Company sold 6,000,000
shares of Common Stock resulting in gross proceeds to the Company
of $765,000, or a per share purchase price of $0.13 per share.
Aggregate net proceeds from this financing approximated $1,387,000
after recognition of direct offering costs.
Lincoln Park Capital Fund, LLC
On April 28, 2020, the Company entered into a
purchase agreement, and as amended on June 11, 2020 (the
“Lincoln Purchase
Agreement”), and a
registration rights agreement (the “Lincoln Registration Rights
Agreement”) with Lincoln
Park Capital fund, LLC (“Lincoln
Park”) pursuant to which
Lincoln Park committed to purchase up to $10,250,000 of our Common
Stock.
Under the terms and subject to the conditions of
the Lincoln Purchase Agreement, including stockholder
approval of an amendment to the Company’s Certificate of
Incorporation, as amended from time to time (the "Certificate of Incorporation") to
increase the number of shares of the Company’s capital stock
to 350 million shares, obtained from our shareholders effective
June 9, 2020, we have the right, but
not the obligation, to sell to Lincoln Park, and Lincoln Park is
obligated to purchase up to $10,250,000 of shares of Common Stock.
On April 28, 2020, we sold 1,000,000 shares of Common Stock to
Lincoln Park under the Lincoln Purchase Agreement for an aggregate
purchase price of $100,000 (the “Initial Purchase
Shares”). On June 11,
2020, we sold an additional 1,500,000 shares of Common Stock to
Lincoln Park under the Lincoln Purchase Agreement for an aggregate
purchase price of $150,000 (the “Commencement Purchase
Shares”). Future sales of
Common Stock under the Lincoln Purchase Agreement, if any, will be
subject to certain limitations, and may occur from time to time, at
our sole discretion, over the 24-month period commencing on July 8,
2020, and the other conditions set forth in the Purchase Agreement
are satisfied (such date on which all of such conditions are
satisfied, the “Commencement
Date”).
After the Commencement Date, on any business day
over the term of the Lincoln Purchase Agreement, the Company has
the right, in its sole discretion, to direct Lincoln Park to
purchase up to 125,000 shares of its Common Stock on such business
day (the “Regular
Purchase”), subject to
increases under certain circumstances as provided in the Lincoln
Purchase Agreement. The purchase price per share of Common Stock
for each such Regular Purchase will be based on prevailing market
prices of the Company’s Common Stock immediately preceding
the time of sale as computed under the Lincoln Purchase Agreement.
In each case, Lincoln Park’s maximum commitment in any single
Regular Purchase may not exceed $500,000. In addition to Regular
Purchases, provided that the Company presents Lincoln Park with a
Lincoln Purchase Notice for the full amount allowed for a Regular
Purchase, the Company may also direct Lincoln Park to make
accelerated purchases and additional
accelerated purchases as described in the Lincoln Purchase
Agreement.
Pursuant to the
terms of the Lincoln Purchase Agreement, in no event may the
Company issue or sell to Lincoln Park under the shares of Common
Stock under the Lincoln Purchase Agreement which, when aggregated
with all other shares of Common Stock then beneficially owned by
Lincoln Park and its affiliates (as calculated pursuant to Section
13(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)
and Rule 13d-3 promulgated thereunder), would result in the
beneficial ownership by Lincoln Park and its affiliates of more
than 4.99% of the then issued and outstanding shares of Common
Stock (the “Beneficial
Ownership Limitation”).
The Lincoln Purchase Agreement and the Lincoln Registration Rights
Agreement contain customary representations, warranties, agreements
and conditions and indemnification obligations of the parties. The
Company has the right to terminate the Purchase Agreement at any
time, at no cost or penalty. The Company issued to Lincoln Park
2,500,000 shares of Common Stock in consideration for entering into
the Lincoln Purchase Agreement. Pursuant to this issuance, $400,000
was recorded by the Company as a deferred stock issuance cost. Such
amount was recorded in the Company’s consolidated balance
sheet under the caption “Other assets”. Such deferred
stock issuance costs will be recognized as a charge against paid in
capital in proportion to securities sold under this Lincoln
Purchase Agreement. During the year ended December 31, 2020, the
Company recognized approximately $36,000 as a charge against paid-
in capital relating to securities sold under the Lincoln Purchase
Agreement.
In addition to the Initial Purchase Shares and Commencement
Purchase Shares disclosed above, during the year ended December 31,
2020, the Company sold an aggregate 3,200,000 shares of Common
Stock to Lincoln Park under the terms of the Lincoln Purchase
Agreement resulting in gross cash proceeds to the Company of
approximately $918,000.
