iwsys1a_jun2020
As filed with the Securities and Exchange Commission on
July 2,
2020
Registration
No. 333-239173
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
S-1/A
(Amendment No.
1)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IMAGEWARE SYSTEMS,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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7372
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33-0224167
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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13500 Evening Creek Drive N, Suite 550
San Diego, California 92128
(858) 673-8600
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive
offices)
Kristin Taylor
Chief Executive Officer
ImageWare Systems, Inc.
13500 Evening Creek Drive N, Suite 550
San Diego, California 92128
(858) 673-8600
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies to
Daniel W. Rumsey, Esq.
Jessica R. Sudweeks, Esq.
Disclosure Law Group, a Professional Corporation
655 West Broadway, Suite 870
San Diego, CA 92101
Telephone: (619) 272-7050
Facsimile: (619) 330-2101
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following
box. [X]
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act:
Large accelerated filer
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[
]
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Accelerated filer
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[
]
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Non-accelerated
filer
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[X]
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Smaller reporting company
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[X]
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Emerging
growth company
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[
]
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
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Amount to be
registered (1)
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Proposed
maximum
offering price
per share (2)
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Proposed
maximum
aggregate
offering price
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Amount of
registration
fee
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Common
stock, par value $0.01 per share
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8,200,000
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$
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0.39
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$
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3,198,000
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$
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415.10
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(3)
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(1)
Pursuant
to Rule 416 under the Securities Act of 1933, as amended, this
registration statement shall be deemed to cover the additional
securities of the same class as the securities covered by this
registration statement issued or issuable prior to completion of
the distribution of the securities covered by this registration
statement as a result of a split of, or a stock dividend on, the
registered securities.
(2)
Pursuant
to Rule 457(c) of the Securities Act of 1933, as amended,
calculated on the basis of the average of the high and low prices
per share of the registrant’s common stock as reported by the
OTCQB Marketplace June 26, 2020.
The
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities nor does it seek an offer to buy
these securities in any jurisdiction where the offer or sale is not
permitted.
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PRELIMINARY PROSPECTUS
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SUBJECT TO COMPLETION
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DATED JULY 2, 2020
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8,200,000 Shares of Common
Stock
This
prospectus relates to the offer and sale of up to 8,200,000 shares of common stock, par value
$0.01, 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 April 28, 2020, as amended on June 11,
2020. 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 2, 2020, the last reported sale price of our
common stock on the OTCQB Marketplace was $0.39
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 7 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
,
2020.
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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
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 and its “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 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 are integrated
into the IWS Biometric Engine.
Our IWS
Biometric Engine is a patented biometric identity management
software platform for multi-biometric enrollment, management and
authentication, managing population databases of virtually
unlimited sizes. 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”)
based search engine, enabling developers and system integrators to
implement a biometric solution or integrate biometric capabilities
into existing applications without having to derive biometric
functionality from preexisting applications.
Our
secure credential solutions empower customers to create secure and
smart digital identification documents with complete ID systems. We
develop, sell and support software and design systems that utilize
digital imaging and biometrics in the production of 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 cards and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
or governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine to our secure credential product
line.
The Company is also a
developer of a biometric based multi-factor authentication (MFA)
cloud-based service. The service, GoVerifyID® brings together
cloud and mobile technologies to offer multi-factor authentication
for smartphone users, for the enterprise, and across industries.
GoVerifyID® consists of mobile and desktop client applications
and a cloud-based Software-as-a-Service (“SaaS”)
which services cloud-based template matching requests for
authentication requests. GoVerifyID® is leveraged by product
developers to enable biometric authentication for their consumers
and enterprises securing access to company property and IP. For the
enterprise, GoVerifyID® provides turnkey integration with
Microsoft Windows, Microsoft Active Directory, CA SSO, IBM Security
Access Manager (“ISAM”),
SAP Cloud Platform, Fujitsu's RunMyProcess 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/SMT 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 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
other biometrics such as iris or DNA.
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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. Our offices are currently under a shelter-in-place mandate and
many of our clients worldwide are similarly
impacted. The global outbreak of COVID-19
continues to rapidly evolve, and the extent to which COVID-19
may impact our business and the markets we serve will depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, such as the ultimate geographic spread
of the disease, 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 in the United States and other countries to contain
and treat the disease. We are continuing to vigilantly
monitor the situation with our primary focus on the health and
safety of our employees and clients.
Company Information
ImageWare Systems, Inc., a Delaware corporation,
was founded in February 1987. Our principal executive offices are
located at 13500 Evening Creek Drive N, Suite 550, San Diego,
California 92128, 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.
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 system sales and we may fail to
achieve one or more large system sales 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
significant 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;
●
We
are dependent upon third parties for the successful integration of
our products, and/or the launch of our products. Any delay in the
integration of our products, or the launch of third party products
may materially affect our results from operations and financial
condition;
●
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; and
●
We
will need to raise substantial 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 April 28, 2020, we entered into a purchase
agreement, as amended on June 11, 2020 (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 $10,250,000 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 $10,250,000 of shares
of our common stock. On April 28, 2020, we sold 1,000,000 shares of
common stock to Lincoln Park under the 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 Purchase Agreement for an aggregate
purchase price of $150,000 (the “Commencement 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 125,000
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. 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. For additional information on the procedure for
completing a Regular Purchase under the Purchase Agreement, see the
section titled “Lincoln Park
Transaction” beginning on
page 19 of this prospectus.
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 2.5 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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8,200,000
shares consisting of: (i) 1.0 million shares sold to Lincoln Park
at $0.10 per share on the
Execution Date (the “Initial
Purchase Shares”); (ii) 1.5 million shares sold to
Lincoln Park at $0.10 per share on June 11, 2010 (the “Commencement Purchase
Shares”); (iii) 3,200,000 shares we may sell to Lincoln
Park under the Purchase Agreement from time to time after the date
of this prospectus; and 2.5
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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129,035,167 shares of common stock.
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Shares of common stock to be outstanding after giving effect to the
issuance of 8,200,000 shares
under the Purchase Agreement registered
hereunder
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132,235,167
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 $10,000,000
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 7 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
129,035,167
shares of our common
stock outstanding as of June
25, 2020.
Unless we specifically state
otherwise, the share information in this prospectus
excludes:
●
3,845,335
shares of common stock issuable upon the exercise of stock options
at a weighted average exercise price of $1.37 per
share;
●
620,221 shares of
common stock issuable upon vesting of
outstanding restricted stock grants;
●
1,693,856 shares of
common stock issuable upon exercise of
outstanding warrants, with a weighted average exercise price of
$0.11 per share;
●
34,160,819 shares
of common stock issuable upon conversion
of the Company’s Series A Convertible Redeemable Preferred
Stock;
●
47,899 shares of
common stock issuable upon conversion of
the Company’s Series B Convertible Redeemable Preferred
Stock;
●
10,484,932 shares
of common stock issuable upon conversion
of the Company’s Series C Convertible Redeemable Preferred
Stock;
●
2,448,340
shares of common stock reserved for future issuance under the
Company’s 1999 Stock Option Plan;
●
3,471,295
shares of common stock issuable upon conversion of the
Company’s Convertible Notes Payable;
and
●
25,000,000 shares
of common stock reserved for future
issuance under the Company’s 2020 Omnibus Equity Incentive
Plan, which plan was approved by the Company’s stockholders
on June 5, 2020.
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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
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 included elsewhere in this prospectus, 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.
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, 2020 and December 31, 2019, we had negative
working capital of approximately $4,350,000
and $1,653,000, respectively. Our
principal source of liquidity at March 31, 2020 and
December 31, 2019 consisted of cash and cash equivalents of
$53,000 and $1,030,000,
respectively. Considering 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 $207.5 million at March 31, 2020 and
$203.2 million at December 31, 2019, and these losses may continue
in the future.
As of March 31, 2020 and December 31,
2019, we had an accumulated deficit of approximately
$207.5 million and $203.2
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 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 epidemic, poses 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. In addition, we are currently under a
shelter-in-place mandate and many of our clients worldwide are
similarly impacted.
Our operating results have fluctuated in the past and are likely to
fluctuate significantly 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 $2,000,000 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 computerized identity
management system, potential customers may take as long as eighteen
months to evaluate different systems 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 significant
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.
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.
One customer accounted for approximately 27% of
our total revenue during the three months ended March 31, 2020,
and two customers accounted for approximately
37% of our total revenue during the year ended December 31, 2019.
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, 2020, one customer accounted
for approximately 27% or $216,000 of our total revenue, and during
the year ended December 31, 2019, two customers accounted
for approximately 37% or $1,301,000 of
our total revenue. If this
customer were to significantly reduce its 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 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, particularly in
foreign countries. 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.
We are dependent upon third parties for the successful integration
of our products, and/or the launch of our products. Any delay in
the integration of our products or the launch of third-party
products may materially affect our results from operations and
financial condition.
Our current marketing
strategy involves the distribution of our products 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. Our strategy leaves us largely dependent upon the
successful rollout of our products by our distribution partners. We
have experienced delays in the rollout of our products due to these
factors during the three months ended March 31, 2020 and
during the year ended December 31, 2019, and no assurances
can be given that we will not experience delays in the future. Any
delays negatively affect our results from operations and financial
condition.
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.
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, as illustrated by the
recent Spectre and Meltdown threats, 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.
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.
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.
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 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 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 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 four
million shares of 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 June 25, 2020, we had three
series of preferred stock outstanding, the Series A Preferred,
Series B Preferred and Series C 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, 2020 and
December 31, 2019, we had cumulative dividends of approximately
$937,000 and $0, respectively, on our Series A
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, 2020 and
December 31, 2019, we had cumulative undeclared dividends on our
Series B Preferred of approximately $21,000 and $8,000,
respectively.
The
provisions of our Series C 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 C Preferred will be entitled to receive, in preference
to any distribution to the holders of common
stock, initial distributions of $10,000 per share,
plus all accrued but unpaid dividends. As of March 31, 2020
and December 31, 2019, we had cumulative dividends of $250,000 and
$0, respectively on our Series C Preferred.
Upon the occurrence of certain events, we may be required to redeem
all or a portion of our Series C Preferred.
On September 10, 2018, we filed the Series C COD
with the Secretary of State of the State of Delaware, pursuant to
which Holders of the Series C Preferred may require us to redeem
all or any portion of such Holder’s shares of Series C
Preferred at a price per share equal to the Stated Value plus all
accrued and unpaid dividends 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 COD). 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 Series C Preferred
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 Goldman
Capital Management and related entities controlled by Neal Goldman,
a member of our Board of Directors (together,
“Goldman”), Goldman beneficially owns, in the
aggregate, approximately 24% of the Company’s outstanding
voting securities as of June 25, 2020. As a
result, Goldman has the potential ability to exert influence over
both the actions of the Board of Directors and 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,
preferred stockholders could make it more difficult for a third
party to acquire us.
We
are also subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. Under these provisions, if
anyone becomes an “interested stockholder”, we may not
enter into a “business combination” with that person
for three years without special approval, which could discourage a
third party from making a takeover offer and could delay or prevent
a change of control. For purposes of Section 203, “interested
stockholder” means, generally, someone owning 15% or more of
our outstanding voting stock or an affiliate of ours that owned 15%
or more of our outstanding voting stock during the past three
years, subject to certain exceptions as described in Section
203.
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 B Preferred and Series C Preferred directly
limit our ability to pay cash dividends on our common
stock.
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
April 28, 2020, we entered into
the Purchase Agreement with Lincoln Park, as amended June 11, 2020,
pursuant to which Lincoln Park has committed to purchase up to
$10,250,000 of our common stock, including the Initial Purchase
Shares. Upon the execution of the Purchase Agreement, we issued
2.5 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
3,200,000 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 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 $10,250,000 worth of shares
of our common stock under our agreement over a 24-month period
generally in amounts up to 125,000 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. In addition to the 2.5 million Commitment Shares, the
1.0 million Initial Purchase
Shares, and the 1.5 million Commencement Purchase Shares, an
additional 3,200,000 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 date of the
Commencement. 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 $10,250,000. 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 $10,250,000
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
April 28, 2020 (the “Execution Date”), we entered into
a Purchase Agreement, as amended June 11, 2020, and a Registration
Rights Agreement, with Lincoln Park. Pursuant to the terms of the
Purchase Agreement, including stockholder approval of an amendment
to the Company’s Certificate of Incorporation to increase the
number of shares of the Company’s capital stock to 350.0
million shares, obtained from our shareholders effective June 9,
2020, we have the right, not the obligation, to sell to Lincoln
Park up to $10,250,000 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, and the Commencement Purchase Shares, which we
sold to Lincoln Park on June 11, 2020, 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 125,000 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. 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
8,200,000 shares of common
stock, representing 6.35% of
our issued and outstanding shares of common stock on June 15, 2020.
Regular Purchases
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
$10,250,000 of shares of common stock, including the Initial
Purchase Shares and the Commencement Purchase Shares.
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, once
the registration statement covering the resale of shares of common
stock, 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. The
maximum number of shares that may be purchased by Lincoln Park in
connection with a Regular Purchase is subject to change, based on
the closing price of our common stock on the date of the Purchase
Notice, as reported on the OTCQB. The following table summarizes
the maximum number of shares of common stock that may be purchased
by Lincoln Park in a single Regular Purchase under the Purchase
Agreement, based on the most recent closing price of our common
stock, as well as in the event the closing price of our common
stock is at least $0.25 per share, at or in excess of $0.25 per
share but less than $0.40 per share, and at or in excess
of $0.40 per share but less than $0.55 per share. In the
event the closing price of our common stock is in excess of $0.55
per share, Lincoln Park's maximum commitment in any single
Regular Purchase may not exceed $500,000.
Closing
Price Per Share, as reported on the OTCQB
|
|
Maximum
Number of Shares that may be Purchased by Lincoln Park during a
Regular Purchase
|
|
|
|
Less than
$0.25
|
|
Up to 125,000
shares
|
$0.25 or
higher
|
|
Up to 225,000
shares
|
$0.40 or
higher
|
|
Up to 325,000
shares
|
$0.55 or
higher
|
|
Up to 425,000
shares
|
More than
$0.55
|
|
No maximum;
provided, the aggregate Purchase Price (defined below) may not
exceed $500,000
|
|
|
|
Current ($0.39, as
of July 2, 2020)
|
|
Up to 225,000
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 our common stock on
the purchase date of such shares; and
●
the average of the
three lowest closing sale prices of our
common stock during the fifteen
consecutive business days ending on the business day immediately
preceding the purchase date of such shares.
Accelerated
Purchases
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 OTCQB (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.
Additional Accelerated Purchases
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 $0.25 (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 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.
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
our 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
our common stock from the
OTCQB, provided, however, that our 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.
Effect of Performance of the Purchase Agreement on Our
Stockholders
All
8,200,000 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 $10.25M Purchase
Agreement (3)
|
$0.10
|
3,200,000
|
6.2%
|
$320,000
|
$0.20
|
3,200,000
|
6.2%
|
$640,000
|
$0.31
|
3,200,000
|
6.2%
|
$992,000
|
$0.50
|
3,200,000
|
6.2%
|
$1,600,000
|
$1.00
|
3,200,000
|
6.2%
|
$3,200,000
|
(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
2.5 million Commitment Shares, previously issued to Lincoln Park,
nor the 1.0 million Initial Purchase Shares and 1.5 million
Commencement Purchase Shares previously sold to Lincoln Park.
Although the Purchase Agreement provides that we may sell up to
$10,250,000 of our common stock to Lincoln Park (including the 2.5
million Commitment Shares, the 1.0 million Initial Purchase Shares
and the 1.5 million Commencement Purchase Shares), we are only
registering 8,200,000 shares
(including the 2.5 million Commitment Shares, the 1.0 million
Initial Purchase Shares and the 1.5 million Commencement 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 129,035,167 shares outstanding as of
June 25,
2020, which includes (i) 2.5 million Commitment Shares, 1.0 million
Initial Purchase Shares and 1.5 million Commencement 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. Although the percentage of
outstanding shares beneficially owned by Lincoln Park after giving
effect to the issuance to Lincoln Park of all shares under the
Purchase Agreement is 6.2%, the Purchase Agreement restricts the
total percentage of outstanding shares beneficially owned by
Lincoln Park at 4.99%.
(3)
Does
not include $100,000 proceeds from sale of 1.0 million Initial
Purchase Shares nor $150,000 proceeds from sale of 1.5
million Commencement Purchase Shares.
SELLING STOCKHOLDER
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 April 28, 2020 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 April 28, 2020. 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)
|
|
5,000,000 (2)
|
|
|
3.87%
(3)
|
|
|
8,200,000 (4)
|
|
|
0.00%
|
(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; (ii) the 1.5 million shares sold to Lincoln Park as
Commencement Purchase Shares under the Purchase Agreement; and
(iii) 2.5 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 129,035,167
shares of our common stock outstanding as
of June 25,
2020.
(4)
Although the
Purchase Agreement provides that we may sell up to $10,250,000 of
our common stock to Lincoln Park, in addition to the 2.5 million Commitment Shares, the 1.0 million Initial Purchase Shares and
the 1.5 million Commencement Purchase Shares, an additional
3,200,000 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 $10,250,000 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 $10,000,000 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
345,000,000 shares of our common stock, $0.01 par value per share,
and 5,000,000 shares of preferred stock, $0.01 par value per
share.
As of
June 25, 2020, we had
129,035,167
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 three series of preferred stock, Series A Convertible
Preferred (“Series A
Preferred”), Series
B Convertible Redeemable Stock (“Series B
Preferred”) and
Series C Convertible Preferred (“Series C
Preferred”). As of
June 25, 2020, there were 37,468 shares of
Series A Preferred issued and outstanding, 239,400 shares of series
B Preferred issued and outstanding and 1,000 shares of Series C
Preferred issued and 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 and Series C Preferred Stock accrue dividends at a
rate of 8% if paid in cash and 10% if paid with common stock, which
dividends are payable quarterly.
DESCRIPTION OF OUR
BUSINESS
ImageWare Systems,
Inc., a Delaware corporation since 2005 and previously incorporated
in California in 1987 as a California corporation, has its
principal place of business at 13500 Evening Creek Drive N, Suite
550, San Diego, California 92128. We maintain a corporate website
at www.iwsinc.com.
Our common stock, par value $0.01 per share (“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
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 and its “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 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 are integrated
into the IWS Biometric Engine.
Our IWS
Biometric Engine is a patented biometric identity management
software platform for multi-biometric enrollment, management and
authentication, managing population databases of virtually
unlimited sizes. 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”)
based search engine, enabling developers and system integrators to
implement a biometric solution or integrate biometric capabilities
into existing applications without having to derive biometric
functionality from preexisting applications.
Our
secure credential solutions empower customers to create secure and
smart digital identification documents with complete ID systems. We
develop, sell and support software and design systems that utilize
digital imaging and biometrics in the production of 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 cards and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
or governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine to our secure credential product
line.
The Company is also a
developer of a biometric based multi-factor authentication
(“MFA”)
cloud-based service. The service, GoVerifyID® brings together
cloud and mobile technologies to offer multi-factor authentication
for smartphone users, for the enterprise, and across industries.
GoVerifyID® consists of mobile and desktop client applications
and a cloud-based Software-as-a-Service (“SaaS”)
which services cloud-based template matching requests for
authentication requests. GoVerifyID® is leveraged by product
developers to enable biometric authentication for their consumers
and enterprises securing access to company property and IP. For the
enterprise, GoVerifyID® provides turnkey integration with
Microsoft Windows, Microsoft Active Directory, CA SSO, IBM Security
Access Manager (“ISAM”),
SAP Cloud Platform, Fujitsu's RunMyProcess 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/SMT 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 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
other biometrics such as iris or DNA.