Our Board of Directors has designated five series
of Preferred Stock; (i) Series A Preferred, (ii) Series A-1
Preferred, (iii) Series B Preferred, (iv) Series C Preferred and
(v) Series D Preferred. As of December 31, 2020, there were 14,911 shares of
Series A Preferred outstanding, 14,782 shares of Series A-1
Preferred outstanding, 239,400 shares of series B Preferred
outstanding, 0 shares of Series C Preferred outstanding, and
22,863 shares of Series D
Preferred outstanding.
Series A Convertible Preferred Stock
On September 15, 2017, the Company filed the
Certificate of Designations of the Series A Preferred with the
Delaware Secretary of State (the “Series A
Certificate”),
designating 38,000 shares of the Company’s preferred stock,
par value $0.01 per share, as Series A Preferred. The Company had
37,467 shares of Series A Preferred outstanding as of December 31,
2019.
During July
2020, the Company entered into the Series A Exchange Agreement with
the Series A Holders, pursuant to which such Series A Holders
exchanged 18,828 shares of Series A Preferred for an equivalent
number of Series A-1 Preferred in consideration for their waiver of
approximately $1,849,000 in dividends payable.
On September 28, 2020, the Company received executed written
consents from (i) the requisite holders of the Company's voting
securities, voting on an as-converted basis, and (ii) the requisite
holders of Series A Preferred, voting as a separate class,
approving the Amended Series A Certificate, which, among other
things, provides for (i) the automatic conversion of all Series A
Preferred into Common Stock at a rate of 10% per month following
the Closing of the Series D Financing, with the conversion price
for such conversion reduced from $1.15 per share of Common Stock,
to $0.20 per share of Common Stock, and (ii) a reduction of the
dividend rate from 8% of the stated Series A Liquidation Preference
Amount if paid in cash and 10% of the stated Series A Liquidation
Preference Amount if paid in Common Stock, to 4% of the Series A
Liquidation Preference Amount, with the dividends being paid only
in shares of Common Stock.
The Company determined that the September 28, 2020 changes to the
Series A Preferred Stock was a modification of its Series A
preferred stock. Using the fair value method, the Company concluded
that the modification was significant and applied the guidance in
ASC 260-10-S99 for extinguishments. Under such guidance, the
Company recognized the difference between the consideration paid
(i.e. the fair value of the new or modified preferred shares) and
the carrying value of the original preferred shares as a deemed
dividend to (from) the holder. Pursuant to such guidance the
company recorded approximately $9,173,000 as a deemed dividend from
the holder in the computation of Earnings Per Share.
As modified, shares of Series A Preferred accrue dividends at a
rate of 4% per annum payable through the Conversion Period, as
defined below, in shares of Common Stock. Each share of Series A
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 $0.20. Each holder of the Series A Preferred
is entitled to vote on all matters, together with the holders of
Common Stock, on an as converted basis. The Series A
Preferred is subordinate to and ranks junior to the Company’s
Series B Preferred, Series C Preferred, Series D Preferred and all
indebtedness of the Company, and ranks senior to the
Company’s Common Stock and to all other classes and series of
equity securities of the Company which by their terms rank junior
to the Series A Preferred. Holders of
Series A Preferred may elect to convert shares of Series A
Preferred into Conversion Shares at any time. In the event the volume-weighted average price
(“VWAP”) of the Company’s Common Stock is at
least $2.15 per share for at least 20 consecutive trading days, the
Company may elect to convert one-half of the shares of Series A
Preferred issued and outstanding, on a pro-rata basis, into
Conversion Shares, or, if the VWAP of the Company’s Common
Stock is at least $2.15 for 80 consecutive trading days, the
Company may convert all issued and outstanding shares of Series A
Preferred into Conversion Shares. In addition, the Series A
Certificate provides for a voluntary conversion window, beginning
on the consummation of the Series D Financing, and ends on August
1, 2021 (the “Conversion
Period”), whereby holders may voluntarily convert all
shares of Series A Preferred into Common Stock upon notice to the
Company, and provides that holders of Series A Preferred that do
not voluntarily convert all shares of Series A Preferred into
Common Stock, a mandatory, automatic conversion of each such
holder’s shares of Series A Preferred at a rate of 10% per
month beginning on the consummation of the Series D Financing, with
all shares converting by August 1, 2021. In the event of a Change of Control, the Company
will have the option to redeem all issued and outstanding shares of
Series A Preferred for 115% of the Liquidation Preference per
share.