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. Our offices are currently under a shelter-in-place mandate and
many of our clients worldwide are similarly
impacted. The global outbreak of COVID-19
continues to rapidly evolve, and the extent to which COVID-19
may impact our business and the markets we serve will depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, such as the ultimate geographic spread
of the disease, 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 in the United States and other countries to contain
and treat the disease. We are continuing to vigilantly
monitor the situation with our primary focus on the health and
safety of our employees and clients.
Solutions and
Products
Our
identity management solutions are primarily focused around
biometrics and secure credentials providing complete,
cross-functional and interoperable systems.
IWS Biometric Engine. This is a
biometric identity management platform 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), X:N (investigative) and N:N (database integrity).
IWS Biometric Engine 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,
hand geometry, palm, signature, DNA, voice, 3D face and retina. The
IWS Biometric Engine is available as an SDK, as well as a platform
for custom configurations to meet specific customer requirements.
The added suite of products provides government, law enforcement,
border management and enterprise businesses with a wide variety of
application-specific solutions that address specific government
mandates and technology standards. It also provides users with the
ability to integrate into existing legacy systems and expand based
upon specific customer requirements.
GoVerifyID®. The Company introduced
GoVerifyID®, a multi-factor biometric authentication solution
for the enterprise markets on November 14, 2016. Our GoVerifyID
products support multi-modal biometric authentication including,
but not limited to, face, voice, fingerprint, iris, palm, and more.
All the biometrics can be combined with or used as replacements for
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.
GoVerifyID provides patented multi-modal biometric identity
authentication that can be used in place of passwords or as a
strong second factor authentication method. GoVerifyID is provided
as a cloud-based Software-as a-Service (“SaaS”) solution, thereby,
eliminating complex IT deployment of biometric software and
eliminating startup costs. GoVerifyID works with existing mobile
devices, eliminating the need for specialized biometric scanning
devices typically used with most biometric solutions.
IWS EPI Suite. This is an ID
software solution for producing, issuing, and managing secure
credentials and personal identification cards. Users can
efficiently manage large amounts of data, images and card designs,
as well as track and issue multiple cards per person, automatically
populate multiple cards and eliminate redundant data entry. 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, school boards 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.
IWS Law Enforcement. IWS Law
Enforcement is a digital booking, identification and investigative
solution that enables users to digitally capture, store, search and
retrieve images and demographic data, including mugshots,
fingerprints and 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 and electronic mug books, and production of
identification cards and credentials. IWS Law Enforcement also
uses off-the-shelf hardware and is designed to comply with open
industry standards so that it can operate on an array of systems
ranging from a stand-alone personal computer to a wide area
network. 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.
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.
Facial Recognition. This
software module uses biometric facial recognition and retrieval
technology to help authorities identify possible suspects. Images
taken from surveillance videos or photographs can be searched
against a digital database of facial images to retrieve any desired
number of faces with similar characteristics. This module can also
be used at the time of booking to identify persons using multiple
aliases. Using biometrics-based technology, the application can
search through thousands of facial images in a matter of seconds,
reducing the time it would otherwise take a witness to flip through
a paper book of facial images that may or may not be similar to the
description of the suspect. The Facial Recognition module then
creates a selection of possible matches ranked in order of
similarity to the suspect, and a percentage confidence level is
attributed to each possible match. The application incorporates
search engine technology, which we license from various facial
recognition algorithm providers.
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. QuickCapture 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.
Maintenance and Customer Support
Maintenance and support enrollment entitle software license
customers to technical support services, including telephone and
internet support and problem resolution services, and the right to
receive unspecified product upgrades, maintenance releases and
patches released during the term of the support period on a
when-and-if-available basis. Maintenance and support service fees
are an important source of recurring revenue, and we invest
significant resources in 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. Our secure
credential products are also being used in Australia, Canada, the
United Arab Emirates, Kuwait, Saudi Arabia, Mexico, Colombia, Costa
Rica, Venezuela, Singapore, Indonesia and the Philippines.
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, as compared to
two customers that accounted for approximately 37% or
$1,301,000 of total revenue and had $161,000 trade receivables as
of the year ended December 31, 2019.
Our Strategy
Our
strategy is to provide biometric-based identity management
solutions to governments and enterprises through key partners and
large systems integrators and by 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 uncovered over the coming years,
many problems have been immediately realized by corporations and
government agencies, which are diligently looking for solutions to
these new challenges.
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. GoVerifyID®
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 GoVerifyID® as a solution as a solution
for protecting corporate systems during this time of increased
awareness and opportunity, leveraging targeted web ads and our
inside sales team to increase sales through the increased need to
securely provide remote access to employees.
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
authentication for retail, finance, government services 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. Over the
next year we will work with customers, partners, and sales
prospects to leverage and integrate existing product assets to
support an end-to-end workflow. Enroll, Validate, Credential and
Authenticate. A streamlined, scalable solution to capture biometric
data from individuals and then make them usable through smart card
and mobile-based access management and authentication to support
the operationalization of biometrics in a way that is cost
effective, transparent and secure.
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, Quick Capture. Quick Capture streamlines
the process of capturing biometrics from perpetrators. The law
enforcement market will immediately benefit from this product, but
we also believe we can leverage this into new places such as;
corporate, academia, hospitality, entertainment. We will continue
to strategically invest our law enforcement product
offerings.
We
believe the increasing demand for biometric technology will drive
demand for our solutions. Our identity management products are
built to accommodate the use of biometrics and meet the demanding
requirements across the entire identity life cycle.
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 and may impact our strategy. A pandemic,
including COVID-19 or other public health epidemic, poses
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 and causing 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.
Sales and Marketing
We
market and sell our products in most major world markets directly
through our sales force and indirectly through channel partners,
including resellers, distributors and systems integrators. Our
sales force includes both field, and an 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 that conducts sales, sales support, professional
services, and support, marketing and product distribution services
from a number of international offices. In addition to our sales
offices located in San Diego CA, we also conduct Sales activities
in Canada, Mexico, Chile, Australia, and Japan. Our product
manufacturing and distribution operations are based in San Diego
CA, and Portland OR. 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
We
license our software under both perpetual and term license models
for customer on-premise use. Under perpetual license arrangements,
our customers receive the perpetual license right to use our
software in conjunction with related maintenance and support
services that are generally purchased on an annual or multi-year
basis. Under term license arrangements, our customers receive
license rights to use our software along with bundled maintenance
and support services for the term of the contract. The majority of
our contracts provide customers with the right to use one or more
of our products up to a specific license capacity. Capacity can be measured in many ways,
including the number of servers, number of users, or
identities.
Software as a Service Business Model
We also provide on-demand SaaS
offerings for certain of our products. With the advent of
cloud-based computing and the proliferation of smart mobile
devices, which allow for reliable biometric capture and the need to
secure access to data, products and services, the Company believes
that the market for multi-biometric solutions will expand to
encompass significant deployments of biometric systems in the
commercial and consumer markets.
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), X:N
(investigative), 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, hand
geometry, palm, DNA, signature, voice, 3D face and
retina.
Our
multi-biometric product faces competition from French-based Safran,
Irish-based Daon, 3M 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 500 corporations and large
government agencies;
●
the
ease of integrating our technology into other complex applications;
and
●
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.
Our
software faces competition from Datacard Corporation, a privately
held manufacturer of hardware, software and consumables for the ID
market, as well as small, regionally based companies.
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; and
●
the
responsiveness, availability and reliability of our customer
support.
Our law
enforcement product line faces competition from other companies
such as DataWorks Plus and 3M. 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 in the first to file patents related to
multi-modal biometrics and currently are the worldwide leader in
multi-modal biometric patents, with 23 issued patents worldwide and
18 patents pending. These technologies allow biometric
matching using any type of biometric modality for identity
verification while protecting the privacy of an individual. It is
our belief that such technology will be critical to providing
biometric management solutions for the consumer market where
privacy protection has been a historical issue and barrier to
biometric adoption.
Employees
We
had a total of 65 and 75 full-time employees as of
March 31, 2020 and December 31, 2019, respectively.
As of March 31, 2020, we have
57 employees based in the United States,
5 employees based in Canada and 3
employees based in
other countries. 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.
Legal Proceedings
There is currently 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.
Additional Available Information
We make
available, free of charge, at our corporate website www.iwsinc.com copies of our
annual reports filed with the United States Securities and Exchange
Commission (“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 the emerging market for
biometrically enabled software-based identity management solutions.
Using those human characteristics that are unique to us all, we
create software that provides a highly reliable indication of a
person’s identity. Our “flagship” product is our
patented IWS Biometric Engine®. Scalable for small city
business or worldwide deployment, our IWS Biometric Engine is a
multi-biometric software platform that is hardware and algorithm
independent, enabling the enrollment and management of unlimited
population sizes. It allows a user to utilize one or more
biometrics on a seamlessly integrated platform. Our products are
used to manage and issue secure credentials, including national
IDs, passports, driver licenses and access control credentials. Our
products also provide law enforcement with integrated mug shot,
LiveScan fingerprint and investigative capabilities. We also
provide comprehensive authentication security software using
biometrics to secure physical and logical access to facilities or
computer networks or Internet sites. Biometric technology is now an
integral part of all markets we address, and all of our products
are integrated into the IWS Biometric Engine.
With
the advent of cloud-based computing and the proliferation of smart
mobile devices, which allow for reliable biometric capture and the
need to secure access to data, products and services, the Company
believes that the market for multi-biometric solutions will expand
to encompass significant deployments of biometric systems in the
commercial and consumer markets. The Company therefore intends to
leverage the strength of its experience servicing existing
government clients who have deployed the Company’s products
for large populations, as well as its foundational patent portfolio
in the field of multi-modal biometrics and the fusion of multiple
biometric algorithms, to address the growing commercial and
consumer market.
Our
biometric technology is a core software component of an
organization’s security infrastructure and includes a
multi-biometric identity management solution for enrolling,
managing, identifying and verifying the identities of people by the
physical characteristics of the human body. We develop, sell and
support various identity management capabilities within government
(federal, state and local), law enforcement, commercial
enterprises, and transportation and aviation markets for
identification and verification purposes. Our IWS Biometric Engine
is a patented biometric identity management software platform for
multi-biometric enrollment, management and authentication, managing
population databases of virtually unlimited sizes. 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 an
SDK based search engine, enabling developers and system integrators
to implement a biometric solution or integrate biometric
capabilities into existing applications without having to derive
biometric functionality from pre-existing applications. The IWS
Biometric Engine combined with our secure credential platform, IWS
EPI Builder, provides a comprehensive, integrated biometric and
secure credential solution that can be leveraged for high-end
applications such as passports, driver licenses, national IDs, and
other secure documents.
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/SMT image lineups and electronic mugbooks; 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 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
other biometrics such as iris or DNA.
Our
secure credential solutions empower customers to create secure and
smart digital identification documents with complete ID systems. We
develop, sell and support software and design systems which utilize
digital imaging and biometrics in the production of 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 the production of digital
identification cards and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
or governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine to our secure credential product
line.
Our enterprise authentication software includes
the IWS Desktop Security product, which is a comprehensive
authentication management infrastructure solution providing added
layers of security to workstations, networks and systems through
advanced encryption and authentication technologies. IWS Desktop
Security is optimized to enhance network security and usability,
and uses multi-factor authentication methods to protect access,
verify identity and help secure the computing environment without
sacrificing ease-of-use features such as quick login. Additionally,
IWS Desktop Security provides an easy integration with various
smart card-based credentials including the Common Access Card
(“CAC”), Homeland Security Presidential Directive
12 (“HSPD-12”), Personal Identity Verification
(“PIV”) credential, and Transportation Worker
Identification Credential (“TWIC”) with an organization’s access
control process. IWS Desktop Security provides the crucial
end-point component of a Logical Access Control System
(“LACS”), and when combined with a Physical Access
Control System (“PACS”), organizations benefit from a complete
door to desktop access control and security
model.
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 through April, as federal, state and local governments
react to the public health crisis, creating significant
uncertainties in both the worldwide and the United States
economies. In the interest of public health and safety,
jurisdictions (international, national, state and local), required
and continue to require mandatory office closures. As of the date
of this report, while our employees are working remotely, all of
our facilities are closed. 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,
deferred tax asset valuation allowances, recoverability of
goodwill, assumptions used in the Black-Scholes model to calculate
the fair value of share based payments, fair value of Series A
Preferred, fair value of derivatives issued with and affected by
the Series C Preferred Financing, 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”)
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.
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.
Valuation
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 goodwill impairment test in the fourth quarter of
each year, or if required, at the end of each fiscal quarter.
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, 2020 or the year ended
December 31, 2019.
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, 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–.
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 of Directors. 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 Internal Revenue Code of 1986 (the
“Code”).
Pursuant
to the adoption of the 2020 Plan, such plan will supersede and
replace the Company’s 1999 Stock Option Plan (the “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.
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. 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. There were no options granted during the three months
ended March 31, 2020. Historical volatility factors utilized in the
Company’s Black-Scholes computations for options granted
during the years ended December 31, 2019 and 2018 ranged
from 64% and 57%.
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 2019 and 2018 as computed by this method 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 were 2.58% for the years ended December
31, 2019 and 2018. 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 0% for corporate officers, 4.1%
for members of the Board of Directors and 6.0% for all other
employees. The Company reviews the expected forfeiture rate
annually to determine if that percent is still reasonable based on
historical experience.
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 and 2012, 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, binomial stock price models and variable
conversion probabilities.
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 in the Notes to the Consolidated
Financial Statements.
Results of Operations
This
management’s discussion and analysis of financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and related notes contained
elsewhere in this prospectus.
Comparison of the Three Months Ended March 31, 2020 to the Three
Months Ended March 31, 2019
Product
Revenue
|
Three
Months Ended
March
31,
|
|
|
Net Product Revenue
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Software and
royalties
|
$ 125
|
$ 111
|
$ 14
|
13%
|
Percentage of total
net product revenue
|
83%
|
40%
|
|
|
Hardware and
consumables
|
$ 14
|
$ 11
|
$ 3
|
27%
|
Percentage of total
net product revenue
|
9%
|
4%
|
|
|
Services
|
$ 11
|
$ 156
|
$ (145)
|
(93)%
|
Percentage of total
net product revenue
|
7%
|
56%
|
|
|
Total net product
revenue
|
$ 150
|
$ 278
|
$ (128)
|
(46)%
|
Software and
royalty revenue increased approximately $14,000 during the three
months ended March 31, 2020 as compared to the corresponding period
in 2019. This increase is attributable
to higher royalty revenue
of approximately $19,000, higher law
enforcement project related revenue of approximately $2,000 offset
by lower identification project related revenue of approximately
$7,000.
Revenue from the sale of hardware and consumables
increased approximately $3,000
during the three months ended March 31, 2020 as compared to the
corresponding period in 2019 due to an increase in consumables
procurement by our customers.
Services revenue is comprised primarily of
software integration services, system installation services and
customer training. Such revenue decreased approximately
$145,000 during the three months ended March 31, 2020 as compared
to the corresponding period in 2019. The decrease results
from the completion of the service
element in certain project related work completed during the three
months ended March 31, 2019.
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 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,
2020, we have focused on
strategically updating our products with the latest mobile and
cloud technology prioritized by market opportunities. We will be
relaunching 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 2020 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 the both law enforcement and
non-governmental sectors including commercial, consumer and
healthcare applications further resulting in additional
implementations of both our GoVerify ID® products and Identity
Platform products.
Maintenance Revenue
|
Three
Months Ended
March
31,
|
|
|
Maintenance Revenue
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Total maintenance
revenue
|
646
|
$ 653
|
$ (7)
|
(1)%
|
Maintenance
revenue was approximately $646,000 for the three months ended March
31, 2020, as compared to approximately $653,000 for the
corresponding period in 2019. For the three months ended March
31, 2020, identity management maintenance revenue was approximately
$317,000 as compared to $328,000 for the comparable period in
2019. The decrease in identity management maintenance revenue
of approximately $11,000 reflects the expiration of certain
maintenance contracts. Law enforcement maintenance revenue was
approximately $329,000 and $325,000 for the three months ended
March 31, 2020 and 2019. This increase of approximately $4,000 is
primarily due to the expansion of our law enforcement customer
installed base.
We
anticipate growth of our maintenance revenue through the retention
of existing customers combined with the continued expansion of our
installed base resulting from the completion of project-oriented
work; however, we cannot predict the timing of this anticipated
growth, if ever. Furthermore, we cannot predict how the effects of
the COVID-19 pandemic, discussed more fully elsewhere in this
Quarterly Report may affect our future growth.
Cost of Product Revenue
|
Three
Months Ended
March
31,
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Software and
royalties
|
$ 14
|
$ —
|
$ 14
|
100%
|
Percentage of
software and royalty product revenue
|
11%
|
0%
|
|
|
Hardware and
consumables
|
$ 6
|
$ 8
|
$ (2)
|
(25)%
|
Percentage of
hardware and consumables product revenue
|
43%
|
73%
|
|
|
Services
|
$ 1
|
$ 76
|
$ (75)
|
(99)%
|
Percentage of
services product revenue
|
9%
|
49%
|
|
|
Total product cost
of revenue
|
$ 21
|
$ 84
|
$ (63)
|
75%
|
Percentage of total
product revenue
|
14%
|
30%
|
|
|
The
cost of software and royalty product revenue increased
approximately $14,000 for the three months ended March 31, 2020 as
compared to the corresponding period in 2019 due primarily to
certain fixed third-party software license
costs.
The cost of services revenue decreased
approximately $75,000 during the three months ended March 31, 2020
as compared to the corresponding period in 2019.
This
decrease reflects lower service revenue of approximately
$145,000. In addition to
changes in costs of services product revenue caused by revenue
level fluctuations, costs of services can vary as a percentage of
service revenue from period to period depending upon both the level
and complexity of professional service resources utilized in the
completion of the service element.
Cost of Maintenance Revenue
Maintenance cost of revenue
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
Total maintenance
cost of revenue
|
$ 98
|
$ 120
|
$ (22)
|
(18)%
|
Percentage of total
maintenance revenue
|
15%
|
18%
|
|
|
Cost of maintenance revenue
decreased approximately $22,000 during the three months ended March
31, 2020 as compared to the corresponding period in 2019, resulting
principally from lower maintenance labor costs incurred during the
months ended March 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 and reductions in
headcount in our customer support
department.
Product
Gross Profit
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and
royalties
|
$ 111
|
$ 111
|
$ —
|
—%
|
Percentage of
software and royalty product revenue
|
89%
|
100%
|
|
|
Hardware and
consumables
|
$ 8
|
$ 3
|
$ 5
|
167%
|
Percentage of
hardware and consumables product revenue
|
57%
|
27%
|
|
|
Services
|
$ 10
|
$ 80
|
$ (70)
|
(88)%
|
Percentage of
services product revenue
|
91%
|
51%
|
|
|
Total product gross
profit
|
$ 129
|
$ 194
|
$ (65)
|
(34)%
|
Percentage of total
product revenue
|
86%
|
70%
|
|
|
Software and royalty gross profit approximated
$111,000 for the three months ended March 31, 2020 and the
corresponding period in 2019. 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
$70,000 during the three months ended March 31, 2020 as compared to
the corresponding period in 2019, with such decrease primarily
resulting from lower service revenue of
approximately $145,000 combined
with lower cost of service revenue
of approximately $75,000 for the three months ended March 31, 2020 as compared to
the corresponding period in 2019.
Maintenance
Gross Profit
Maintenance gross profit
|
Three
Months Ended
March
31,
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Total maintenance
gross profit
|
$ 548
|
$ 533
|
$ 15
|
3%
|
Percentage of total
maintenance revenue
|
85%
|
82%
|
|
|
Gross
profit related to maintenance revenue increased approximately
$15,000 for the three months ended March 31, 2020 as compared to
the corresponding period in 2019. This increase results from lower
maintenance revenue of approximately $7,000 due to the expiration
of certain Identification customer maintenance contracts offset by
lower cost of maintenance revenue of approximately $22,000 due to
headcount reductions in our service department combined with lower
maintenance labor cost incurred during the same period due to the
composition of engineering resources used in the provision of
maintenance services.
Operating
Expense
|
Three
Months Ended
March
31,
|
|
|
Operating expense
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
$ 983
|
$ 1,107
|
$ (124)
|
(11)%
|
Percentage of total
net revenue
|
123%
|
119%
|
|
|
Sales and
marketing
|
$ 1,058
|
$ 1,005
|
$ 53
|
5%
|
Percentage of total
net revenue
|
133%
|
108%
|
|
|
Research and
development
|
$ 1,868
|
$ 1,774
|
$ 94
|
5%
|
Percentage of total
net revenue
|
235%
|
191%
|
|
|
Depreciation and
amortization
|
$ 18
|
$ 19
|
$ (1)
|
(5)%
|
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 decrease of approximately $124,000 in general and
administrative expense for the three months ended March 31, 2020 as
compared to the corresponding period in 2019 is comprised of the
following major components:
●
Decrease
in personnel related expense of approximately
$56,000;
●
Decreases
in professional services of approximately $106,000, which includes
lower Board of Director fees of approximately $72,000, lower
contractor fees of approximately $2,000, lower contract services of
approximately $43,000 and lower investor relations fees of
approximately $26,000 offset by higher general corporate expense of
approximately $11,000, higher legal fees of approximately $22,000,
and audit fees of approximately
$4,000;
●
Increase
in travel, insurances, licenses, dues, rent, and office related
costs of approximately $13,000;
●
Increase in
financing related expense of approximately $50,000; and
●
Decrease
in stock-based compensation expense of approximately
$25,000.
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.
The dollar increase in sales and marketing expense of approximately
$53,000 during the three months ended March 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 $18,000 driven
primarily by headcount reductions;
●
Recognition
of approximately $154,000 in severance related
costs;
●
Decrease in contractor fees, contract services and
dues and subscriptions of approximately $2,000 resulting from
increased utilization of certain sales consultants of approximately
$13,000, higher contract services of approximately $47,000 offset
by lower marketing dues and subscription expense of approximately
$62,000 ;
●
Decrease
in travel, trade show expense and office related expense of
approximately $67,000;
●
Decrease
in stock-based compensation expense of approximately $11,000;
and
●
Decrease
in our Mexico sales office expense and other of approximately
$3,000.
We
anticipate that the level of expense incurred for sales and
marketing during the year ended December 31, 2020 will increase as
we pursue large project solution opportunities, however we cannot
predict how the effects of the COVID-19 pandemic, discussed more
fully elsewhere in this Quarterly Report may affect our level of
anticipated expenditures.
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.
Research and development expense increased approximately $94,000
for the three months ended March 31, 2020, as compared to the
corresponding period in 2019, due primarily to the following major
components:
●
Decrease
in personnel related expense of approximately $13,000 due to
headcount reductions offset by lower capitalized labor into work in
process inventory of approximately $13,000 related to in-process
projects;
●
Increase in contractor fees and contract services
of approximately $64,000 for services related to the accelerated
development of mobile identity management ;
●
Decrease in stock-based compensation of
approximately $5,000;
and
●
Increase in rent, office related expense and
engineering tools and supplies of approximately $35,000
.
Our level of expenditures in research and development reflects our
belief that to maintain our competitive position in markets
characterized by rapid rates of technological advancement, we must
continue to invest significant resources in new systems and
software as well as continue to enhance existing
products.
Depreciation and Amortization
During
the three months ended March 31, 2020 and 2019, depreciation and
amortization expense was approximately $18,000 and $19,000,
respectively. 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, 2020, we recognized interest
income of $1,000 and interest expense of approximately $25,000. For
the three months ended March 31, 2019, we recognized interest
income of approximately $22,000 and interest expense of $0. The
decrease in interest income of approximately $21,000 for the three
months ended March 31, 2020 as compared to the corresponding period
in 2019 reflects lower interest earned on lower cash balances.
Interest expense of approximately $25,000 for the three months
ended March 31, 2020 reflects interest incurred on a related party
factoring agreement.
Change in Fair
Value of Derivative Liabilities
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 other income under the caption
“(Gain) loss on change in fair value of derivative
liabilities” in our condensed consolidated statement of
operations for three months ended March 31,
2020.
For the three
months ended March 31, 2019, we recognized expense of approximately
$424,000 from the increase of derivative liabilities arising from
the consummation of the Series C Financing in September 2018. Such
increase was determined by management using fair value
methodologies and is included as an expense under the caption
“(Gain) loss on change in fair value of derivative
liabilities” in our condensed consolidated statement of
operations for three months ended March 31,
2019.
Comparison of Results for Fiscal Years Ended December 31, 2019 and
2018
Product
Revenue
|
Twelve Months Ended
December 31,
|
|
|
Net Product Revenue
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Software
and royalties
|
$489
|
$1,334
|
$(845)
|
(63)%
|
Percentage
of total net product revenue
|
53%
|
76%
|
|
|
Hardware
and consumables
|
$96
|
$133
|
$(37)
|
(28)%
|
Percentage
of total net product revenue
|
10%
|
7%
|
|
|
Services
|
$338
|
$294
|
$44
|
15%
|
Percentage
of total net product revenue
|
37%
|
17%
|
|
|
Total
net product revenue
|
$923
|
$1,761
|
$(838)
|
(48)%
|
Software and royalty revenue decreased 63% or
approximately $845,000 during the year ended December 31, 2019 as
compared to the corresponding period in 2018. This decrease is
attributable to lower identification project related revenue of
approximately $705,000, lower law enforcement project related
revenue of approximately $76,000, lower sales of boxed identity
management software sold through our distribution channel of
approximately $21,000 and lower royalty revenue of approximately
$43,000. The decrease in
identification project related revenue is reflective of additional
software licenses sold into existing identification projects caused
by increased end-user utilization during the twelve months ended
December 31, 2018. The decrease in royalty revenue results
primarily from lower reported usage from certain customers and 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.
Revenue
from the sale of hardware and consumables decreased approximately
$37,000 during the year ended December 31, 2019 as compared to the
corresponding period in 2018 due to a decrease in project related
solutions containing hardware and consumables and a decrease
in replacement hardware procurement by our customers.
Services revenue is comprised primarily of
software integration services, system installation services and
customer training. Such revenue increased $44,000 during the
year ended December 31, 2019 as compared to the corresponding
period in 2018, due to an
increase in the service element of project related work completed
during the year ended December 31, 2019.
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 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 twelve months ended December
31, 2019, we continued our efforts to move the Biometric Engine
into cloud and mobile markets, and expand our end-user market into
non-government sectors, including commercial, consumer and
healthcare applications. Our approach to the markets we serve
is to partner with larger integrators as resellers who have both
the infrastructure and resources to sell into the worldwide market.
We rely upon these partners for guidance as to when they expect
revenue for our products to begin to ramp. During the year
ended December 31, 2019 we saw
additional customers implement GoVerify ID®, our cloud based
mobile biometric authentication software as a service.
Management believes that additional implementations will occur
resulting in increased identities under
management.
Maintenance Revenue
|
Twelve Months Ended
December 31,
|
|
|
Maintenance Revenue
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Total
maintenance revenue
|
$2,583
|
$2,643
|
$(60)
|
(2)%
|
Maintenance
revenue was approximately $2,583,000 for the year ended December
31, 2019, as compared to approximately $2,643,000 for the
corresponding periods in 2018. For the year ended December 31,
2019, identity management maintenance revenue was approximately
$1,275,000 as compared to $1,344,000 for the comparable period in
2018. The decrease in identity management maintenance revenue
of approximately $69,000 reflects the expiration of certain
maintenance contracts. Law enforcement maintenance revenue was
approximately $1,308,000 for the twelve months ended December 2019
as compared to $1,299,000 for the comparable period in 2018. This
increase of approximately $9,000 is primarily due to the expansion
of our law enforcement customer installed base.
We
anticipate growth of our maintenance revenue through the retention
of existing customers combined with the continued expansion of our
installed base resulting from the completion of project-oriented
work; however, we cannot predict the timing of this anticipated
growth, if ever. Furthermore, we cannot predict how the effects of
the COVID-19 pandemic, discussed more fully elsewhere in this
prospectus may affect our future growth.
Cost of Product Revenue
|
Twelve Months Ended
December 31,
|
|
|
Cost of Product Revenue:
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Software
and royalties
|
$36
|
$11
|
$25
|
227%
|
Percentage
of software and royalty product revenue
|
7%
|
1%
|
|
|
Hardware
and consumables
|
$66
|
$92
|
$(26)
|
(28)%
|
Percentage
of hardware and consumables product revenue
|
69%
|
69%
|
|
|
Services
|
$116
|
$102
|
$14
|
14%
|
Percentage
of services product revenue
|
34%
|
35%
|
|
|
Total
product cost of revenue
|
$218
|
$205
|
$13
|
6%
|
Percentage
of total product revenue
|
24%
|
12%
|
|
|
The
cost of software and royalty product revenue increased
approximately $25,000 despite lower software and royalty revenue
for the year ended December 31, 2019 as compared to the
corresponding period in 2018 due to the 2019 period containing
certain fixed third-party software license costs and the 2018
period containing significant software license revenue with minimal
third-party license costs.
The cost of product
revenue for our hardware and consumable sales during the year ended
December 31, 2019 decreased approximately
$26,000 as
compared to the corresponding period in 2018 due primarily to lower
hardware and consumable product revenue of approximately
$37,000 during the 2019
period.
Cost of services
revenue increased approximately $14,000 during the year ended
December 31, 2019 as compared to the corresponding period in 2018.
This increase reflects higher service revenue of approximately
$44,000. In addition to changes
in costs of services product revenue caused by revenue level
fluctuations, costs of services can vary as a percentage of service
revenue from period to period depending upon both the level and
complexity of professional service resources utilized in the
completion of the service element.
Cost of Maintenance Revenue
Maintenance cost of revenue
|
Twelve Months Ended
December 31,
|
|
|
(dollars in thousands)
|
|
|
|
|
Total
maintenance cost of revenue
|
$425
|
$671
|
$(246)
|
(37)%
|
Percentage
of total maintenance revenue
|
16%
|
25%
|
|
|
Cost
of maintenance revenue decreased approximately $246,000 during the
year ended December 31, 2019 as compared to the corresponding
period in 2018, resulting principally from lower maintenance labor
costs incurred during the year ended December 31, 2019 as compared
to the corresponding period in 2018 due primarily to the
composition of engineering resources used in the provision of
maintenance services and reductions in headcount in our customer
support department.
Product
Gross Profit
|
Twelve
Months Ended
December
31,
|
|
|
Product
gross profit
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Software and
royalties
|
$453
|
$1,323
|
$(870)
|
(66)%
|
Percentage of
software and royalty product revenue
|
93%
|
99%
|
|
|
Hardware and
consumables
|
$30
|
$41
|
$(11)
|
(27)%
|
Percentage of
hardware and consumables product revenue
|
31%
|
31%
|
|
|
Services
|
$222
|
$192
|
$30
|
16%
|
Percentage of
services product revenue
|
66%
|
65%
|
|
|
Total product gross
profit
|
$705
|
$1,556
|
$(851)
|
(55)%
|
Percentage of total
product revenue
|
76%
|
88%
|
|
|
Software and royalty gross profit decreased 66% or
approximately $870,000 for the year ended December 31, 2019 as
compared to the corresponding period in 2018, due primarily to lower
software and royalty revenue of approximately $845,000 combined
with higher software and royalty cost of revenue of approximately
$25,000 for the same
period. This increase in
software and royalty cost of revenue despite lower software and
royalty revenue during the 2019 period as compared to the
comparable 2018 period reflects the 2018 period containing software
revenue with extremely minimal third-party software costs whereas
the 2019 period did not contain similar revenues with related
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 decreased
approximately $11,000 for the year ended December 31, 2019, as
compared to the 2018 period. This decrease resulted
from lower sales of hardware and consumables revenues of
approximately $37,000
combined
with corresponding lower cost of hardware and consumables product
revenue of $26,000
for the
year ended December 31, 2019 as compared to the corresponding
period in 2018.
Services gross profit increased approximately
$30,000 during the year ended December 31, 2019, as compared to the
corresponding period in 2018, with such increase primarily
resulting from higher service revenue
of approximately $44,000 combined with higher cost of service
revenue of approximately $14,000 for the year ended December 31,
2019 as compared to the corresponding period in
2018.
Maintenance
Gross Profit
Maintenance gross profit
|
Twelve
Months Ended
December
31,
|
|
|
(dollars in thousands)
|
|
|
|
|
Total
maintenance gross profit
|
$2,158
|
$1,972
|
$186
|
9%
|
Percentage
of total maintenance revenue
|
84%
|
75%
|
|
|
Gross
profit related to maintenance revenue increased 9% or approximately
$186,000 for the year ended December 31, 2019 as compared to the
corresponding period in 2018. This increase results from lower
maintenance revenue of approximately $60,000 due to the expiration
of certain Identification customer maintenance contracts offset by
lower cost of maintenance revenue of approximately $246,000 due to
headcount reductions in our service department combined with lower
maintenance labor cost incurred during the same period due to the
composition of engineering resources used in the provision of
maintenance services.
Operating
Expense
|
Twelve
Months Ended
December
31,
|
|
|
Operating expense
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
General
and administrative
|
$3,614
|
$4,285
|
$(671)
|
(16)%
|
Percentage
of total net revenue
|
103%
|
97%
|
|
|
Sales
and marketing
|
$3,937
|
$3,571
|
$366
|
10%
|
Percentage
of total net revenue
|
112%
|
81%
|
|
|
Research and
development
|
$7,488
|
$7,351
|
$137
|
2%
|
Percentage
of total net revenue
|
214%
|
167%
|
|
|
Depreciation
and amortization
|
$71
|
$51
|
$20
|
39%
|
Percentage
of total net revenue
|
2%
|
1%
|
|
|
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 decrease of approximately $671,000 in general and
administrative expense for the year ended December 31, 2019 as
compared to the corresponding period in 2018 is comprised of the
following major components:
●
Decrease
in personnel related expense of approximately $24,000;
●
Decreases
in professional services of approximately $395,000, which includes
lower Board of Director fees of approximately $320,000, lower
auditing fees of approximately $183,000 and lower legal fees of
approximately $40,000 offset by higher general corporate expense of
approximately $54,000, higher investor relations fees of
approximately $21,000, higher patent-related fees of approximately
$15,000, higher contractor fees of approximately $16,000 and higher
contract services of approximately $42,000;
●
Decrease
in travel, insurances, licenses, dues, rent, and office related
costs of approximately $50,000;
●
Decrease in
financing related expense of approximately $29,000; and
●
Decrease
in stock-based compensation expense of approximately
$173,000.
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.
The dollar increase in
sales and marketing expense of approximately
$366,000 during the year ended
December 31, 2019 as compared to the corresponding period in 2018,
is primarily comprised of the following major
components:
●
Increase
in personnel related expense of approximately $108,000 driven
primarily by headcount increases;
●
Increase in contractor and contract services of
approximately $200,000 resulting from increased utilization of
certain sales consultants of approximately $136,000 combined with
higher marketing dues and subscription expense and contract
services of approximately $64,000 ;
●
Increase
in travel, trade show expense and office related expense of
approximately $72,000;
●
Decrease
in stock-based compensation expense of approximately $68,000;
and
●
Increase
in our Mexico sales office expense and other of approximately
$54,000.
We
anticipate that the level of expense incurred for sales and
marketing during the year ended December 31, 2020 will increase as
we pursue large project solution opportunities, however we cannot
predict how the effects of the COVID-19 pandemic, discussed more
fully elsewhere in this prospectus may affect our level of
anticipated expenditures.
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 increased approximately
$137,000 for the year ended
December 31, 2019, as compared to the corresponding period in 2018,
due primarily to the following major
components:
●
Increase
in personnel related expense of approximately $354,000 due to
headcount increases offset by approximately $335,000 in capitalized
labor into work in process inventory related to in-process
projects;
●
Increase in contractor fees and contract services
of approximately $242,000 for services related to the accelerated
development of mobile identity management applications offset by
approximately $167,000 in capitalized labor into work in process
inventory related to in-process projects ;
●
Decrease in stock-based compensation of
approximately $62,000;
and
●
Increase in rent, office related expense and
engineering tools and supplies of approximately $105,000
.
Our level of expenditures in research and development reflects our
belief that to maintain our competitive position in markets
characterized by rapid rates of technological advancement, we must
continue to invest significant resources in new systems and
software as well as continue to enhance existing
products.
Depreciation and Amortization
During
the year ended December 31, 2019, depreciation and amortization
expense increased approximately $20,000 as compared to the
corresponding period in 2018. The relatively small amount of
depreciation and amortization reflects the relatively small
property and equipment carrying value. The increase is reflective
of certain furniture and leasehold improvement asset additions in
the fourth quarter of 2018.
Interest Expense (Income), Net
For
the year ended December 31, 2019, we recognized interest income of
$90,000 and interest expense of $0. For the year ended December 31,
2018, we recognized interest income of $78,000 and interest expense
of $541,000. The decrease in interest expense reflects the
conversion of all amounts outstanding under the Company’s
related-party lines of credit into shares of Series A Preferred
stock in September 2018.
Interest
expense for the year ended December 31, 2018 contains the following
components:
●
Approximately
$8,000 of amortization expense of deferred financing fees related
to our Lines of Credit;
●
Approximately
$162,000 of amortization expense of recognized beneficial
conversion feature related to our Lines of Credit; and
●
Approximately
$371,000 related to coupon interest on our 8% Line of Credit
borrowings.
Other
Income
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.
For the year ended
December 31, 2018, we recognized other income of approximately
$4,000 and other expense of
$0. Other income for the year ended December 31, 2018 is
comprised of approximately $4,000 from miscellaneous
receipts.
Change in Fair Value of Derivative Liabilities
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.
For the
year ended December 31, 2018, we recognized approximately $232,000
from the increase of derivative liabilities arising from the
consummation of the Series C Financing in September 2018. Such
increase was determined by management using fair value
methodologies and is included as a non-cash expense under the
caption “Change in fair value of derivative
liabilities” in our consolidated statement of operations for
the year ended December 31, 2018.
Income Tax Expense
During
the years ended December 31, 2019 and 2018, we recorded an expense
for income taxes of $10,000 and $11,000, respectively. These tax
expenses relates 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, 2019, and 2018, 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 Software-as-a-Service
(“SaaS”) capabilities for existing products as
well as general working capital and capital expenditure
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.
Related Party Financings
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and were due no later than 21 days after
February 12, 2020. As of June 25, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member. Under the terms of
the factoring agreement, factored money will bear interest at the
rate of 1% of the factoring money for the first seven days, and 1%
for each additional seven days until the factoring money is paid in
full.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. On June
30, 2020, the Company entered into promissory notes in the
principal amount of $550,000 payable to the two members, which
notes are convertible into shares of the Company’s Common
Stock for $0.16 per share. The promissory notes bear interest at
the rate of 5% per annum, and mature on the earlier to occur of
October 13, 2020 or 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.