The Company had 14,911 shares of Series A Preferred outstanding as
of December 31, 2020. At December 31, 2020 and 2019, the
Company had cumulative undeclared dividends of
$0. During the years ended December 31, 2020 and 2019, the Company issued the
holders of Series A Preferred 1,388,876 and 6,959,523 shares of Common Stock,
respectively, as payment of dividends due.
During the year ended December 31, 2020, the Company issued
18,640,000 shares of Common Stock upon the conversion of 3,728
shares of Series A Preferred Stock.
Series A-1 Convertible Preferred Stock
In July 2020, the Company filed the Series A-1 Certificate with the
Secretary of State for the State of Delaware – Division of
Corporations, designating 31,021 shares of the Company’s
Preferred Stock as Series A-1 Preferred. Shares of Series A-1
Preferred accrue cumulative dividends and are payable quarterly
beginning March 31, 2021 at a rate of 8% per annum if paid in cash,
or 10% per annum if paid by the issuance of shares of the
Company’s Common Stock.
Shares of Series A-1 Preferred rank senior to the Company’s
Common Stock, pari-passu to the Company's Series A Preferred, and
are subordinate and rank junior to Series B Preferred and Series D
Preferred.
Each share of Series A-1 Preferred has a liquidation preference
equal to the greater of (i) $1,000 per share plus all accrued and
unpaid dividends, or (ii) such amount per share as would have been
payable had each such share been converted into Common Stock
immediately prior to such liquidation, dissolution or winding up
(the amount payable pursuant to the foregoing is referred to herein
as the “Series A-1 Liquidation Preference Amount”)
before any payment shall be made or any assets distributed to the
holders of the Common Stock or any other classes and series of
equity securities of the Company which by their terms rank junior
to the Series A-1 Preferred.
Each share of Series A-1 Preferred is convertible
into that number of shares of the Company’s Common Stock
(“Series A-1 Conversion
Shares”) equal to that
number of shares of Series A-1 Preferred being converted multiplied
by $1,000, divided by $0.65, or the conversion price as defined in
the Series A-1 Certificate in effect as of the date the holder
delivers to the Company their notice of election to convert.
Holders of Series A-1 Preferred may elect to convert shares of
Series A-1 Preferred into Common Stock at any time. In addition to
the aforementioned holder conversion option, if the volume weighted
average closing price (VWAP) of the Company’s Common Stock is
at least $1.00 per share for 20 consecutive trading days, then the
Company has the right to convert one-half of the issued and
outstanding shares of Series A-1 Preferred into Common Stock. In
the event of a Change of Control, the Company will have the option
to redeem all issued and outstanding shares of Series A-1 Preferred
for 115% of the Liquidation Preference per
share.
The
Series A-1 Preferred is a freestanding financial instrument that
contains characteristics of both liabilities and equity. Guidance
for accounting for freestanding financial instruments that contain
characteristics of both liabilities and equity are contained in ASC
480 and ASR 268. Pursuant to this
guidance, the Company evaluated the
various provisions of the Series A-1 Preferred and determined that
the instrument should be recorded as a component of permanent
equity.
The
Company noted that the Series A-1 Preferred Stock instrument was a
hybrid instrument that contains several embedded features. In
November 2014, the FASB issued ASU 2014-16 to amend ASC 815,
“Derivatives and
Hedging”, (“ASC
815”) and require the use of the whole instrument
approach (described below) to determine whether the nature of the
host contract in a hybrid instrument issued in the form of a share
is more akin to debt or to equity.
Using
the whole instrument approach, the Company concluded that the host
instrument is more akin to equity than debt as the majority of
identified features contain more characteristics of
equity.
The
Company evaluated the identified embedded features of the Series
A-1 Preferred host instrument and determined that certain features
did not meet the definition of and did not contain the
characteristics of derivative financial instruments requiring
bifurcation at fair value from the host instrument.
During July 2020, the Company entered into an
Exchange Agreement, Consent and Waiver (“Exchange
Agreement”) with certain
holders of its Series A Preferred (the "Series A
Holders"), pursuant to which
such Series A Holders exchanged 18,828 shares of Series A Preferred
for an equivalent number of Series A-1 Preferred in consideration
for their waiver of approximately $1,849,000 in dividends payable
to the Series A Holders and payable for the quarters ended March
31, 2020 and June 30, 2020 (the “Series A
Restructuring”). Also, as
part of the Exchange Agreement, 739,372 warrants held by those
Series A Holders participating in the exchange were
cancelled.