2020 Common Stock Financings
Triton Funds
LP
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" or the "Investor"). 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 the Company's
Common Stock under the Triton Purchase Agreement (the
"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 the Investor to be set forth in each written notice sent to
the Investor by the Company (the "Purchase
Notice") and delivered to the
Investor (the "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 "Purchased
Shares"). The Closing of the
purchase of the Purchased Shares as set forth in the Purchase
Notice will occur no later than three business days following
receipt of the Purchased Shares by the
Investor.
The Offering was
made pursuant to an effective registration statement on Form S-3,
as previously filed with the SEC on July 10, 2018, and a related
prospectus supplement filed on February 21, 2020. The Offering will
terminate upon the earlier date of either (i) that date which the
Investor has purchased an aggregate of $2.0 million in Purchased
Shares pursuant to the Triton Purchase Agreement; or (ii) March 31,
2020. The Company intends to use the proceeds from the Offering for
general working capital purposes.
In
February and March of 2020, the Company sold, and Triton purchased,
an aggregate of 10,000,000 shares of the Company’s 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.
Proceeds from the March 2020 sale were received on April 29, 2020.
Aggregate net proceeds from this financing approximated $1,387,000
after recognition of direct offering costs.
As prescribed by ASC topic 505,
Equity,
stock subscription receivable represents the purchase of Common
Stock for which the Company has not yet received payment from the
purchaser. As of March 31, 2020, the Company has recorded a stock
subscription receivable in the amount of $765,000 in its condensed
consolidated balance sheet. This amount was received by the Company
on April 29, 2020.
Lincoln Park Capital Fund, LLC
On April 28, 2020, we entered into a purchase
agreement, as amended on June 11, 2020 (the
“Purchase
Agreement”), and a
registration rights agreement (the “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 Purchase Agreement, including stockholder approval of an
amendment to the Company’s 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 our Common
Stock. On April 28, 2020, we sold 1,000,000 shares of Common Stock
to Lincoln Park under the 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 Purchase Agreement for an aggregate purchase
price of $150,000 (the “Commencement 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, the Company has the right,
in its sole discretion, to direct Lincoln Park to purchase up to
125,000 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. In addition to Regular Purchases, provided
that the Company presents Lincoln Park with a 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 Purchase Agreement.
Pursuant to the
terms of the Purchase Agreement, in no event may the Company issue
or sell to Lincoln Park under the shares of the Company’s
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 the Investor 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. 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 Purchase
Agreement.
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.
CARES Act Financing
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, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use 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.
Going Concern
At
March 31, 2020, we had negative working capital of
approximately $4,350,000, as compared to
negative working capital of approximately
$1,653,000 at December 31, 2019. Our
principal sources of liquidity at March 31, 2020
consisted of cash and cash equivalents of $53,000. Our
principal sources of liquidity at December 31, 2019
consisted of cash and cash equivalents of
$1,030,000.
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.
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 June 23, 2020, cash on hand approximated $945,000. Based
on the Company’s rate of cash consumption in the first
quarter of 2020 and the last quarter of 2019, the Company will need
additional capital in the third quarter of 2020 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 utilize cash
proceeds available under the Lincoln Park facility at such time as
the Company is able to register shares to be issued to Lincoln
Park. Additionally, management is currently negotiating a
restructuring of certain of our issued and outstanding Preferred
Stock to facilitate additional equity and/or debt financing, and
may seek strategic or other transactions intended to provide
necessary working capital and increase shareholder value. There are
currently no agreements with the holders of our issued and
outstanding Preferred Stock or 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 such
efforts, including our ability to raise 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 condensed 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 regarding the
Company’s ability to continue as a going
concern.
The
condensed consolidated financial statements and 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
Net
cash used in operating activities was $1,980,000 during the
three months ended March 31, 2020 as compared to $11,267,000
during the year ended December 31, 2019.
During the three months ended March 31, 2020, net cash used in
operating activities consisted of net loss of $3,124,000 and a
decrease in working capital and other assets and liabilities of
$1,137,000. Those amounts are in addition to $7,000 of non-cash
costs consisting of $186,000 in stock-based compensation and
$18,000 in depreciation and amortization offset by approximately
$197,000 in non-cash income from the change in fair value of
derivative liabilities. During the three months ended March 31,
2020, we generated cash of $134,000 from decreases in current
assets offset by $3,000 from increases in our operating leases
right-of-use assets and generated cash of $1,006,000 through
increases in current liabilities and deferred
revenue.
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 was $0 for the
three months ended March 31, 2020
as compared
to $31,000 for the year ended
December 31, 2019. For the
three months ended March 31,
2019, we used cash of $8,000 to fund capital
expenditures of software. For the year ended
December 31, 2019, we used cash
of $31,000 to fund capital expenditures of software.
Financing Activities
We
generated cash of $972,000 from financing activities for the three
months ended March 31, 2020 as compared
to $6,635,000 for the year ended December 31,
2019.
During the three months ended March 31, 2020, 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. During
the year ended December 31, 2019, we generated cash of
approximately $166,000 from the exercise of 351,334 stock options
resulting in the issuance of 351,334 shares of Common Stock, and
$6,520,000 from the sale of 5,954,545 shares of Common Stock and
used cash of approximately $51,000 for the payment of dividends on
our Series B Preferred Stock.
Debt
As a result of the conversion of amounts outstanding under the
Company’s related-party lines of credit on September 10,
2018, at December 31, 2018, the Lines of Credit and all
indebtedness, liabilities and other obligations arising thereunder
were terminated, cancelled and deemed satisfied in full. As a
result, no future borrowings are available under the Lines of
Credit.
Real Property Leases
Our corporate headquarters is located in San Diego, California,
where we now occupy 8,511 square feet of office space at a cost of
approximately $30,000 per month. We entered into this
facility’s lease was in July 2018 and this new lease
commenced on November 1, 2018 and terminates on April 30, 2025. In
addition to our corporate headquarters, we also occupied the
following spaces at March 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;
●
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,
2020.
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):
|
Three months ended
March 31,
2020
|
Year ended
December 31, 2019
|
Cost
of revenue
|
$ 2
|
$ 13
|
General
and administrative
|
67
|
347
|
Sales
and marketing
|
29
|
148
|
Research
and development
|
26
|
135
|
Total
|
$ 124
|
$ 643
|
Off-Balance Sheet Arrangements
At
March 31, 2020 and December 31, 2019, 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
prospectus.
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 these consolidated
financial statements 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 (1)
|
|
Age
|
|
Title/Position Held with the Company
|
Kristin Taylor
|
|
53
|
|
Chief Executive Officer
|
Jonathan D. Morris
|
|
44
|
|
Senior Vice President, Chief Financial Officer
|
David Harding
|
|
50
|
|
Senior Vice President, Chief Technical Officer
|
S. James Miller, Jr.
|
|
66
|
|
Chair of the Board
|
David Carey
|
|
75
|
|
Director
|
Neal Goldman
|
|
76
|
|
Director
|
Guy Steve Hamm
|
|
72
|
|
Director
|
Dana W. Kammersgard
|
|
64
|
|
Director
|
David Loesch
|
|
76
|
|
Director
|
(1)
As previously disclosed by the Company, Charles
Croker resigned from the Board effective February 14, 2019, Robert
T. Clutterbuck and Charles Frischer resigned from the Board
effective May 8, 2019, and John Cronin resigned from the Board
effective April 1, 2020. In addition, S. James Miller, Jr. resigned
from his position as Chief Executive Officer but remains in his
position as Executive Chairman of the Board of Directors, and Wayne
Wetherell resigned from his position as the Company’s
Senior Vice President, Chief Financial Officer and Corporate
Secretary, effective May 1, 2020.
The
following biographical information regarding the foregoing
directors and officers of the Company is presented
below:
Kristin
Taylor serves as our Chief
Executive Officer since her appointment in March 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 currently serves as Principal at
Veritas Lux since November 2019 and previously served as a
consultant with Kristin Taylor Consulting since 2012, in which she
developed a proprietary patented and algorithmic methodology to
weigh and rank the most influential global technical analysts. From
2017 to 2019, Ms. Taylor served as Vice President of Worldwide
Analyst Relations at IBM and led the efforts to modernize and
transform IBM's analyst relations organization. From 2013 to 2017,
she served as Vice President, Global Analyst and Public Relations
at MediaTek, the third largest fabless semiconductor company
worldwide 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
as Head of Industry Analyst Relations, Senior Director of Business
Development, and as a Director in Information Technology. Ms.
Taylor earned her Bachelor's degree in Sociology and Business
Management from the University of New
Hampshire.
Jonathan D.
Morris serves as our Senior
Vice President, Chief Financial Officer since his appointment in
May 2020. Mr. Morris has over 23 years of experience as a
finance executive holding key leadership positions in financial
management, mergers & acquisitions, private equity, and both
merchant banking and investment banking. Mr. Morris previously
served as Chief Financial Officer of American Patriot Brands, a
provider of consumer staples since joining the organization in
2019. Prior to that, Mr. Morris served in Direct Investments and
Special Opportunities with Private Family Office from 2015 to 2019,
where his primary responsibilities included the investment sourcing
and long-term strategic partnerships with core stakeholders both
domestically and internationally. From 2012 to 2015, he served in
technology, media and telecommunications with Blackstone Group and
from 2005 to 2012, he held positions within investment banking
divisions of Credit Suisse. Mr. Morris began his career in 1997
within the merchant banking division of Lombard, Odier et Cie,
private bank in Switzerland. Mr. Morris earned his Bachelor's
degree in Finance from the University of Virginia and an MBA from
Georgetown University.
David Harding serves as our Senior
Vice President and Chief Technology Officer since his appointment
in January 2006. Mr. Harding has more than 25 years of technology
implementation and managerial experience and is responsible for
strategic design, technology infrastructure and core strategy from
concept through delivery. Before joining the Company, from 2001 to
2003, Mr. Harding was the Chief Technology Officer at IC
Solutions, Inc., where he was responsible for all technology
departments including the development and management of software,
IT and quality assurance, as well as their respective hardware,
software and human resource budgets. From 1999 to 2000, he served
as the Chief Technology Officer at Thirsty.com and from 1996 to
1999, he served as the Chief Technology Officer at Fulcrum Point
Technologies, Inc., and as a consultant to Access360, which is
now part of IBM/Tivoli, from 1995 to
1996.
S. James
Miller, Jr. served
as our Chief Executive Officer and President since 1990 until March
2, 2020 and currently serves as Chair of the Board since 1996.
Prior to joining the Company, from 1980 to 1990, Mr. Miller
was an executive with Oak Industries, Inc., a manufacturer of
components for the telecommunications industry. While at Oak
Industries, Mr. Miller served as a director and as Senior Vice
President, General Counsel, Corporate Secretary and
Chairman/President of Oak Industries’ Pacific Rim
subsidiaries. He has a J.D. from the University of San Diego School
of Law and a B.A. from the University of California, San
Diego.
The
Nominating and Corporate Governance Committee believes that Mr.
Miller possesses substantial managerial expertise necessary to lead
the Company through its various stages of development and growth.
Additionally, the historical knowledge of the Company and his
knowledge of the daily operations of the Company is extremely
valuable to the Board of Directors and management as it executes
the Company’s business plan. In addition, the Board of
Directors values the input provided by Mr. Miller given his legal
expertise.
David
Carey was appointed to the
Board in February 2006. Mr. Carey currently serves as the
Chairman of Proxy Boards for Leonard DRS Technologies and OnPoint
Consulting. In addition, he is a member of the Proxy Board for
Informatica Federal Operations, Corp. and serves on a number
of Advisory Boards. Mr. Carey briefly served on the Board of
Cybergy, Inc., a publicly-listed company prior to his resignation
in 2015. He is a former Executive Director of the Central
Intelligence Agency (“CIA”), where he served for 32 years until 2001.
During his career with the CIA, Mr. Carey held several senior
positions including that of Executive Director, often referred to
as the Chief Operating Officer within the agency. Mr. Carey
earned his B.S. in Economics from Cornell University and a MBA from
the University of Delaware.
The
Board of Directors believes that Mr. Carey’s experience as a
former Executive Director of the CIA and his in-depth knowledge and
expertise with IT security matters as well as his extensive network
within the intelligence and security community, provides the Board
with specialized expertise and insight into the specific markets in
which the Company operates.
Neal
Goldman was appointed to the Board in August 2012. Mr.
Goldman is currently President, Chief Compliance Officer and a
director of Goldman Capital Management, Inc., an employee owned
investment advisor that he founded in 1985. Additionally, Mr.
Goldman is Chairman of Charles and Colvard, LTD, a specialty
jewelry company. Mr. Goldman has previously served as a member
of the Board of Directors and its Compensation Committee for Blyth,
Inc., a New York Stock Exchange-listed designer and marketer of
home decorative and fragrance products.
Mr.
Goldman is the Company’s largest shareholder and has
significant investment experience. As a result, the
Board of Directors believes that Mr. Goldman provides valuable
insight to the Board of Directors as it seeks to build shareholder
value.
Guy Steve
Hamm was appointed to the
Board in October 2004. Mr. Hamm served as CFO of Aspen
Holding, a privately held insurance provider, from
December 2005 to February 2007. In 2003, Mr. Hamm retired
from PricewaterhouseCoopers, where he was a national
partner-in-charge of middle market. Mr. Hamm was instrumental
in growing the Audit Business Advisory Services
(“ABAS”) Middle Market practice at
PricewaterhouseCoopers, where he was responsible for $300 million
in revenue and more than 100 partners. Mr. Hamm is a
graduate of San Diego State University.
The
Board of Directors believes that Mr. Hamm’s experience in
public accounting, together with his managerial experience as a
Chief Financial Officer, provides the Audit Committee with the
expertise needed to oversee the Company’s finance and
accounting functions and oversight of its independent registered
public accountants.
Dana
Kammersgard was appointed to
the Board in May of 2016. He is currently the Executive Vice
President, Cloud Systems and Solutions for Seagate Technology
(“Seagate
Systems”), where he is
responsible for all storage systems related products and
strategies. Prior to joining Seagate Systems in 2015, he served as
the President, Chief Executive Officer and a director of Dot Hill
System Corp. (“Dot Hill”) since 2006. Mr. Kammersgard served as
President of Dot Hill from 2004 to 2006 and from 1999 to 2004, he
served as its Chief Technical Officer. Mr. Kammersgard was a
Founder of Artecon, Inc. (“Articon”) a storage systems company, where he
served as a director from its inception in 1984 until the
Articon’s merger with a competitor, Box Hill Systems Corp. in
1999. While at Artecon, Mr. Kammersgard served in various
positions, including Secretary and Senior Vice President of
Engineering from March 1998 until August 1999, and as Vice
President of Sales and Marketing from March 1997 until March 1998.
Prior to that, Mr. Kammersgard was the Director of Software
Development at Calma, a division of General Electric Company. Mr.
Kammersgard holds a B.A. in chemistry from the University of
California, San Diego.
The
Board of Directors believes that Mr. Kammersgard’s
engineering and technical experience, coupled with his senior
executive management experience with technology companies, is
valuable to the Company’s Board of Directors and senior
management in navigating the technical and marketing challenges
within the industry.
David
Loesch was appointed to
the Board in September 2001. Prior to that, he served as a
Special Agent with the Federal Bureau of Investigations
(“FBI”) for 29 years and upon his retirement from
the FBI, Mr. Loesch was the Assistant Director in Charge of
the Criminal Justice Information Services Division. He was awarded
the Presidential Rank Award for Meritorious Executive in 1998 and
has served on the Board of Directors of the Special Agents Mutual
Benefit Association since 1996. He is also a member of the
International Association of Chiefs of Police and the Society of
Former Special Agents of the FBI, Inc. In 1999, Mr.
Loesch was appointed by former Attorney General Janet Reno to serve
as one of 15 original members of the Compact Council, an
organization charged with promulgating rules and procedures
governing the use and exchange of criminal history records for
non-criminal justice use. Mr. Loesch served in the United
States Army as an Officer with the 101st Airborne Division in
Vietnam. He holds a Bachelor’s degree from Canisius College
and a Master’s degree in Criminal Justice from George
Washington University. Mr. Loesch continues to work as a private
consultant on criminal justice information sharing and the use of
biometrics to help identify criminals and individuals of special
concern.
The
Board of Directors believes that Mr. Loesch’s extensive
service as a Special Agent with the FBI, together with his
knowledge of security issues relevant to the Company’s
products and markets, provides the Board of Directors and the
Company with valuable input regarding the Company’s
competitors and the markets in which the Company
serves.
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, 2019, all Section 16(a) filing
requirements were complied with in a timely
manner.
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.
Board Leadership Structure
Our
Board of Directors 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 stockholders. The Board now believes it to be
in the best interest of the Company and its stockholders as well as
the Board, to separate these roles to allow Mr. Miller to focus
solely on the Chair’s responsibility to develop meeting
agendas that focus the Board’s time and attention on the most
critical matters and to facilitate constructive dialogue among
Board members on strategic issues. Ms. Taylor will then be able to
focus her time and attention on the in-depth knowledge of the
issues, opportunities and risks facing the Company, our business
and our industry to fulfill the responsibilities of our Chief
Executive Officer.
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.
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.
Director Independence
Our
Board of Directors has determined that all of its members, other
than Mr. Goldman, who beneficially owns approximately
33.6% of the Company’s Common Stock, are
“independent” within the meaning of the Nasdaq Stock
Market Rules and SEC rules regarding independence.
Committees of the Board of Directors
Our
Board of Directors 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 of Directors 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. Hamm
(Committee Chair), Carey and Loesch, each of whom is a
non-management member of our Board of Directors. Mr. Hamm is also
our Audit Committee financial expert, as currently defined under
current SEC rules. The Audit Committee met three times during
the year ended December 31, 2019. 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. Carey (Committee Chair) and Goldman, each of
whom is a non-management member of our Board of Directors. The
Compensation Committee met one time during the year ended December
31, 2019. Although Mr. Carey meet the criteria for independence
under the applicable Nasdaq Stock Market Rules and SEC rules and
regulations, Mr. Goldman is not considered independent under such
requirements.
Nominating and
Corporate Governance Committee
The
Nominating and Corporate Governance Committee is responsible for
making recommendations to the Board of Directors 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
nonemployee members of the Board. The Nominating and
Corporate Governance Committee met three times during the year
ended December 31, 2019.
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.
Executive Compensation Discussion and Analysis
Overview of Compensation Program
The
Compensation Committee of our Board of Directors has responsibility
for establishing, implementing and monitoring adherence to our
compensation philosophy. The Board of Directors has delegated to
the Compensation Committee the responsibility for determining our
compensation policies and procedures for senior management,
including the named executive officers, periodically reviewing
these policies and procedures, and making recommendations
concerning executive compensation to be considered by the full
board of directors, when such approval is required under any of our
plans or policies or by applicable laws. The Compensation Committee
also has the principal responsibility for the administration of our
stock plans, including the approval of stock option grants to the
named executive officers.
The
compensation received by our named executive officers in fiscal
year 2019 is set forth in the Summary Compensation Table, below.
For 2019, the named executive officers included: (i) S. James
Miller, Jr., Chair of the Board of Directors and former Chief
Executive Officer; (ii) David Harding, Senior Vice President
Engineering, Chief Technical Officer, and (iii) David Somerville,
former Senior Vice President Sales and Marketing.
Compensation Philosophy
In
general, our executive compensation policies are designed to
recruit, retain and motivate qualified executives by providing them
with a competitive total compensation package based in large part
on the executive’s contribution to our financial and
operational success, the executive’s personal performance and
increases in stockholder value as measured by the price of our
common stock. We believe that the total compensation paid to our
executives should be fair, reasonable and competitive.
We
seek to have a balanced approach to executive compensation with
each primary element of compensation (base salary, variable
compensation and equity incentives) designed to play a specific
role. Overall, we design our compensation programs to allow for the
recruitment, retention and motivation of the key executives and
high-level talent required in order for us to:
●
achieve
or exceed our annual financial plan and achieve
profitability;
●
make
continuous progression towards achieving our long-term strategic
objectives to be a high-growth company with growing profitability;
and
●
increase
our share price to provide greater value to our
stockholders.