As
there is no specific guidance under GAAP on whether an amendment
to, or exchange of, an equity-classified preferred stock instrument
(whether presented in temporary or permanent equity) that is not
within the scope of ASC 718 should be accounted for as an
extinguishment or a modification, the Company used, by analogy, the
Guidance in ASC 470, (“Debt”) regarding the
modification of debt instruments and determined that the exchange
transaction was a modification.
The
Company measured the fair value of the Series A and A-1 Preferred
stock immediately before and after the modification date by
measuring the value of Common Stock each instrument was convertible
into and determined that the modification resulted in a deemed
dividend of approximately $2,272,000.
On September 28, 2020, the Company's holders of Common Stock and
Preferred Stock voted to revise the Series A-1 Certificate by
i) amending and restating the Series A-1 Certificate to,
without limitation, provide for (i) the voluntary conversion of all
outstanding shares of the Company's Series A-1 Preferred into
shares of the Company’s Common Stock at a reduced conversion
price of $0.20 per share of Common Stock, and (ii) the automatic
conversion of all issued and outstanding shares of Series A
Preferred and Series A-1 Preferred into shares of Common Stock at a
rate of 10% per month, beginning on November 1, 2020, and ending on
August 1, 2021, at the reduced conversion price of $0.20 per share
of Common Stock;
The Company determined that the September 28, 2020 changes to the
Series A Preferred Stock was a modification of its Series A-1
preferred stock. Using the fair value method, the Company concluded
that the modification was significant and applied the guidance in
ASC 260-10-S99 for extinguishments. Under such guidance, the
difference between the consideration paid (i.e. the fair value of
the new or modified preferred shares) and the carrying value of the
original preferred shares was recognized as a deemed dividend to
(from) the holder. Pursuant to such guidance the company recorded
approximately $9,440,000 as a deemed dividend from the holder in
the computation of Earnings Per Share.
The Company had 14,782 shares and 0 shares of
Series A-1 Preferred outstanding as of December 31, 2020 and 2019,
respectively. During the years ended December 31, 2020 and 2019, the Company issued the
holders of Series A-1 Preferred 1,159,416 and 0 shares of Common Stock,
respectively, as payment of dividends due.
During
the year ended December 31, 2020, the Company issued
19,016,452 shares of Common Stock upon the conversion of 4,046
shares of Series A-1 Preferred.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares
of Series B Convertible Preferred Stock (“Series B
Preferred”) outstanding
as of December 31, 2020 and 2019. At December 31, 2020 and 2019,
the Company had cumulative undeclared dividends of approximately
$8,000 ($0.03 per share), respectively. There were no conversions
of Series B Preferred into Common Stock during the years ended
December 31, 2020 and 2019. The Company paid dividends of
approximately $51,000 to the holders of our Series B Preferred for
each of the years ended December 31, 2020 and
2019.
Common Stock
On
September 28, 2020, the Company received executed written consents
from the requisite holders of the Company’s voting
securities, voting on as as-converted basis, approving the Amended
Charter, which, among other things will increase the authorized
number of shares of Common Stock from 345 million to 1 billion
shares. This action did not become effective until 20 calendar days
after an Information Statement was delivered to our shareholders.
Such Information Statement was delivered on October 13,
2020.
The following table summarizes outstanding Common Stock activity
for the following periods:
|
|
|
|
Shares outstanding at December 31, 2018
|
98,223,632
|
|
Shares issued pursuant to payment of stock
dividend on Series A Preferred
|
6,959,523
|
|
Shares issued as payment of stock
dividend on Series C Preferred
|
1,857,438
|
|
Shares issued for cash
|
5,954,545
|
|
Shares issued pursuant to option
exercises
|
351,334
|
|
Shares outstanding at December 31, 2019
|
113,346,472
|
|
Shares issued pursuant to payment of stock
dividend on Series A Preferred
|
1,388,876
|
|
Shares issued pursuant to payment of
stock dividend on Series A-1 Preferred
|
1,159,416
|
|
Shares issued as payment of stock
dividend on Series C Preferred
|
6,455,149
|
|
Shares issued pursuant to Series A
conversion to Common Stock
|
18,640,000
|
|
Shares issued pursuant to Series A-1
conversion to Common Stock
|
19,016,452
|
|
Shares issued to secure financing
facility
|
2,500,000
|
|
Shares issued for cash
|
15,700,000
|
|
Shares issued pursuant to option exchange
and RSU vesting
|
1,883,248
|
|
Shares outstanding at December 31, 2020
|
180,089,613
|
Warrants
As of December 31, 2020, warrants to purchase
753,775 shares
of Common Stock at prices ranging from $0.01 to $0.80 were
outstanding. At December 31, 2020, no warrants are exercisable and
become exercisable only upon the attainment of specified events.
All warrants expire on September 19, 2028 with the exception of
150,000 warrants whose expiration date is 3 years from initial
vesting, such vesting based on certain events . The intrinsic value
of warrants outstanding at December 31, 2020 was $0. The Company
has excluded from this computation any intrinsic value of the
603,775 warrants issued to the Series A Preferred stockholders due
to the conversion exercise contingency associated with these
warrants.
The following table summarizes warrant activity for the following
periods:
|
|
|
Weighted-Average
Exercise
Price
|
|
|
|
|
|
Balance at December 31, 2018
|
1,813,856
|
$0.19
|
|
Granted
|
—
|
|
|
Expired / Canceled
|
(80,000)
|
$1.13
|
|
Exercised
|
—
|
|
|
Balance at December 31, 2019
|
1,733,856
|
$0.14
|
|
Granted
|
—
|
|
|
Expired / Canceled
|
(980,081)
|
$ 0.15
|
|
Exercised
|
—
|
|
|
Balance at December 31, 2020
|
753,775
|
$ 0.17
|
There were no warrants issued or exercised during the twelve months
ended December 31, 2020. During the year ended December 31, 2020,
739,386 warrants were cancelled in conjunction with the exchange of
Series A Preferred Stock into Series A-1 Preferred Stock, 150,695
warrants were cancelled pursuant to the mandatory conversion of
Series A Preferred Stock into Common Stock and 90,000 warrants
expired unexercised.
15. STOCK-BASED COMPENSATION
Stock Options
As of December 31, 2020, the Company had one
active stock-based compensation plan: the 2020 Omnibus Stock
Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization
obtained from the Company’s stockholders, the Company adopted
the 2020 Omnibus Stock Incentive Plan (the
“2020
Plan”). Such plan had
been previously unanimously approved by the Company’s Board.
The purposes of our 2020 Plan are to enhance our ability to attract
and retain highly qualified officers, non-employee directors, key
employees and consultants, and to motivate those service providers
to serve the Company and to expend maximum effort to improve our
business results by providing to those service providers an
opportunity to acquire or increase a direct proprietary interest in
our operations and future success. The 2020 Plan also will allow us
to promote greater ownership in our Company by the service
providers in order to align the service providers’ interests
more closely with the interests of our stockholders. Awards granted
under the 2020 Plan are designed to qualify for special tax
treatment under Section 422 of the Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede
and replace the Company’s 1999 Plan and no new awards will be
granted under the 1999 Plan thereafter. Any awards outstanding
under the 1999 Plan on the date of approval of the 2020 Plan will
remain subject to the 1999 Plan. Upon approval of our 2020 Plan,
all shares of Common Stock remaining authorized and available for
issuance under the 1999 Plan and any shares subject to outstanding
awards under the 1999 Plan that subsequently expire, terminate, or
are surrendered or forfeited for any reason without issuance of
shares will automatically become available for issuance under our
2020 Plan. As of December 31, 2020, there are approximately
26,382,377 shares available for issuance under the 2020
Plan.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “Compensation – Stock
Compensation”. 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 operating expense based upon the departments to which
substantially all the associated employees report and credited to
additional paid-in-capital.
ASC 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-pricing 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-pricing 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 options granted
during the years ended December 31, 2020 and 2019 ranged from 57%
to 83%. 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 Topic 14.