Role of Executive Officers in Compensation Decisions
The Compensation
Committee considers action on executive
compensation annually. They discuss their proposed actions
with the Chief Executive Officer and make recommendations for any
changes to the Company’s Board of
Directors. Only the
Compensation Committee and the Board of Directors are authorized to
approve the compensation for any named executive officer. Because
our Chief Executive Officer is also a member of our Board of
Directors, he does not participate in any conversation or approvals
related to his compensation. Compensation of new executives is
based on hiring negotiations between the individuals and our Chief
Executive Officer and/or Compensation
Committee.
Elements of Compensation
Consistent
with our compensation philosophy and objectives, we offer executive
compensation packages consisting of the following three
components:
●
annual
incentive compensation (in the form of bonuses or otherwise);
and
●
equity
awards pursuant to the terms and conditions of our
2020
Omnibus Stock Incentive Plan (the “2020 Plan
”).
In each fiscal year,
the Compensation Committee determines the amount and relative
weight of each component for all executives, including the named
executive officers. Base salaries are paid in fixed amounts and
thus do not encourage risk taking. For 2019, we
had no incentive bonus
programs.
We
also have issued stock options focusing the recipients on the
achievement of certain short- and longer-term goals and objectives.
The Compensation Committee believes that these awards do not
encourage unnecessary or excessive risk taking because the ultimate
value of the awards is tied to our stock price, and the vesting
schedules align our employees’ interests even more closely
with those of our investors.
Base Salary
Because our
compensation philosophy stresses performance-based awards, base
salary is intended to be a smaller portion of total executive
compensation relative to long-term equity. Therefore, we target
executive base salary at the median level of the compensation
guidelines that have been approved by the Compensation Committee.
In addition, the Compensation Committee takes into account the
executive’s scope of responsibility and significance to the
execution of our long-term strategy, past accomplishments,
experience and personal performance and compares each
executive’s base salary with those of the other members of
senior management. The Compensation Committee may give different
weighting to each of these factors for each executive, as it deems
appropriate. The Compensation Committee did not
retain a compensation
consultant or determine a compensation peer group for 2019. In
2019, there were no
changes to the base salaries
paid to our named executive officers except for the contractually
specified cost of living adjustments.
Annual Incentive Compensation
The Compensation
Committee has not
adopted an executive bonus plan
for 2020.
Equity Awards
Although
we do not have a mandated policy regarding the ownership of shares
of Common Stock by officers and directors, we believe that granting
equity awards to executives and other key employees on an ongoing
basis gives them a strong incentive to maximize stockholder value
and aligns their interests with those of our other stockholders on
a long-term basis. Our 2020 Plan enables us to grant
equity awards, as well as other types of stock-based compensation,
to our executive officers and other employees. Under authority
delegated to it by the board of directors, the Compensation
Committee reviews and approves all equity awards granted to named
executive officers under the 2020 Plan. Typically, the
options granted upon the executive’s hire vest over three
years with a third vesting on the one-year anniversary, and the
remainder vesting quarterly over the next eight quarters. The
options granted to executives in connection with an annual
performance review typically begin vesting on the one-year
anniversary of the grant date, and vest ratably over the following
eight quarters. Our general policy is to grant the options with an
exercise price equal to fair market value, which currently is the
closing price of our Common Stock, as reported by the OTCQB
marketplace, on the grant date.
We
intend to grant equity awards to achieve retention and
motivation:
●
upon
the hiring of key executives and other personnel;
●
annually,
when we review progress against corporate and personal goals;
and
●
when we believe that competitive forces or economic conditions
threaten to cause our key executives to lose their motivation
and/or where retention of these key executives is in
jeopardy.
With
the Compensation Committee’s approval, we grant options to
purchase shares of Common Stock when we initially hire executives
and other employees, as a long-term performance incentive. The
Compensation Committee has determined the size of the initial
option grants to newly hired executives with reference to existing
guidelines and hiring negotiations with the individual, in addition
to other relevant information regarding the size and type of
compensation package considered necessary to enable us to recruit,
retain and motivate the executive.
Historically,
no employee was eligible for an annual performance grant until the
employee had worked for us for at least sixty days. The
Compensation Committee reviews our Chief Executive Officer’s
and other executives’ performance and determines whether they
should be granted an option to purchase additional shares. Aside
from stock award grants in connection with annual performance
reviews, we do not have a policy of granting additional awards to
executives and, consequently, the Board of Directors and the
Compensation Committee has not adopted a policy with respect to
granting awards in coordination with the release of material
non-public information.
In
determining the size of equity awards the Compensation Committee
takes into account the executive’s current position with and
responsibilities to us.
Only
the Board of Directors or the Compensation Committee may approve
options or other equity-based compensation to our executives.
However, the Board of Directors has authorized our Chief Executive
Officer to approve option grants to non-executive employees. All
such grants must be consistent with equity incentive guidelines
approved by the Compensation Committee. The exercise price for such
grants must be equal to the most recent closing price of a share of
the Common Stock as reported by the OTCQB marketplace on the date
of grant.
Going
forward, we intend to continue to evaluate and consider equity
grants to our executives on an annual basis. We expect to consider
potential equity awards for executives at the same time as we
annually review our employees’ performance and determine
whether to award grants for all employees.
Accounting and Tax Considerations
Our Compensation Committee has reviewed the impact
of tax and accounting treatment on the various components of our
executive compensation program. Section 162(m) of the Internal
Revenue Code (the “Code”) generally disallows a tax deduction to
publicly held companies for compensation paid to
“covered” executive officers, to the extent that
compensation paid to such an officer exceeds $1.0 million
during the taxable year. We endeavor to award compensation that
will be deductible for income tax purposes, though other factors
will also be considered. Our Compensation Committee may authorize
compensation payments that do not comply with the exemptions to
Section 162(m) when we believe that such payments are
appropriate to attract and retain executive
talent.
Say-on-Pay
Our
stockholders have not yet had the opportunity to provide feedback
on our executive compensation through an advisory vote, as we have
not held an annual meeting of stockholders since 2011, at which
time we were not required to hold a “Say-on-Pay” vote
as we followed the disclosure guidelines of a Smaller Reporting
Company.
Compensation Committee Interlocks and Insider
Participation
As
of December 31, 2019, the members of our Compensation Committee
were, David Carey (Committee Chair), John Cronin and Neal Goldman.
As a result of Mr. Cronin’s resignation from the Board, the
Compensation Committee currently consists of Messrs. Carey and
Goldman. None of the current or past members of our Compensation
Committee is or has been an officer or employee of our Company.
None of our executive officers currently serves, or in the past
year has served, as a member of the compensation committee (or
other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) or
director of any entity that has one or more executive officers
serving on our Compensation Committee or our Board of
Directors.
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee has reviewed and discussed with management
the Compensation Discussion and Analysis provisions included in our
Annual Report on Form 10-K for the year ended
December 31, 2019. Based on this review and discussion, the
Compensation Committee recommended to the board of directors that
the Compensation Discussion and Analysis be included in our Annual
Report on Form 10-K for the year ended December 31,
2019.
The Compensation Committee of the Board of Directors:
|
David Carey, Committee Chair
Neal Goldman
|
Summary Compensation Table
The following table sets forth certain information
about the compensation paid or accrued during the years ended
December 31, 2019 and 2018 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, 2019, 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
|
|
|
|
|
All Other
Compensation
|
|
|
|
|
|
|
|
|
|
S.
James Miller, Jr.
|
2019
|
$400,856
|
$-
|
$-
|
$16,799
|
|
$417,655 $
|
Chair of the Board and
|
2018
|
$387,787
|
$-
|
$199,408
|
$19,967
|
(3)
|
$607,162
|
Former Chief Executive Officer
|
|
|
|
|
|
|
|
David
Harding
|
2019
|
$275,000
|
$-
|
$-
|
$4,784
|
|
$279,784
|
Vice President and
|
2018
|
$275,000
|
$-
|
$161,481
|
$5,288
|
(4)
|
$441,769
|
Chief Technical Officer
|
|
|
|
|
|
|
|
David
Somerville
|
2019
|
235,000
|
$-
|
-
|
8,963
|
|
243,963
|
Former Sr. Vice President Sales
|
2018
|
$230,631
|
$-
|
$90,400
|
$67,089
|
(5)
|
$388,120
|
and Marketing
|
|
|
|
|
|
|
|
(1)
All
option awards were granted under the 1999 Plan.
(2)
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, 2019 or
2018. During the year ended December 31, 2019 and 2018, no named
executive officer exercised an option and therefore no value was
realized during the reporting period. The amounts reflect the grant
date fair value of the options awarded in the fiscal years ended
December 31, 2019 and 2018, 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, 2019 and 2018
ranged from 64% to 57%. 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, 2019 and 2018 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, 2019 and 2018 was 2.58%. Dividend yield is zero, as we
do not expect to declare any dividends on our 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. We have estimated an annualized
forfeiture rate of 0% for corporate officers, 4.1% for members of the Board of Directors
and 6.0% for all other
employees. We review the expected forfeiture rate annually to
determine if that percent is still reasonable based on historical
experience.
(3)
This
amount includes premiums on life insurance and disability insurance
of $2,984 and matching 401(k) contributions of $1,800.
(4)
This
amount includes premiums on life insurance and disability insurance
of $8,399 and matching 401(k) contributions of $8,400.
(5)
This
amount includes premiums in life insurance and disability insurance
of $1,848 and matching 401(k) contributions of $7,115. Effective
March 9, 2020, Mr. Somerville resigned from his position with the
Company.
Grants of Plan Based Awards
There
were no plan-based awards granted in 2019 to the Named Executive
Officers.
Outstanding Equity Awards at Fiscal
Year-End
The
following table sets forth information regarding unexercised
options, stock that has not vested and equity incentive awards held
by each of the then Named Executive Officers outstanding as of
December 31, 2019:
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options:
Exercisable (#)
|
Number of
Securities
Underlying
Unexercised
Options:
Unexercisable (#)
|
Option
Exercise
Price
($)
|
|
Number of Shares That
Have Not Vested
(#)
|
Market Value of Shares That Have Not
Vested
($)
|
David Harding
|
325,000
|
—
|
$0.92
|
2/2/2022
|
—
|
$—
|
|
100,000
|
—
|
$0.93
|
2/8/2023
|
—
|
$—
|
|
75,000
|
—
|
$1.93
|
10/29/2023
|
—
|
$—
|
|
50,000
|
—
|
$2.29
|
12/15/2024
|
—
|
$—
|
|
125,000
|
—
|
$1.73
|
9/14/2025
|
—
|
$—
|
|
300,000
|
---
|
$1.37
|
9/20/2026
|
—
|
$—
|
|
58,375
|
41,625
|
$1.75
|
1/31/2028
|
—
|
$—
|
Former
Named Executive Officers
|
|
|
|
|
|
|
S. James
Miller, Jr.
|
225,000
|
—
|
$1.11
|
3/10/2021
|
—
|
$—
|
|
450,000
|
—
|
$0.92
|
2/2/2022
|
—
|
$—
|
|
100,000
|
—
|
$0.93
|
2/8/2023
|
—
|
$—
|
|
100,000
|
—
|
$1.93
|
10/29/2023
|
—
|
$—
|
|
50,000
|
—
|
$2.29
|
12/15/2024
|
—
|
$—
|
|
150,000
|
—
|
$1.73
|
9/14/2025
|
—
|
$—
|
|
300,000
|
---
|
$1.37
|
9/20/2026
|
—
|
$—
|
|
116,679
|
83,330
|
$1.75
|
1/31/2028
|
—
|
$—
|
|
|
|
|
|
|
|
David
Somerville
|
175.000
|
125,000
|
$1.75
|
1/31/2028
|
—
|
$—
|
Employment Agreements
Kristin
Taylor. On March 2, 2020, we
entered into an employment agreement with Ms. Kristin Taylor, our
President and Chief Executive Officer. This agreement provides
for an annual base salary of $330,000 for a period of 24
months effective April 10, 2020. The agreement is 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 shall vest in three
equal annual installments beginning one year from the date of
issuance; (ii) an annual bonus equal to 100% of Ms. Taylor's annual
salary upon meeting the following performance objectives: (a) the
Company establishing a major partnership that generates $1.5
million in revenue during the calendar year 2020; (b) the Company
achieving positive cash flow by the year ended December 31, 2020;
(c) the Company's operating loss being reduced by a minimum of 50%
by the year ended December 31, 2020; and (d) total sales exceeding
$10.0 million in 2020, with each objective equal to 25% of the
total bonus objective. If all performance objectives are met, Ms.
Taylor will be granted an additional stock option to purchase
500,000 shares of Common Stock. 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.
David
Harding. On
May 21, 2007, we entered into a
Change of Control and Severance Benefits Agreement with
Mr. David Harding, our Vice President and Chief Technical
Officer. This agreement was originally for a two-year term,
ending on May 21, 2009; however, the agreement has been
amended to extend the expiration date to December 31, 2019. Under
the terms of the agreement, Mr. Harding is paid a semi-monthly base
salary of $11,458, and is
entitled to the following severance benefits if we terminate his
employment without cause or in the event of an involuntary
termination: (i) a lump sum cash payment equal to six months
base salary; and continuation of Mr. Harding’s
medical and disability insurance for a period of six
months. In the event that Mr. Harding’s employment
is terminated within six months prior to or thirteen months
following a change of control (defined below), Mr. Harding is
entitled to the severance benefits described above, except that
100% of Mr. Harding’s outstanding stock options and
restricted stock awards will immediately vest.
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
our 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 our 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 our 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 us and our Subsidiaries, other than a
sale, lease, license, or other disposition of all or substantially
all of the consolidated assets of us and our Subsidiaries to an
entity, 50% or more of the combined voting power of the voting
securities of which are owned by our stockholders 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.
Former Named Executive Officers
S. James
Miller, Jr. On October 1, 2005, we 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. Historically, Mr.
Miller’s employment agreement was amended annually to extend
the expiration date, and was amended on January 31, 2019 to extend
the expiration date of the agreement to December 31, 2019. The
agreement provided for annual base compensation in the amount of
$291,048, which amount, as a result of cost-of-living adjustments,
was increased to $400,856. Under this agreement, Mr. Miller
was entitled to reimbursement for reasonable expenses incurred in
connection with our business. Under the terms of the agreement,
Mr. Miller was entitled to the following severance benefits if
we terminated his employment without cause or in the event of an
involuntary termination: (i) a lump sum cash payment equal to
twenty-four months base salary; (ii) continuation of
Mr. Miller’s fringe benefits and medical insurance for a
period of three years; and (iii) immediate vesting of 50% of
Mr. Miller’s outstanding stock options and restricted
stock awards. In the event that Mr. Miller’s employment
is terminated within six months prior to or thirteen months
following a change of control (defined below), Mr. Miller was
entitled to the severance benefits described above, except that
100% of Mr. Miller’s outstanding stock options and
restricted stock awards will immediately vest. As a result of Mr.
Miller’s resignation as President and Chief Executive Officer
on March 2, 2020, all outstanding options will continue to vest as
long as Mr. Miller remains as a member of the Board of
Directors.
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2019
regarding equity compensation plans approved by our security
holders and equity compensation plans that have not been approved
by our security holders:
Plan Category
|
Number of securities to be issued
upon exercise
of outstanding options, warrants and rights
|
Weighted-Average exercise price of outstanding options,
warrants
and rights
|
Number of securities remaining available for future
issuance under equity
compensation plans
(excluding securities reflected in column (a))
|
Equity compensation plans approved by security
holders:
|
|
|
|
|
|
|
|
1999
Stock Award Plan, as amended and restated
|
7,204,672
|
$1.32
|
401,919
|
Description of Equity Compensation Plans
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 of Directors. 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 Internal Revenue Code of 1986 (the
“Code”).
Pursuant to the adoption of the 2020 Plan, such
plan will supersede and replace the Company’s 1999 Stock
Option Plan (the “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.
Board
members who also serve on the Audit Committee receive additional
monthly compensation of $458 for the Committee Chair and $208 for
the remaining members of the Audit Committee. Board members
who also serve on the Compensation Committee receive additional
monthly compensation of $417 for the Committee Chair and $208 for
the remaining members of the Compensation Committee. 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, 2019 the total
amounts of compensation to non-employee directors (excluding
reimbursable expenses) was approximately $82,564, which amount was
paid $20,500 in cash with the remainder paid in stock
options.
Each of
our non-employee directors is also eligible to receive stock option
grants under the 1999 Plan. Stock options granted under the 1999
Plan are intended by us not to qualify as incentive stock options
under the Code.
The
term of stock options granted under the 1999 Plan is
ten years. In the event of a merger of us with or into another
corporation or a consolidation, acquisition of assets or other
change-in-control transaction involving us, an equivalent option
will be substituted by the successor corporation; provided, however, that we may cancel
outstanding options upon consummation of the transaction by giving
at least thirty (30) days’ notice.
The
following table sets forth the compensation awarded to, earned by,
or paid to each person who served as a director during the year
ended December 31, 2019, other than a director who also served as
an executive officer:
Current
Directors
|
Fees Earned
or
Paid
in Cash
($)
|
|
|
All
Other Compensation ($)
|
|
David
Carey
|
$7,500
|
$-
|
$8,131
|
$-
|
$15,631
|
|
|
|
|
|
|
Neal
Goldman
|
$2,500
|
$-
|
$8,131
|
$-
|
$10,631
|
|
|
|
|
|
|
Guy Steve
Hamm
|
$5,500
|
$-
|
$8,131
|
$-
|
$13,631
|
|
|
|
|
|
|
Dana
Kammersgard
|
$0
|
$-
|
$12,865
|
$-
|
$12,865
|
|
|
|
|
|
|
David
Loesch
|
$2,500
|
$-
|
$8,131
|
$-
|
$10,631
|
|
|
|
|
|
|
Former
Directors
|
|
|
|
|
|
Robert T.
Clutterbuck (2)
|
$-
|
$-
|
$3,152
|
$-
|
$3,152
|
|
|
|
|
|
|
Charles Crocker
(3)
|
$-
|
$-
|
$2,240
|
$-
|
$2,240
|
|
|
|
|
|
|
John Cronin
(4)
|
$2,500
|
$-
|
$8,131
|
$-
|
$10,631
|
|
|
|
|
|
|
Charles Frischer
(2)
|
$-
|
$-
|
$3,152
|
$-
|
$3,152
|
(1)
|
The
amounts reflect the grant date fair value of options recognized as
compensation in 2019, in accordance with the provisions of FASB ASC
Topic 718, and thus may include amounts from awards granted prior
to 2019.
|
|
|
(2)
|
Messrs.
Clutterbuck and Frischer resigned from their positions as members
of our Board of Directors on May 6, 2019.
|
|
|
(3)
|
Mr.
Crocker resigned from his position as a member of our Board of
Directors on February 14, 2019.
|
|
|
(4)
|
Mr.
Cronin resigned from his position as a member of our Board of
Directors on April 1, 2020.
|
CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS
Related Party Lines of
Credit
At
January 1, 2018, the Company had certain convertible Lines of
Credit borrowing facilities with two members of the Company’s
Board of Directors. Before their termination, (described more fully
below), these convertible Lines of Credit bore interest at 8% per
annum and were convertible into that number of shares of the
Company’s common stock equal to the quotient obtained by
dividing the outstanding balance by $1.25. These convertible Lines
of Credit had a maturity date of December 31, 2018.