The expected term used by the Company during the years ended
December 31, 2020 and 2019 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 years ended December 31, 2020 and 2019
averaged 2.58%. Dividend yield is zero as the Company does not
expect to declare any dividends on the Company’s common
shares 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 adopted the provisions of ASU
2016-09 and will continue to use an estimated annualized forfeiture
rate of approximately 5.0% for corporate officers, 4.1% for members
of the Board of Directors and 15.0% 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:
|
|
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
Balance at December 31, 2018
|
7,227,248
|
$1.4
|
5.8
|
|
Granted
|
750,000
|
$0.89
|
—
|
|
Expired/Cancelled
|
(421,242)
|
$1.52
|
—
|
|
Exercised
|
(351,334)
|
$0.47
|
—
|
|
Balance at December 31, 2019
|
7,204,672
|
$1.32
|
5.3
|
|
Granted
|
2,450,000
|
$ 0.14
|
—
|
|
Expired/Cancelled
|
(7,069,172)
|
$ 1.33
|
—
|
|
Exercised
|
—
|
$—
|
—
|
|
Balance at December 31, 2020
|
2,585,500
|
$ 0.19
|
9.2
|
During
the year ended December 31, 2020, the Company issued an aggregate
2,450,000 options to purchase common stock at exercise prices of
$0.07 to $0.24. Of the options granted in 2020, 1,750,000
options are issuable to the Company’s Chief Executive Officer
and are included as granted options in the totals above, however
such options have not been issued to the executive as of the date
of this Annual Report, pending the negotiation of a new grant since
the consummation of the offering of Series D Preferred in November
2020.
During the year ended December 31, 2020,
certain terminated employees exchanged 1,225,500 Common Stock
purchase options for 612,750 shares of Common Stock as a component
of their severance agreement.
During
the year ended December 31,
2020, certain employees exchanged 1,417,832 Common Stock purchase
options for 708,916 Restricted Stock Units
(“RSUs”)
and certain members of the Company’s Board of Directors and
certain officers exchanged 3,467,000 Common Stock purchase options
for 1,733,500 RSUs.
In
addition to the aggregate 6,110,332 options exchanged, an
additional 958,840 Common Stock purchase options expired
unexercised during the year ended December 31, 2020.
During the year ended December 31, 2020, there were no options
exercised for cash. During the year ended December 31, 2019, there
were 351,334 options exercised for cash resulting in the issuance
of 351,334 shares of the Company’s Common Stock and proceeds
of approximately $166,000.
At December 31, 2020, a total of 2,585,500 options were
outstanding, of which 113,137 were exercisable at a weighted
average price of $1.12 per share with a remaining weighted average
contractual term of 6.13 years. The Company expects that, in
addition to the 113,137 options that were exercisable as of
December 31, 2020, another 2,472,363 will ultimately vest resulting
in a combined total of 2,585,500. Those 2,585,500
shares have a weighted average exercise price of $0.19 and an
aggregate intrinsic value of approximately $1,000 as of
December 31, 2020. Stock-based compensation expense related to
equity options was approximately $263,000 and $643,000 for the
years ended December 31, 2020 and 2019, respectively.
The weighted-average grant-date fair value per share of options
granted to employees during the years ended December 31, 2020 and
2019 was $0.12 and $0.47, respectively. At December 31, 2020,
the total remaining unrecognized compensation cost related to
unvested stock options amounted to approximately $277,906, which
will be amortized over the weighted-average remaining requisite
service period of 1.7 years.
The intrinsic value of options exercised during the years ended
December 31, 2020 and 2019 was approximately $0 and $222,000,
respectively. The intrinsic value of options exercisable at
December 31, 2020 and 2019 was approximately $0 and $0,
respectively. The intrinsic value of options that vested
during 2020 was approximately $0. The aggregate intrinsic value for
all options outstanding as of December 31, 2020 and 2019 was
approximately $1,000 and $1,000, respectively.
The Company
periodically issues RSUs to certain employees which vest over time.
When vested, each RSU represents the right to that number of shares
of Common Stock equal to the number of RSUs granted. The grant date
fair value for RSU’s is based upon the market price of the
Company's Common Stock on the date of the grant. The fair value is
then amortized to compensation expense over the requisite service
period or vesting term.
A summary of the activity related to RSUs is as
follows:
|
|
|
Weighted-Average
Issuance Price
|
|
Balance at
December 31, 2019
|
—
|
$—
|
|
Granted
|
3,857,416
|
$0.15
|
|
Expired/Cancelled
|
(847,959)
|
$0.17
|
|
Vested
|
(2,164,351)
|
$0.14
|
|
Balance at
December 31, 2020
|
845,106
|
$0.14
|
During
the year ended December 31,
2020, the Company granted 708,916 RSUs to certain
employees in exchange for options to purchase
1,417,832 shares of Common Stock held by such employees.
During the year ended December 31, 2020, 336,998 of these RSUs
vested with the remainder of such RSUs vesting quarterly over a
period of two years.
During the year ended December 31, 2020, the Company agreed to
grant 1,733,500 RSUs to certain officers and members of the
Company’s Board of Directors in exchange for options to
purchase 3,467,000 shares of Common Stock held by such officers and
directors. During the year ended December 31, 2020, 1,000,684 of
these RSUs vested with the remainder of such RSUs expiring
unvested. At December 31, 2020, the Company had not issued 67,191
shares of its Common Stock pursuant to these vested
RSUs.
The Company determined that the exchange agreements are a
modification of a share-based payment award under ASC 718.
Accordingly, the Company computed any incremental compensation
expense as a component of the total compensation cost to be
measured at the modification date. Aggregate incremental
compensation expense measured from the modifications of stock
options was approximately $385,000.
In addition and unrelated to the aforementioned exchanges, the
Company granted 500,000 RSUs on July 29, 2020 at a per share price
of $0.13, granted 885,000 RSUs on November 13, 2020 at a per share
price of $0.09 and granted 30,000 RSU’s on December 23, 2020
at a per share price of $0.07. During the year ended December 31,
2020, 826,676 of these RSUs vested with the remainder of the RSUs
vesting at various dates over a two-year period. As of December 31,
2020, the Company has not issued the Common Stock shares pursuant
to the vesting of the 826,669 shares.
Stock-based Compensation
Stock-based compensation related to equity options has been
classified as follows in the accompanying consolidated statements
of operations (in thousands):
|
|
|
|
|
|
|
|
Cost of revenue
|
$15
|
$13
|
|
General and administrative
|
550
|
347
|
|
Sales and marketing
|
163
|
148
|
|
Research and development
|
134
|
135
|
|
|
|
|
|
Total
|
$862
|
$643
|
Common Stock Reserved for Future Issuance
The following table summarizes the Common Stock reserved for future
issuance as of December 31, 2020:
|
|
|
|
Convertible preferred stock – Series A, Series A-1, Series B
and Series D
|
540,677,052
|
|
Stock options
outstanding
|
2,585,500
|
|
Restricted Stock
Units
|
845,106
|
|
Warrants outstanding
|
753,775
|
|
Authorized for
future grant under stock option plans
|
26,382,377
|
16. EMPLOYEE BENEFIT PLAN
During 1995, the Company adopted a defined
contribution 401(k) retirement plan (the “Plan”). All U.S. based employees aged 21 years
and older are eligible to become participants after the completion
of 60 day's employment. The Plan provides for annual contributions
by the Company of 50% of employee contributions not to exceed 8% of
employee compensation. Effective April 1, 2009, the Plan
was amended to provide for Company contributions on a discretionary
basis. Participants may contribute up to 100% of the annual
contribution limitations determined by the Internal Revenue
Service.
Employees are fully vested in their share of the Company’s
contributions after the completion of five years of
service. In 2019, the Company authorized contributions
of approximately $184,000 for the 2019 plan year of which $138,000
were paid prior to December 31, 2019. In 2020, there were no
contributions authorized or made.
17. PENSION PLAN
One of the Company’s dormant foreign subsidiaries maintains a
defined benefit pension plan that provides benefits based on length
of service and final average earnings. The following table sets
forth the benefit obligation, fair value of plan assets, and the
funded status of the Company’s plan; amounts recognized in
the Company’s consolidated financial statements; and the
assumptions used in determining the actuarial present value of the
benefit obligations as of December 31:
|
($ in thousands)
|
|
|
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$3,969
|
$3,610
|
|
Service cost
|
—
|
—
|
|
Interest cost
|
52
|
70
|
|
Actuarial (gain) loss
|
113
|
436
|
|
Effect of exchange rate changes
|
370
|
(67)
|
|
Effect of curtailment
|
—
|
—
|
|
Benefits paid
|
(92)
|
(80)
|
|
Benefit obligation at end of year
|
$4,412
|
$3,969
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$1,713
|
$1,734
|
|
Actual return of plan assets
|
92
|
80
|
|
Company contributions
|
10
|
12
|
|
Benefits paid
|
(92)
|
(80)
|
|
Effect of exchange rate changes
|
158
|
(33)
|
|
Fair value of plan assets at end of year
|
$1,881
|
$1,713
|
|
Funded status
|
$(2,531)
|
$(2,256)
|
|
Unrecognized actuarial loss (gain)
|
1,702
|
1,778
|
|
Unrecognized prior service (benefit) cost
|