The
Company evaluated the Lines of Credit and determined that the
instruments contained a contingent beneficial conversion feature,
i.e. an embedded conversion right that enabled the holder to obtain
the underlying Common Stock at a price below market value. The
beneficial conversion feature was contingent, as the terms of the
conversion did not permit the Company to compute the number of
shares that the holder would receive if the contingent event
occurred (i.e. future borrowings under the Line of Credit). The
Company has considered the accounting for this contingent
beneficial conversion feature using the guidance in ASC 470, Debt.
The guidance in ASC 470 states that a contingent beneficial
conversion feature in an instrument shall not be recognized in
earnings until the contingency is resolved. The beneficial
conversion features of borrowings under the Line of
Credit were to be measured using the intrinsic value
calculated at the date the contingency is resolved using the
conversion price and trading value of the Company’s Common
Stock at the date the Lines of Credit were issued (commitment
date).
For the years ended December 31, 2019
and 2018, the Company recorded approximately $0 and $30,000,
respectively, in debt discount
attributable to beneficial conversion feature and accreted
approximately $0 and $162,000, respectively, of debt
discount. Such expense is
recorded as a component of interest expense in the Company’s
consolidated statements of operations.
On
September 10, 2018, the Company entered into an agreement with the
board members, pursuant to which they agreed to exchange
approximately $6.3 million and $0.6 million, respectively, of
outstanding debt (including accrued and unpaid interest) owed under
the terms of their respective Lines of Credit for an aggregate of
6,896 shares of the Company’s Series A Preferred. As a result
of this exchange, all indebtedness, liabilities and other
obligations arising under the Lines of Credit were terminated,
cancelled and deemed satisfied in full. Because the holders of
the Lines of Credit are members of the Company’s Board of
Directors and shareholders of the Company, they are considered
related parties and the exchange transaction is considered a
capital transaction and is recorded within the equity accounts of
the Company.
Notes Payable
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and are due no later than 21 days after
February 12, 2020. As of June 25, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member. Under the terms of the factoring agreement,
factored money will bear interest at the rate of 1% of the
factoring money for the first seven days, and 1% for each
additional seven days until the factoring money is paid in
full.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. On June
30, 2020, the Company entered into promissory notes in the
principal amount of $550,000 payable to the two members, which
notes are convertible into shares of the Company’s Common
Stock for $0.16 per share. The promissory notes bear interest at
the rate of 5% per annum, and mature on the earlier to occur of
October 13, 2020 or 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.
Professional Services Agreement
During
the year ended December 31, 2018, the Company entered into
professional services agreement with a firm whose managing director
is also a member of the Company’s Board of Directors. During
the year ended December 31, 2018, the Company recorded and paid
one-half of the aggregate fee of $50,000 with the remaining payment
being made during the year ended December 31, 2019.
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 of
Directors 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.
The
following table sets forth the high and low sale prices for our
Common Stock for the first two quarters of 2020 and
for each quarter in 2019 and 2018:
2020 Fiscal Quarters
|
|
|
First
Quarter
|
$ 0.54
|
$ 0.10
|
Second
Quarter
|
$ 0.50
|
$ 0.13
|
Third Quarter
(through July 2, 2020)
|
$ 0.33
|
$ 0.41
|
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
|
2018 Fiscal Quarters
|
|
|
First
Quarter
|
$2.24
|
$1.50
|
Second
Quarter
|
$1.90
|
$1.08
|
Third
Quarter
|
$1.44
|
$0.86
|
Fourth
Quarter
|
$1.01
|
$0.55
|
Holders
As
of June 25, 2020, we had approximately
234 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 March 31, 2020 and December 31, 2019, we had cumulative
dividends of approximately $937,000 and $0, respectively, relating
to our Series A Preferred, approximately $21,000 and $8,000,
respectively, relating to our Series B Preferred and $250,000 and
$0, respectively, related to our Series C
Preferred.
Securities Authorized for Issuance under Equity Compensation
Plans
For a discussion of our equity compensation plans,
please see “Securities Authorized for
Equity Compensation Under Equity Compensation
Plans”
above.
Recent Sales of Unregistered Securities
We
issued certain equity securities in unregistered transactions
during 2020 and fiscal year 2019. All of the 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, 2019 and
through the date of this report.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As of June 25, 2020, we had four classes of voting stock
outstanding: (i) Common Stock; (ii) our Series A Preferred; (iii)
our Series B Preferred and (iv) our Series C Preferred. The
following tables sets forth information regarding shares of Series
A Preferred, Series B Preferred, Series C Preferred, and Common
Stock beneficially owned as of June
25, 2020
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
B, and Series C. Percent ownership is calculated based on 37,467
shares of Series A Preferred, 239,400 shares of Series B Preferred,
1,000 shares of Series C Preferred and 129,035,167 shares Common
Stock outstanding as of June 25, 2020.
Beneficial Ownership of Series A Preferred
Name, Address and Title (if applicable) (1)
|
Series A Preferred
Stock (2)
|
|
|
|
|
Directors and Named Executive
Officers: (3)
|
|
|
S.
James Miller, Jr., Chair of the Board
|
100
|
*
|
Wayne
Wetherell, Former Chief Financial Officer
|
25
|
*
|
Neal
Goldman, Director
|
9,434
|
25.2%
|
Total beneficial ownership of directors and officers as a group (9
persons):
|
9,559
|
25.5%
|
|
|
|
5%
Stockholders:
|
|
|
Charles
Frischer
4404 52nd Avenue NE
Seattle,
WA 98105
|
3,105
|
8.3%
|
Robert
C. Clutterbuck
1360 East 9th
Street, Suite 1250
Cleveland, OH
44114
|
2,148
|
5.7%
|
CF Special Situation Fund I, LP
(4)
1360 East 9th
Street, Suite 1250
Cleveland, OH
44114
|
5,605
|
15.0%
|
CAP 1 LLC (5)
14000
Quail Spring Parkway, Suite 2200
Oklahoma
City, OK 73134
|
3,000
|
8.0%
|
Richard
Leahy
322
Pilots Point
Mt.
Pleasant, SC 29464
|
2,000
|
5.3%
|
* less than 1%
(1)
The
business address of each of the executive officers and directors is
13500 Evening Creek Drive N., Suite 550, San Diego, CA
92128.
(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)
Each of the Company’s Named Executive
Officers and directors who do not hold shares of Series A Preferred
are excluded from this table.
(4)
Robert
T. Clutterbuck is President of CF Special Situation Fund I,
LP.
(5)
Mr.
David Sackler, President of CAP I LLC, may be deemed to have voting
and investment discretion over the securities identified
herein.
Beneficial Ownership of Series B Preferred
Name, Address and Title (if applicable) (1)
|
Series B
Preferred
Stock (2)
|
|
Darrelyn
Carpenter
|
28,000
|
12%
|
Frederick
C. Orton
|
20,000
|
8%
|
Howard
Harrison
|
20,000
|
8%
|
Wesley
Hampton
|
16,000
|
7%
|
(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 13500 Evening Creek Drive N.,
Suite 550, San Diego, CA 92128.
(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 C Preferred
Name, Address and Title (if applicable) (1)
|
Series C
Preferred
Stock (2)
|
|
Blackwell Partners
LLC – Series A (3)
c/o Nantahala
Capital Management, LLC
19 Old Kings
Highway South, Suite 200
Darien, CT
06820
|
128
|
12.8%
|
Geode Capital
Management LP
1 Post Office
Square, 20th Floor
Boston, MA
02109
|
100
|
10.0%
|
Nantahala Capital
Partners Limited Partnership (3)
c/o Nantahala
Capital Management, LLC
19 Old Kings
Highway South, Suite 200
Darien, CT
06820
|
54
|
5.4%
|
Nantahala Capital
Partners II Limited Partnership (3)
c/o Nantahala
Capital Management, LLC
19 Old Kings
Highway South, Suite 200
Darien, CT
06820
|
112
|
11.2%
|
Nantahala Capital
Partners SI LP (3)
c/o Nantahala
Capital Management, LLC
19 Old Kings
Highway South, Suite 200
Darien, CT
06820
|
397
|
39.7%
|
Shellback
Financial, LLC
16405 45th Avenue
North
Minneapolis, MN
55446
|
100
|
10.0%
|
Silver Creek CS
SAV, L.L.C. (3)
c/o Nantahala
Capital Management, LLC
19 Old Kings
Highway South, Suite 200
Darien, CT
06820
|
59
|
5.9%
|
(1)
Each of the Company’s Named Executive
Officers and directors who do not hold shares of Series C 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. 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 C Preferred for purposes of Section 13(d) of
the Exchange Act or any other purpose.
Beneficial Ownership of Common Stock
Name and Address
|
|
|
|
|
|
Directors and Named Executive
Officers:
|
|
|
S. James Miller, Jr., Chair of the
Board (3)
|
3,270,790
|
2.5%
|
David Carey, Director (4)
|
269,022
|
*
|
Neal Goldman, Director (5)
|
47,534,940
|
33.6%
|
G. Steve Hamm, Director (6)
|
266,608
|
*
|
Dana W. Kammersgard, Director (7)
|
234,836
|
*
|
David Loesch, Director (8)
|
297,230
|
*
|
Kristin
Taylor, Chief Executive Officer
|
0
|
*
|
Jonathan
D. Morris, Chief Financial Officer
|
0
|
*
|
David Harding, Chief Technical Officer
(9)
|
1,108,350
|
*
|
|
|
|
Total beneficial ownership of directors and Named Executive
Officers as a group (9 persons):
|
52,981,776
|
33.5%
|
* less than 1%
(1)
All
entries exclude beneficial ownership of shares issuable pursuant to
options that have not vested or that are not otherwise exercisable
as of the date hereof, or which will not become vested or
exercisable within 60 days of June 25,
2020.
(2)
Percentages
are rounded to nearest one-tenth of one percent. Percentages are
based on 129,035,167 shares of Common Stock outstanding as of June
25, 2020. Options that are presently exercisable or
exercisable within 60 days of June 25, 2020 are deemed
to be beneficially owned by the stockholder holding the options for
the purpose of computing the percentage ownership of that
stockholder, but are not treated as outstanding for the purpose of
computing the percentage of any other stockholder.
(3)
Includes
75,201 shares held jointly with spouse, 1,541,668 shares issuable
upon exercise of stock options, each exercisable within 60 days of
June 25, 2020, 92,817 shares issuable upon the
conversion of Series A Preferred, 630,578 shares issuable
upon conversion of Convertible Notes and 3,987 shares
issuable upon the exercise of warrants.
(4)
Includes
162,336 shares issuable upon exercise of stock options exercisable
within 60 days of June 25, 2020.
(5)
Includes
8,756,370 shares issuable upon the conversion of Series A Preferred
and 147,336 shares issuable upon exercise of stock options, each
exercisable within 60 days of June 25, 2020. Mr.
Goldman exercises sole voting and dispositive power over 33,298,556
shares, and shared voting and dispositive power over 3,147,700
reported shares, of which 3,000,000 shares are owned by the Goldman
Family 2012 GST Trust and 147,700 shares are owed by The Neal and
Marlene Goldman Foundation, 3,359,337 shares issuable upon
the conversion of Convertible Notes and 376,128 shares
issuable upon the exercise of warrants.
(6)
Includes
162,336 shares issuable upon exercise of stock options exercisable
within 60 days of June 25, 2020.
(7)
Includes
149,336 shares issuable upon exercise of stock options exercisable
within 60 days of June 25, 2020.
(8)
Includes
162,336 shares issuable upon exercise of stock options, each
exercisable within 60 days of June 25,
2020.
(9)
Includes
1,058,350 shares issuable upon exercise of stock options
exercisable within 60 days of June 25,
2020.
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
Our consolidated
financial statements appearing elsewhere in this registration
statement for the years ended December 31, 2019 and 2018, and
the effectiveness of our internal control over financial reporting
as of December 31, 2019, have been audited by Mayer Hoffman
McCann P.C., an independent registered public accounting firm, as
set forth in their reports thereon (which include an explanatory paragraph related to
the change in the method of accounting for leases and an
explanatory paragraph about the existence of substantial doubt
about the Company’s ability to continue as a going
concern). Such consolidated
financial statements are included herein in reliance upon such
reports given on the authority of such firm as experts in
accounting and auditing, in giving said
reports.
WHERE YOU CAN
FIND MORE INFORMATION
We
are a public company and file annual, quarterly and special
reports, proxy statements and other information with the SEC. You
may read and copy any document we file at the SEC’s public
reference room at 100 F Street, NE, Washington, D.C. Because we are
subject to the information and reporting requirements of the
Exchange Act, we file periodic reports, proxy statements and other
information with the SEC. Our SEC filings are available to the
public over the Internet at the SEC’s website at
http://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.
We have
not incorporated by reference into this prospectus the information
on our website, and you should not consider it to be a part of this
prospectus.
IMAGEWARE SYSTEMS, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
Three Months Ended March 31, 2020 and
2019
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-7
|
|
|
|
|
|
F-9
|
|
|
|
Fiscal Year Ended December 31, 2019 and
2018
|
|
|
|
|
|
|
|
F-29
|
|
|
|
|
|
F-31
|
|
|
|
|
|
F-32
|
|
|
|
|
|
F-33
|
|
|
|
|
|
F-34
|
|
|
|
|
|
F-36
|
|
|
|
|
|
F-37
|
IMAGEWARE
SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except for share and per share
data)
|
|
|
ASSETS
|
|
|
Current
Assets:
|
|
|
Cash and cash
equivalents
|
$53
|
$1,030
|
Accounts
receivable, net of allowance for doubtful accounts of $7 at March
31, 2020 and December 31, 2019.
|
489
|
657
|
Inventory,
net
|
679
|
615
|
Stock
subscription receivable
|
765
|
—
|
Other
current assets
|
214
|
243
|
Total
Current Assets
|
2,200
|
2,545
|
|
|
|
Property
and equipment, net
|
198
|
216
|
Other
assets
|
256
|
257
|
Operating
lease right-of-use assets
|
1,822
|
1,906
|
Intangible
assets, net of accumulated amortization
|
67
|
70
|
Goodwill
|
3,416
|
3,416
|
Total Assets
|
$7,959
|
$8,410
|
|
|
|
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
Current
Liabilities:
|
|
|
Accounts
payable
|
$1,178
|
$515
|
Deferred
revenue
|
1,865
|
1,629
|
Accrued
expense
|
2,594
|
1,312
|
Notes
payable to related parties
|
350
|
—
|
Operating
lease liabilities, current portion
|
391
|
373
|
Derivative
liabilities
|
172
|
369
|
Total
Current Liabilities
|
6,550
|
4,198
|
|
|
|
Other
long-term liabilities
|
118
|
118
|
Lease
liabilities, net of current portion
|
1,611
|
1,716
|
Pension
obligation
|
2,265
|
2,256
|
Total
Liabilities
|
10,544
|
8,288
|
|
|
|
Mezzanine
Equity:
|
|
|
Series C
Convertible Redeemable Preferred Stock, $0.01 par value, designated
1,000 shares, 1,000 shares issued and outstanding at March 31, 2020
(unaudited) and December 31, 2019, respectively; liquidation
preference $10,250 at March 31, 2020 (unaudited) and $10,000 at
December 31, 2019.
|
9,059
|
8,884
|
|
|
|
Shareholders’
Deficit:
|
|
|
Preferred
stock, authorized 4,000,000 shares:
|
|
|
Series A Convertible Redeemable Preferred Stock,
$0.01 par value;designated 38,000 shares, 37,467 shares issued and
outstanding at March 31, 2020 (unaudited) and December 31,
2019; liquidation preference $38,404
at March 31, 2020 (unaudited) and $37,467 at December 31,
2019.
|
—
|
—
|
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, 2020 (unaudited)
and December 31, 2019; liquidation
preference $620 and $607 at March 31, 2020 (unaudited) and
December 31, 2019, respectively.
|
2
|
2
|
Common Stock, $0.01 par value, 175,000,000 shares
authorized; 123,753,176 and 113,353,176 shares issued at
March 31, 2020 (unaudited) and December 31, 2019, respectively, and 123,746,472 and 113,346,472
shares outstanding at March 31, 2020 (unaudited) and
December 31, 2019,
respectively.
|
1,237
|
1,133
|
Additional
paid-in capital
|
196,373
|
195,079
|
Treasury
stock, at cost 6,704 shares
|
(64)
|
(64)
|
Accumulated
other comprehensive loss
|
(1,710)
|
(1,741)
|
Accumulated
deficit
|
(207,482)
|
(203,171)
|
Total
Shareholders’ Deficit
|
(11,644)
|
(8,762)
|
Total Liabilities, Mezzanine Equity and Shareholders’
Deficit
|
$7,959
|
$8,410
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except share and per share
amounts)
(Unaudited)
|
Three
Months Ended
March
31,
|
|
|
|
Revenue:
|
|
|
Product
|
$150
|
$278
|
Maintenance
|
646
|
653
|
|
796
|
931
|
Cost
of revenue:
|
|
|
Product
|
21
|
84
|
Maintenance
|
98
|
120
|
Gross
profit
|
677
|
727
|
|
|
|
Operating
expense:
|
|
|
General and
administrative
|
983
|
1,107
|
Sales and
marketing
|
1,058
|
1,005
|
Research and
development
|
1,868
|
1,774
|
Depreciation and
amortization
|
18
|
19
|
|
3,927
|
3,905
|
Loss from
operations
|
(3,250)
|
(3,178)
|
|
|
|
Interest (income)
expense, net
|
24
|
(22)
|
(Gain) Loss on
change in fair value of derivative liabilities
|
(197)
|
424
|
Other components of
net periodic pension expense
|
47
|
32
|
Loss before income
taxes
|
(3,124)
|
(3,612)
|
Income tax
expense
|
—
|
—
|
Net
loss
|
(3,124)
|
(3,612)
|
Preferred dividends
and preferred stock discount accretion
|
(1,374)
|
(1,294)
|
Net loss available
to common shareholders
|
$(4,498)
|
$(4,906)
|
|
|
|
Basic
and diluted loss per common share - see Note 3:
|
|
|
Basic and diluted
loss per share available to common shareholders
|
$(0.04)
|
$(0.05)
|
Basic and diluted
weighted-average shares outstanding
|
116,196,197
|
98,398,239
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
(Unaudited)
|
Three
Months Ended
March
31,
|
|
|
|
Net
loss
|
$(3,124)
|
$(3,612)
|
Other comprehensive
income (loss):
|
|
|
Foreign currency
translation adjustment
|
31
|
15
|
Comprehensive
loss
|
$(3,093)
|
$(3,597)
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
IMAGEWARE SYSTEMS, INC.
CONDENSED 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 SHAREHOLDERS' EQUITY
(DEFICIT)
(In Thousands, except share amounts)
(Unaudited)
Three Months Ended March 31, 2019
|
Series
A Convertible,
Redeemable
Preferred
|
Series
B Convertible,
Redeemable
Preferred
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Preferred Stock discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(186)
|
-
|
-
|
(186)
|
Issuance
of Common Stock pursuant to option exercises
|
-
|
-
|
-
|
-
|
286,834
|
3
|
-
|
-
|
103
|
-
|
-
|
106
|
Stock-based
compensation expense
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
166
|
-
|
-
|
166
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
15
|
-
|
15
|
Dividends
on Series A preferred stock, $(23.06)/share
|
-
|
-
|
-
|
-
|
591,803
|
6
|
-
|
-
|
858
|
-
|
(864)
|
-
|
Dividends
on Series C preferred stock, $(231.00)/share
|
-
|
-
|
-
|
-
|
157,945
|
2
|
-
|
-
|
229
|
-
|
(231)
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,612)
|
(3,612)
|
Balance
at March 31, 2019
|
37,467
|
$-
|
239,400
|
$2
|
99,266,918
|
$992
|
(6,704)
|
$(64)
|
$185,300
|
$(1,413)
|
$(191,355)
|
$(6,538)
|
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
|
$(3,124)
|
$(3,612)
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
Depreciation and
amortization
|
18
|
19
|
Stock-based
compensation
|
124
|
166
|
Issuance of common
stock in exchange for unexercised options
|
62
|
—
|
Change in fair
value of derivative liabilities
|
(197)
|
424
|
Change in assets
and liabilities:
|
|
|
Accounts
receivable
|
168
|
(151)
|
Inventory
|
(64)
|
(75)
|
Other
assets
|
30
|
71
|
Operating lease
right-of-use assets
|
(3)
|
46
|
Accounts
payable
|
662
|
(230)
|
Deferred
revenue
|
234
|
275
|
Accrued
expense
|
102
|
201
|
Contract
costs
|
—
|
(29)
|
Pension
obligation
|
8
|
13
|
Total
adjustments
|
1,144
|
730
|
Net cash used in
operating activities
|
(1,980)
|
(2,882)
|
|
|
|
Cash
flows from investing activities
|
|
|
Purchase of
property and equipment
|
—
|
(8)
|
Net cash used in
investing activities
|
—
|
(8)
|
|
|
|
Cash
flows from financing activities
|
|
|
Proceeds from
issuance of common stock, net
|
622
|
—
|
Proceeds from
exercise of stock options
|
—
|
106
|
Proceeds from
issuance of related party notes payable
|
350
|
—
|
Net cash provided
by financing activities
|
972
|
106
|
|
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
31
|
15
|
Net decrease in
cash and cash equivalents
|
(977)
|
(2,769)
|
|
|
|
Cash and cash
equivalents at beginning of period
|
1,030
|
5,694
|
|
|
|
Cash and cash
equivalents at end of period
|
$53
|
$2,925
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash paid for
interest
|
$—
|
$—
|
Cash paid for
income taxes
|
$—
|
$—
|
Summary of non-cash
investing and financing activities:
|
|
|
Accrued stock
dividends on Series A Convertible Preferred
Stock
|
$937
|
$864
|
Accrued stock
dividends on Series C Convertible Redeemable Preferred
Stock
|
$250
|
$231
|
Accretion of
discount on Series C Convertible Redeemable Preferred
Stock
|
$175
|
$186
|
Recognition of
operating lease right-of-use assets from adoption of ASC
842
|
$—
|
$2,265
|
Recognition of
lease liabilities from adoption of ASC 842
|
$—
|
$(2,280)
|
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 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 and capital expenditure
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.
Related Party Financings
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and were due no later than 21 days after
February 12, 2020. As of June 25, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In April 2020, the Company received an aggregate
amount of $550,000 from two members of the Company’s Board of
Directors. Terms of repayment are currently being negotiated
between the Company and Board Members, although it is currently
anticipated that the Company will issue subordinated promissory
notes that will convert into shares of the Company’s common
stock, par value $0.01 per share ("Common
Stock"), at a conversion price
to be agreed to by the lenders and the
Company.
2020 Common Stock Financings
Triton Funds LP
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" or the "Investor"). 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 the Company's
Common Stock under the Triton Purchase Agreement (the
"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 the Investor to be set forth in each written notice sent to
the Investor by the Company (the "Purchase
Notice") and delivered to the
Investor (the "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 "Purchased
Shares"). The Closing of the
purchase of the Purchased Shares as set forth in the Purchase
Notice will occur no later than three business days following
receipt of the Purchased Shares by the
Investor.
In
February and March of 2020, the Company sold, and Triton purchased,
an aggregate of 10,000,000 shares of the Company’s 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.
Proceeds from the March 2020 sale were received on April 29, 2020.
Aggregate net proceeds from this financing approximated $1,387,000
after recognition of direct offering costs.
As prescribed by ASC topic 505,
Equity,
stock subscription receivable represents the purchase of Common
Stock for which the Company has not yet received payment from the
purchaser. As of March 31, 2020, the Company has recorded a stock
subscription receivable in the amount of $765,000 in its condensed
consolidated balance sheet. This amount was received by the Company
on April 29, 2020.
Lincoln Park Capital Fund, LLC
On April 28, 2020, we entered into a purchase
agreement, as amended on June 11, 2020 (the
“Purchase
Agreement”), and a
registration rights agreement (the “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 Purchase Agreement, including stockholder approval of an
amendment to the Company’s 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 our Common
Stock. On April 28, 2020, we sold 1,000,000 shares of Common Stock
to Lincoln Park under the 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 Purchase Agreement for an aggregate purchase
price of $150,000 (the “Commencement 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, the Company has the right,
in its sole discretion, to direct Lincoln Park to purchase up to
125,000 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. In addition to Regular Purchases, provided
that the Company presents Lincoln Park with a 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 Purchase Agreement.
Pursuant to the
terms of the Purchase Agreement, in no event may the Company issue
or sell to Lincoln Park under the shares of the Company’s
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 the Investor 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. 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 Purchase
Agreement.
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.
CARES Act Financing
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, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use 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.
Going Concern
At
March 31, 2020, we had negative working capital of approximately
$4,350,000. Our principal sources of liquidity at March 31, 2020
consisted of approximately $53,000 of cash and cash
equivalents.
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.
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 June 23, 2020, cash on hand approximated $945,000. Based
on the Company’s rate of cash consumption in the first
quarter of 2020 and the last quarter of 2019, the Company will need
additional capital in the third quarter of 2020 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 utilize cash
proceeds available under the Lincoln Park facility at such time as
the Company is able to register shares to be issued to Lincoln
Park. Additionally, management is currently negotiating a
restructuring of certain of our issued and outstanding Preferred
Stock to facilitate additional equity and/or debt financing, and
may seek strategic or other transactions intended to provide
necessary working capital and increase shareholder value. There are
currently no agreements with the holders of our issued and
outstanding Preferred Stock or 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 such
efforts, including our ability to raise 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 condensed 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 regarding 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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF
PRESENTATION
Basis of Presentation
The accompanying
condensed consolidated balance sheet as of December 31, 2019, 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, 2019, which are included in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2019 as filed with the SEC on May 15,
2020.
Operating
results for the three months ending March 31, 2020 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2020, 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, deferred tax asset valuation
allowances, recoverability of goodwill, 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 C Preferred Financing, 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
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, 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. The
Company has also elected the optional transition package of
practical expedients which include:
A package of
practical expedients to not reassess:
●
Whether
a contract is or contains a lease
●
Lease
classification, and
Revenue Recognition
Effective January 1, 2018, we adopted ASC 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”)
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, 2020 and December 31,
2019, we had capitalized incremental costs of obtaining a contract
with a customer of approximately $118,000. We recorded no
additional contract costs during the three months ended March 31,
2020. Additionally, we recognized no revenue during the three
months ended March 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 three months ended
March 31, 2020 and 2019:
|
Three
Months Ended
March
31,
|
Net
Revenue
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$125
|
$111
|
Hardware and
consumables
|
14
|
11
|
Services
|
11
|
156
|
Maintenance
|
646
|
653
|
Total
revenue
|
$796
|
$931
|
Customer Concentration
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.
For the three
months ended March 31, 2019, two customers accounted for
approximately 46% or $424,000 of our total revenue and had trade
receivables at March 31, 2019 of $651,000.
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. 2018-14. In August 2018, the FASB issued ASU
2018-14, “Compensation
—Retirement Benefits —Defined Benefit Plans
—General (Subtopic 715-20) —Disclosure Framework
—Changes to the Disclosure Requirements for Defined Benefit
Plans” (“ASU 2018-14”). The amendments in this update remove
defined benefit plan disclosures that are no longer considered
cost-beneficial, clarify the specific requirements of disclosures,
and add disclosure requirements identified as relevant. ASU 2018-14
is effective for fiscal years ending after December 15, 2020. Early
adoption is permitted. The adoption of this standard should be
applied to all periods presented. The adoption of this standard
will not have a material impact on the Company’s consolidated
financial statements.
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
Company does not expect the adoption of this standard to have a
material impact 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
|
$(3,124)
|
$(3,612)
|
Preferred
dividends, deemed dividends and accretion
|
(1,374)
|
(1,294)
|
Net loss available
to common shareholders
|
$(4,498)
|
$(4,906)
|
|
|
|
Denominator for
basic and dilutive loss per share — weighted-average shares
outstanding
|
116,196,197
|
98,398,239
|
|
|
|
Basic and diluted
loss per share available to common shareholders
|
$(0.04)
|
$(0.05)
|
The
following potential dilutive securities have been excluded from the
computations of diluted weighted-average shares outstanding, as
their effect would have been
antidilutive:
Potential
Dilutive securities
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
Convertible
redeemable preferred stock
|
43,685,695
|
42,626,980
|
Stock
options
|
5,927,332
|
7,225,421
|
Warrants
|
1,733,856
|
1,813,856
|
Total potential
dilutive securities
|
51,346,883
|
51,666,257
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $679,000 as of March 31, 2020 were comprised of work
in process of $666,000 representing direct labor costs on
in-process projects and finished goods of $13,000 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.
Intangible Assets
The
carrying amounts of the Company’s patent intangible assets
were $67,000 and $70,000 as of March 31, 2020 and December 31,
2019, respectively, which includes accumulated amortization of
$592,000 and $589,000 as of March 31, 2020 and December 31, 2019,
respectively. Amortization expense for patent intangible
assets was $3,000 for the three months ended March 31, 2020 and
2019. Patent intangible assets are being amortized on a
straight-line basis over their remaining life of approximately 6.25
years. There was no impairment of the Company’s intangible
assets during the three months ended March 31, 2020 and
2019.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
Fiscal
Year Ended December 31,
|
Estimated
Amortization
Expense
($ in
thousands)
|
2020 (nine
months)
|
$9
|
2021
|
12
|
2022
|
12
|
2023
|
12
|
2024
|
12
|
Thereafter
|
10
|
Totals
|
$67
|
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, 2020, had a negative
carrying amount of approximately $11,841,000. Based on the results
of the Company's impairment testing, the Company determined that
its goodwill was not impaired during the three months
ended March 31, 2020 and the year ended December 31,
2019.
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, 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 March 31, 2020, such assets and liabilities
aggregated approximately $1,822,000 and $2,002,000, respectively.
The Company determined that it had no arrangements representing
finance leases.
The Company’s
operating leasing arrangements are summarized
below:
●
The
Company’s corporate headquarters is located in San Diego,
California, where it occupies 8,511 square feet of office space at
an average cost of approximately $28,000 per month. This
facility’s lease was entered into by the Company in July
2018. This lease commenced on November 1, 2018 and terminates on
April 30, 2025;
●
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;
●
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,
2020.
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 three
months ended March 31, 2020 and 2019, 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, 2020 is 4.29
years. Cash payments under operating leases aggregated
approximately $161,000 and $117,000 for the three months ended
March 31, 2020 and 2019, respectively, and are included in
operating cash flows.
The Company’s
lease liability was computed using the present value of future
lease payments. The Company has utilized the practical expedient
regarding lease and non-lease components and combined such
components into a single combined component in the determination of
the lease liability. The Company has excluded the lease of its
office space in Mexico City, Mexico in the determination of the
lease liability as of January 1, 2019 as its term is less than 12
months.
At
March 31, 2020, future minimum undiscounted lease payments are as
follows:
($ in
thousands)
|
|
2020
(nine months)
|
$502
|
2021
|
642
|
2022
|
652
|
2023
|
425
|
2024
|
387
|
Thereafter
|
130
|
Total
|
2,738
|
Short-term
leases not included in lease liability
|
(14)
|
Present
Value effect on future minimum undiscounted lease payments at March
31, 2020
|
(722)
|
Lease
liability at March 31, 2020
|
$2,002
|
Less
current portion
|
(391)
|
Non-current
lease liability at March 31, 2020
|
$1,611
|
NOTE 6. 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
Convertible Redeemable Preferred stock (the
“Series C
COD”) with the Secretary
of State for the State of Delaware – Division of
Corporations, designating 1,000 shares of the Company’s
preferred stock, par value $0.01 per share, as Series C Preferred,
each share with a stated value of $10,000 per share (the
“Stated
Value”). 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
(“Conversion
Shares”) 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 COD.
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 COD). Subject to the terms and
conditions set forth in the Series C COD, 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 COD) 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. 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.
On September 10, 2018, the Company offered and
sold a total of 890 shares of Series C Preferred at a purchase
price of $10,000 per share, and on September 21, 2018, the Company
offered and sold an additional 110 shares of Series C Preferred at
a purchase price of $10,000 per share. The total gross proceeds to
the Company from the Series C Financing were $10,000,000. Issuance
costs incurred in conjunction with the Series C Financing were
approximately $1,211,000. Such costs have been recorded as a
discount on the Series C Preferred Stock and will be accreted to
the point of earliest redemption which is the third anniversary of
the Series C Financing or September 10, 2021 using the effective
interest rate method. The accretion of these costs is recorded as a
deemed dividend.
There were no issuances
or conversions of Series C Preferred during the three months ended
March 31, 2020 or March 31, 2019. The Company issued the holders of
Series C Preferred an aggregate of 157,945 shares of Common Stock
on March 31, 2019 as dividends.
At
March 31, 2020 and December 31, 2019, the Company had cumulative
dividends of approximately $250,000 and $0, respectively. At March
31, 2020, the unpaid Series C dividend of $250,000 is included as a
current liability under the caption “Accrued expense”
in the Company’s condensed consolidated balance
sheet.
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.
The Company noted
that the Series C 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.
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
is 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 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.
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 will be accreted to the
point of earliest redemption which is the third anniversary of the
Series C Financing or September 10, 2021 using the effective
interest rate method. The accretion of these features is recorded
as a deemed dividend.
For the three
months ended March 31, 2020, the Company recorded the accretion of
debt issuance costs and derivative liabilities aggregating
approximately $175,000 using the effective interest rate method.
For the three months ended March 31, 2019, the Company recorded the
accretion of debt issuance costs and derivative liabilities
aggregating approximately $186,000 using the effective interest
rate method.
There were no conversions of Series C Preferred
into Common Stock during the three months ended March 31,
2020 and 2019.
The
Company reflected the following in Mezzanine Equity for the Series
C Preferred Stock as of December 31, 2019 and March 31,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands, except share amounts)
|
|
|
|
|
|
Total Series C
Preferred Stock as of December 31, 2019
|
1,000
|
$8,884
|
|
|
|
Accretion of
discount – deemed dividend for the three months ended March
31, 2020
|
—
|
175
|
|
|
|
Total
Series C Preferred Stock as of March 31, 2020
|
1,000
|
$9,059
|
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 C Preferred host contract 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 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. Such amounts are recorded in the caption
“(Gain) loss on change in fair value of derivative
liabilities” in the Company’s condensed consolidated
statements of operations. During the three months ended March 31,
2020, the Company recorded a decrease to these derivative
liabilities using fair value methodologies of approximately
$197,000. As a result of this decrease, such liabilities aggregated
approximately $172,000 at March 31, 2020. During the three months
ended March 31, 2019, the Company recorded an increase to these
derivative liabilities using fair value methodologies of
approximately $424,000.
NOTE 8. 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.
Series A Convertible Preferred Stock
The Company had 37,467 shares of Series A
Preferred outstanding as of March 31, 2020 and December 31,
2019. At March 31, 2020 and December 31, 2019, the Company had
cumulative dividends of approximately $937,000 and $0,
respectively. There were no conversions of Series A Preferred into
Common Stock during the three months ended March 31, 2020
and 2019. At March 31, 2020, the
unpaid Series A dividend of approximately $937,000 is included as a
current liability under the caption “Accrued expense”
in the Company’s condensed consolidated balance
sheet.
Series B Convertible Preferred Stock
The Company had 239,400 shares of Series B
Convertible Preferred stock, par value $0.01 per share
(“Series B
Preferred”), outstanding
as of March 31, 2020 and December 31, 2019. At March 31, 2020 and
December 31, 2019, the Company had cumulative undeclared dividends
of approximately $21,000 and $8,000. There were no conversions of
Series B Preferred into Common Stock during the three months
ended March 31, 2020 and 2019.
Common Stock
The following table summarizes Common Stock
activity for the three months ended March 31,
2020:
|
|
Shares
outstanding at December 31, 2019
|
113,346,472
|
Shares
issued pursuant to option exchange
|
400,000
|
Shares
issued for cash and stock subscription
receivable
|
10,000,000
|
Shares
outstanding at March 31, 2020
|
123,746,472
|
In
February and March of 2020, the Company sold, and Triton purchased,
an aggregate of 10,000,000 shares of the Company’s 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.
Proceeds from the March 2020 sale were received on April 29, 2020.
Aggregate net proceeds from this financing approximated $1,387,000
after recognition of direct offering costs.
As prescribed by ASC topic 505,
Equity,
stock subscription receivable represents the purchase of Common
Stock for which the Company has not yet received payment from the
purchaser. As of March 31, 2020, the Company has recorded a stock
subscription receivable in the amount of $765,000. This amount was
received by the Company on April 29,
2020.
During the three
months ended March 31, 2020, the Company issued 400,000 shares of
its Common Stock pursuant to an exchange agreement with certain
terminated employees whereby such employees exchanged 800,000
Common Stock purchase options for 400,000 shares of Common Stock as
a component of their severance agreement. The Company recorded the
grant date fair value of this Common Stock issuance as severance
expense in the amount of approximately $62,000.
Warrants
The
following table summarizes warrant activity for the following
periods:
|
|
Weighted-
Average
Exercise
Price
|
Balance at December
31, 2019
|
1,733,856
|
$0.14
|
Granted
|
—
|
—
|
Expired/Canceled
|
—
|
—
|
Exercised
|
—
|
—
|
Balance at
March 31,
2020
|
1,733,856
|
$0.14
|
As of March 31, 2020, warrants to purchase
1,733,856 shares
of Common Stock at prices ranging from $0.01 to $1.46 were
outstanding. All warrants are exercisable as of March 31, 2020 and
expire as of July 29, 2020, except for an aggregate of 1,643,856
warrants, which become exercisable only upon the attainment of
specified events. Such warrants expire at various dates through
September 2028. The intrinsic value of warrants outstanding at
March 31, 2020 was $0. The Company has excluded from this
computation any intrinsic value of the 1,493,856 warrants issued to
the Series A Preferred stockholders due to the conversion exercise
contingency more fully described above.
Stock-Based Compensation
The Company’s 1999 Stock Award Plan (the
“1999
Plan”) was adopted by the
Company’s Board of Directors on December 17, 1999. Under the
terms of the 1999 Plan, the Company could, originally, issue up to
350,000 non-qualified or incentive stock options to purchase Common
Stock of the Company. During the year ended December 31, 2014, the
Company subsequently amended and restated the 1999 Plan, whereby it
increased the share reserve for issuance to approximately 7.0
million shares of the Company’s Common Stock. Subsequently,
in February 2018, the Company amended and restated the 1999 Plan,
whereby it increased the share reserve for issuance by an
additional 2.0 million shares. The 1999 Plan prohibits the
grant of stock option or stock appreciation right awards with an
exercise price less than fair market value of Common Stock on the
date of grant. The 1999 Plan also generally prohibits the
“re-pricing” of stock options or stock appreciation
rights, although awards may be bought-out for a payment in cash or
the Company’s stock. The 1999 Plan permits the grant of
stock-based awards other than stock options, including the grant of
“full value” awards such as restricted stock, stock
units and performance shares. The 1999 Plan permits the
qualification of awards under the plan (payable in either stock or
cash) as “performance-based compensation” within the
meaning of Section 162(m) of the Revenue Code. The number of
options issued and outstanding and the number of options remaining
available for future issuance are shown in the table below. The
number of authorized shares available for issuance under the plan
at March 31, 2020 was 1,679,259.