—
|
—
|
|
Additional minimum liability
|
(1,702)
|
(1,778)
|
|
Unrecognized transition (asset) liability
|
—
|
—
|
|
Net amount recognized
|
$(2,531)
|
$(2,256)
|
|
|
|
|
|
Components of net periodic benefit cost are as
follows:
|
|
|
|
Service cost
|
$—
|
$—
|
|
Interest cost on projected benefit obligations
|
52
|
70
|
|
Expected return on plan assets
|
(55)
|
(53)
|
|
Amortization of prior service costs
|
—
|
—
|
|
Amortization of actuarial loss
|
117
|
92
|
|
Net periodic benefit costs
|
$114
|
$109
|
|
The weighted average assumptions used to determine net periodic
benefit cost for the years ended December 31, were
|
|
|
|
Discount rate
|
1.0%
|
1.3%
|
|
Expected return on plan assets
|
3.2%
|
3.2%
|
|
Rate of pension increases
|
2.0%
|
2.0%
|
|
Rate of compensation increase
|
N/A
|
N/A
|
|
The following discloses information about the Company’s
defined benefit pension plan that had an accumulated benefit
obligation in excess of plan assets as of December 31,
|
|
|
|
Projected benefit obligation
|
$4,412
|
$3,969
|
|
Accumulated benefit obligation
|
$4,412
|
$3,969
|
|
Fair value of plan assets
|
$1,881
|
$1,713
|
As of December 31, 2020, the following benefit payments are
expected to be paid as follows (in thousands):
|
2021
|
$100
|
|
2022
|
$101
|
|
2023
|
$108
|
|
2024
|
$129
|
|
2025
|
$138
|
|
2026 — 2030
|
$750
|
The Company made contributions to the plan of approximately $10,000
during the year ended December 31, 2020, and $12,000 during the
year ended December 31, 2019. The company anticipates making
contributions at similar levels during the next fiscal
year.
In accordance with the Company’s adoption of ASU 2017-07, the
components of net periodic pension expense is shown in the
Company’s Consolidated Statement of Operations for the years
ended December 31, 2020 and 2019 under “Other components of
net periodic pension expense”.
The measurement date used to determine the benefit information of
the plan was January 1, 2021.
18. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is the
combination of the additional minimum liability related to the
Company’s defined benefit pension plan, recognized pursuant
to ASC 715-30, “Compensation - Retirement
Benefits - Defined Benefit Plans – Pension” and the accumulated gains or losses from
foreign currency translation adjustments. The Company translates
foreign currencies of its German, Canadian and Mexican subsidiaries
into U.S. dollars using the period end exchange rate. Revenue and
expense were translated using the weighted-average exchange rates
for the reporting period. All items are shown net of
tax.
As of December 31, 2020 and 2019, the components of accumulated
other comprehensive loss were as follows:
|
($ in thousands)
|
|
|
|
|
|
|
|
Additional minimum pension liability
|
$(1,553)
|
$(1,456)
|
|
Foreign currency translation adjustment
|
(436)
|
(285)
|
|
Ending balance
|
$(1,989)
|
$(1,741)
|
19. SUBSEQUENT
EVENTS
During the period from January 1, 2021 thru March 26, 2021 the
Company issued an aggregate of 94,829,726 shares including
94,455,511 for conversions of its convertible preferred
stock, 242,647 for fees paid in stock, 131,168 pursuant to RSU
vesting’s and 400 shares for the exercise of
warrants.
The
Company undertook the following Corporate Actions which have been
approved by written consent of a majority of our outstanding voting
securities, on an as converted basis (the “Majority
Shareholders”), following a recommendation that shareholders
approve the Corporate Actions by our Board of
Directors:
(i) An
amendment to the Company’s Certificate of Incorporation, as
Amended and Restated (the “Certificate of
Incorporation”) to increase the total number of shares of
Common Stock authorized for issuance thereunder from 1.0 billion
shares to 2.0 billion shares (the “Charter Amendment”);
and
(ii)
An amendment to the Company’s 2020 Omnibus Incentive Plan
(the “Plan”) to increase the number of shares of Common
Stock available for issuance under the 2020 Plan by 120.0 million
shares, from 25.0 million shares to 145.0 million shares (the
“Plan Amendment”).
17,100,000 Shares
Common Stock
PROSPECTUS
We have
not authorized any dealer, salesperson or other person to give any
information or to make any representations not contained in this
prospectus. You must not rely on any unauthorized information. This
prospectus is not an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted.
July 23, 2021
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