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
of Directors. 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 Internal
Revenue Code of 1986 (the “Code”).
Pursuant to the adoption of the 2020 Plan, such
plan will supersede and replace the Company’s 1999 Stock
Option Plan (the “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.
A
more detailed description of the 2020 Plan is set forth in Note
12.
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. Stock-based compensation expense
related to equity options was approximately $124,000 and $166,000
for the three months ended March 31, 2020 and 2019,
respectively.
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. There were no options granted during the three months
ended March 31, 2020. Historical volatility factors utilized in the
Company’s Black-Scholes computations for options granted
during the three months March 31, 2019 ranged from 57% to 59%. 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 three months ended March 31,
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 three months ended March 31, 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 0% for corporate officers, 4.1% for members
of the Board of Directors and 6.0% 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
|
Balance at December
31, 2019
|
7,204,672
|
$1.32
|
Granted
|
—
|
$—
|
Expired/Cancelled
|
(1,277,340)
|
$1.31
|
Exercised
|
—
|
$—
|
Balance at March
31, 2020
|
5,927,332
|
$1.32
|
During the three
months ended March 31, 2020, the Company issued 400,000 shares of
its Common Stock pursuant to an exchange agreement with certain
terminated employees whereby such employees exchanged 800,000
Common Stock purchase options for 400,000 shares of Common Stock as
a component of their severance agreement. The Company recorded the
grant date fair value of this Common Stock issuance as severance
expense in the amount of approximately $62,000. In addition to
these 800,000 options, an additional 477,340 options expired
unexercised during the three months ended March 31,
2020.
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.
Stock-based
compensation related to equity options, including options granted
to certain members of the Company’s Board of Directors, has
been classified as follows in the accompanying condensed
consolidated statements of operations (in
thousands):
|
Three Months Ended
March 31,
|
|
|
|
Cost
of revenue
|
$2
|
$3
|
General
and administrative
|
67
|
93
|
Sales
and marketing
|
29
|
39
|
Research
and development
|
26
|
31
|
Total
|
$124
|
$166
|
NOTE 9. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “Fair Value Measurements and
Disclosures”, which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value
measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
Level
2
|
Applies
to assets or liabilities for which there are inputs other than
quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
|
|
|
|
Level
3
|
Prices
or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value
measurement.
|
Fair Value at March 31, 2020
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$1,675
|
$—
|
$—
|
$1,675
|
Totals
|
$1,675
|
$—
|
$—
|
$1,675
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$172
|
$—
|
$—
|
$172
|
Totals
|
$172
|
$—
|
$—
|
$172
|
|
Fair Value at December 31, 2019
|
($ 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 March 31, 2020, the Company had embedded
features contained in the Series C Preferred host instrument
(issued in September 2018) that qualified
for derivative liability treatment. The
recorded fair market value of these features was approximately
$172,000 and $369,000 at March 31, 2020 and December 31, 2019,
respectively, and are classified as a current liability in the
condensed consolidated balance sheets as of March 31, 2020 and
December 31, 2019. The fair value of the
Company’s derivative liabilities is classified
within Level 3 of the fair value hierarchy because they are valued
using pricing models that incorporate management assumptions that
cannot be corroborated with observable market data. The
Company uses the lattice framework, Monte-Carlo simulations and
other fair value methodologies in the determination of the fair
value of derivative liabilities.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events. Significant assumptions used in the fair value
methodologies during the three months ended March 31, 2020 and 2019
are a risk-free rate of 0.20% to 2.45% equity volatility of 63% to
109%, effective life of 1.44 years to 4.45 years, and a preferred
stock dividend rate of 10.0%. Additionally, management has made
certain estimates regarding the timing of potential change of
control events.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
The reconciliations of Level 3 pension assets
measured at fair value during the three months ended March 31, 2020
and 2019 are presented below:
($
in thousands)
|
Three
months ended
March
31, 2020
|
Three
months ended
March
31, 2019
|
|
|
|
Pension
assets:
|
|
|
Fair
value at beginning of period
|
$1,713
|
$1,733
|
Return
on plan assets
|
14
|
15
|
Company
contributions and benefits paid, net
|
(10)
|
(11)
|
Effect
of rate changes
|
(42)
|
(38)
|
Fair
value at end of period
|
$1,675
|
$1,699
|
The
reconciliations of Level 3 derivative liabilities measured at fair
value during the three months ended March 31, 2020 and 2019 are
presented below:
($
in thousands)
|
Three
months ended
March
31, 2020
|
Three
months ended
March
31, 2019
|
|
|
|
Derivative
liabilities
|
|
|
Fair
value at beginning of period
|
$369
|
$1,065
|
Change
in fair value included in earnings
|
(197)
|
424
|
Fair
value at end of period
|
$172
|
$1,489
|
NOTE 10. RELATED PARTY TRANSACTIONS
Notes Payable
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and are due no later than 21 days after
February 12, 2020. As of June 25, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member. Under the terms of the factoring agreement,
factored money will bear interest at the rate of 1% of the
factoring money for the first seven days, and 1% for each
additional seven days until the factoring money is paid in
full.
In April 2020, the Company received an aggregate
amount of $550,000 from two members of the Company’s Board of
Directors. Terms of repayment are currently being negotiated
between the Company and Board Members, although it is currently
anticipated that the Company will issue subordinated promissory
notes that will convert into shares of the Company’s Common
Stock, par value $0.01 per share ("Common
Stock"), at a conversion price
to be agreed to by the lenders and the
Company.
NOTE 11. CONTINGENT LIABILITIES
Employment Agreements
The
Company has employment agreements with its Chief Executive Officer
and its Chief Technical Officer. The Company may terminate the
agreements with or without cause. Subject to the conditions and
other limitations set forth in each respective employment
agreement, each executive will be entitled to the following
severance benefits if the Company terminates the executive’s
employment without cause or in the event of an involuntary
termination (as defined in the employment agreements) by the
Company or by the executive:
Under
the terms of the employment agreement with our Chief Executive
Officer, executed April 10, 2020, the Chief Executive Officer will
be entitled to the following severance benefits if we terminate her
employment without cause or in the event of an involuntary
termination: (i) severance payments equal to the lesser of twelve
(12) months of salary or the remaining period prior to the
expiration of the employment period; (ii) continuation of medical
insurance for a period of twelve months.
Under
the terms of the employment agreement with our Chief Technical
Officer, this executive will be entitled to the following severance
benefits if we terminate his employment without cause or in the
event of an involuntary termination: (i) a lump sum cash payment
equal to six months of base salary; and (ii) continuation of their
fringe benefits and medical insurance for a period of six months.
In the event that his employment is terminated within six months
prior to or thirteen months following a change of control (as
defined in the employment agreements), he is entitled to the
severance benefits described above, except that 100% of his
outstanding stock options and restricted stock awards will
immediately vest.
On
February 28, 2020, the employment agreement for the Company’s
Chief Technical Officer was amended to extend the term of the
employment agreement until December 31, 2020.
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.
12. SUBSEQUENT EVENTS
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members, although it is currently anticipated that the
Company will issue subordinated promissory notes that will convert
into shares of the Company’s Common Stock, at a conversion
price to be agreed to by the lenders and the
Company.
On April 28, 2020, we entered into a purchase
agreement, as amended on June 11, 2020 (the
“Purchase
Agreement”), and a
registration rights agreement (the “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 Purchase Agreement, including stockholder approval of an
amendment to the Company’s 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 our Common
Stock. On April 28, 2020, we sold 1,000,000 shares of Common Stock
to Lincoln Park under the 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 Purchase Agreement for an aggregate purchase
price of $150,000 (the “Commencement 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, which was filed with the Securities
and Exchange Commission (the “SEC”) pursuant to the Registration Rights
Agreement on June 9, 2020, 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”).
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 125,000 shares of Common Stock per business day,
which increases to up to 425,000 shares in the event the price of
the Company’s Common Stock is not below $0.55 per share (the
"Regular
Purchase") (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 Park 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"),
provided that the closing price of the Company's Common Stock on
the business day immediately preceding such business day is not
below $0.25 (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 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.
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.
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 the Investor and its affiliates of more
than 4.99% of the then issued and outstanding shares of Common
Stock (the “Beneficial
Ownership Limitation”).
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
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 2,500,000 shares of Common Stock
in consideration for entering into the Purchase
Agreement.
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.
On May 4, 2020, the Company entered into a loan
agreement (“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 this program, the
Company received proceeds of approximately $1,571,000, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use 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.
Organizational Developments
The Company and Ms. Kristin Taylor entered into an
employment agreement effective April 10, 2020 resulting from her
appointment as President and Chief Executive Office effective March
2, 2020. A copy of the employment contract that sets forth Ms.
Taylor’s base compensation, equity compensation and
termination provisions was filed with the SEC on April 15, 2020 on
the Company’s Current Report on Form 8-K. On May 27, 2020,
the Company announced the appointment Ms. Taylor to serve as a
director on the Board of Directors (the "Board") of the Company for a period of one year or
until her successor is duly elected. In connection with her service
on the Board and as an employee director, Ms. Taylor is not
entitled to receive any additional
compensation.
On
April 1, 2020, John Cronin resigned from his position as a member
of the Board of Directors of the Company. Mr. Cronin will continue
his work with the Company on intellectual property matters,
including intellectual property monetization.
The
Company announced the appointment of Jonathan D. Morris as Senior
Vice President and Chief Financial Officer effective May 1,
2020.
Subsequent to March 31, 2020, the
Company issued 200,000 shares of its Common Stock to certain
terminated employees as part of such employees’ severance in
exchange for 400,000 outstanding options held by such employees.
Such shares of stock vested immediately. Additionally, on
May 8, 2020 the Company granted 708,916 restricted
stock units to
certain active employees in exchange
for 1,417,832 outstanding
options held by such employees. On May 8, 2020, 88,695 shares of
these restricted stock units vested with the remainder of such
shares of stock vesting quarterly over a period of two
years.
On June 9, 2020, the Company amended its
Certificate of Incorporation, as amended (the
“Charter’) 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 5.0 million shares of Preferred Stock.
Such amendment was made pursuant to authorization obtained from the
Company’s stockholders.
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
of Directors. 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 Internal
Revenue Code of 1986 (the “Code”).
Key
provisions of the 2020 Plan are:
Eligibility
Awards
may be granted under the 2020 Plan to officers, employees and
consultants of our Company and our subsidiaries and to our
non-employee directors. Incentive stock options may be granted only
to employees of our Company or one of our
subsidiaries.
Administration
The
2020 Plan will be administered by the Compensation Committee of the
Board. The Compensation Committee, in its discretion, selects the
individuals to whom awards may be granted, the time or times at
which such awards are granted, and the terms of such awards. The
Compensation Committee may delegate its authority to the extent
permitted by applicable law.
Number of Authorized Shares
A total of 25.0 million shares of Common Stock are
authorized for issuance under the 2020 Plan. In addition, any awards then outstanding
under the 1999 Plan will remain subject to the 1999 Plan. Upon
approval of the 2020 Plan, all shares of Common Stock remaining
authorized and available for issuance under the 1999 Plan,
approximately 1.68 million shares at March 31, 2020, and any shares
then 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 the 2020
Plan.
Limits on Immediate Vesting
No
more than 25% of any equity-based awards granted under the 2020
Plan will vest on the grant date of such award. This requirement
does not apply to (i) substitute awards resulting from acquisitions
or (ii) shares delivered in lieu of fully vested cash awards. In
addition, the minimum vesting requirement does not apply to the
Compensation Committee’s discretion to provide for
accelerated exercisability or vesting of any award, including in
cases of retirement, death, disability or a change in control, in
the terms of the award or otherwise.
Term, Termination and Amendment of the 2020
Plan
Unless
earlier terminated by the Board, the 2020 Plan will terminate, and
no further awards may be granted, ten years after the date on which
it is approved by stockholders. The board may amend, suspend or
terminate the 2020 Plan at any time, except that, if required by
applicable law, regulation or stock exchange rule, stockholder
approval will be required for any amendment. The amendment,
suspension or termination of the 2020 Plan or the amendment of an
outstanding award generally may not, without a participant’s
consent, materially impair the participant’s rights under an
outstanding award.
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. (the
“Company”) as of December 31, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2019, in conformity with accounting
principles generally accepted in the United States of
America.
Adoption of New Accounting Standard
As discussed in Note 2 to the financial
statements, the Company changed its method of accounting for lease
agreements as a result of the adoption of Accounting Standards
Codification Topic 842, Leases, effective January 1, 2019, under the
modified retrospective method.
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.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of
December 31, 2019, based on criteria established in
the Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated May 15, 2020, expressed an unqualified
opinion.
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.
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.
/s/ Mayer Hoffman McCann P.C.
We have served as the Company's auditor since 2011.
San Diego, California
May 15, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of:
ImageWare Systems, Inc.
Opinion on Internal Control over Financial Reporting
We have audited ImageWare Systems,
Inc.’s (the “Company”) internal control over financial reporting
as of December 31, 2019, based on criteria established
in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO criteria). In
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December
31, 2019, based on the COSO criteria.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the
Company as of December 31, 2019 and 2018, 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, 2019, and our report
dated May 15, 2020, expressed an unqualified opinion on those
consolidated financial statements, and included explanatory
paragraphs regarding the Company’s change in method of
accounting for lease agreements as a result of the adoption of
Accounting Standards Codification Topic
842, Leases, effective January 1, 2019, as well as the
existence of substantial doubt about the Company’s ability to
continue as a going concern.
Basis for Opinion
The Company’s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in the
accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the
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 audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. A
company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
May 15, 2020
IMAGEWARE
SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
ASSETS
|
|
|
Current
Assets:
|
|
|
Cash and cash equivalents
|
$1,030
|
$5,694
|
Accounts
receivable, net of allowance for doubtful accounts of $7 and $0 at
December 31, 2019 and 2018, respectively.
|
657
|
968
|
Inventory,
net
|
615
|
29
|
Other
current assets
|
243
|
233
|
Total
Current Assets
|
2,545
|
6,924
|
|
|
|
Property
and equipment, net
|
216
|
244
|
Other
assets
|
257
|
332
|
Operating
lease right-of-use assets
|
1,906
|
—
|
Intangible
assets, net of accumulated amortization
|
70
|
82
|
Goodwill
|
3,416
|
3,416
|
Total Assets
|
$8,410
|
$10,998
|
|
|
|
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
Current
Liabilities:
|
|
|
Accounts
payable
|
$515
|
$678
|
Deferred
revenue
|
1,629
|
1,215
|
Accrued
expense
|
1,312
|
888
|
Operating
lease liabilities, current portion
|
373
|
—
|
Derivative
liabilities
|
369
|
1,065
|
Total
Current Liabilities
|
4,198
|
3,846
|
|
|
|
Other
long-term liabilities
|
118
|
147
|
Lease
liabilities, net of current portion
|
1,716
|
—
|
Pension
obligation
|
2,256
|
1,876
|
Total
Liabilities
|
8,288
|
5,869
|
|
|
|
Mezzanine
Equity:
|
|
|
Series C
Convertible Redeemable Preferred Stock, $0.01 par value, designated
1,000 shares, 1,000 shares issued and outstanding at December 31,
2019 and December 31, 2018, respectively; liquidation preference
$10,000 at December 31, 2019 and December 31, 2018,
respectively.
|
8,884
|
8,156
|
|
|
|
Shareholders’
Deficit:
|
|
|
Preferred
stock, authorized 4,000,000 shares:
|
|
|
Series
A Convertible Redeemable Preferred Stock, $0.01 par value;
designated 38,000 shares, 37,467 shares issued and outstanding at
December 31, 2019 and 2018, respectively; liquidation preference
$37,467 at December 31, 2019 and 2018, 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, 2019 and 2018, respectively;
liquidation preference $607 at December 31, 2019 and 2018,
respectively.
|
2
|
2
|
Common
Stock, $0.01 par value, 175,000,000 shares authorized; 113,353,176
and 98,230,336 shares issued at December 31, 2019 and 2018,
respectively, and 113,346,472 shares and 98,223,632 shares
outstanding at December 31, 2019 and 2018,
respectively.
|
1,133
|
981
|
Additional
paid-in capital
|
195,079
|
184,130
|
Treasury
stock, at cost 6,704 shares
|
(64)
|
(64)
|
Accumulated
other comprehensive loss
|
(1,741)
|
(1,428)
|
Accumulated
deficit
|
(203,171)
|
(186,648)
|
Total
Shareholders’ Deficit
|
(8,762)
|
(3,027)
|
Total Liabilities, Mezzanine Equity and Shareholders’
Deficit
|
$8,410
|
$10,998
|
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
|
$923
|
$1,761
|
Maintenance
|
2,583
|
2,643
|
|
3,506
|
4,404
|
Cost of revenue:
|
|
|
Product
|
218
|
205
|
Maintenance
|
425
|
671
|
Gross
profit
|
2,863
|
3,528
|
|
|
|
Operating expense:
|
|
|
General
and administrative
|
3,614
|
4,285
|
Sales
and marketing
|
3,937
|
3,571
|
Research
and development
|
7,488
|
7,351
|
Depreciation
and amortization
|
71
|
51
|
|
15,110
|
15,258
|
Loss
from operations
|
(12,247)
|
(11,730)
|
|
|
|
Interest
(income) expense, net
|
(90)
|
463
|
Change
in fair value of derivative liabilities
|
(696)
|
232
|
Other
components of net periodic pension expense
|
109
|
118
|
Other
(income) expense, net
|
1
|
(4)
|
Loss
before income taxes
|
(11,571)
|
(12,539)
|
|
|
|
Income
tax expense
|
10
|
11
|
Net
loss
|
$(11,581)
|
$(12,550)
|
Preferred
dividends, deemed dividends and accretion
|
(5,670)
|
(3,913)
|
Net
loss available to common shareholders
|
$(17,251)
|
$(16,463)
|
|
|
|
Basic and diluted loss per common share — see Note
2:
|
|
|
Basic
and diluted loss per share available to common
shareholders
|
$(0.17)
|
$(0.17)
|
Basic
and diluted weighted-average shares outstanding
|
104,372,048
|
95,210,572
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(In thousands)
|
|
|
|
|
|
|
|
Net
loss
|
$(11,581)
|
$(12,550)
|
Other
comprehensive income (loss):
|
|
|
Reduction (increase)
in additional minimum pension liability
|
(312)
|
209
|
Foreign
currency translation adjustment
|
(1)
|
27
|
Comprehensive
loss
|
$(11,894)
|
$(12,314)
|
The accompanying notes are an integral part of these consolidated
financial statements.
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
(DEFICIT)
(In thousands, except share amounts)
|
Series
A Convertible,
Redeemable
Preferred
|
Series
B Convertible,
Redeemable
Preferred
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
Divedends
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)
|
|
Series A
Convertible,
Redeemable Preferred
|
Series B
Convertible,
Redeemable Preferred
|
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
31,021
|
-
|
239,400
|
2
|
94,174,540
|
941
|
(6,704)
|
(64)
|
172,414
|
(1,664)
|
(170,481)
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to Series A Preferred Stock
conversions
|
(450)
|
-
|
-
|
-
|
391,304
|
4
|
-
|
-
|
(4)
|
-
|
-
|
-
|
Related
Party debt exchange for Series A Preferred Stock
|
6,896
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
6,802
|
-
|
-
|
6,802
|
Cumulative
effect of ASC 606 adoption
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
96
|
96
|
Accretion
of Series A Preferred Stock discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(200)
|
-
|
-
|
(200)
|
Issuance
of common stock warrants as compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
26
|
-
|
-
|
26
|
Issuance
of Common Stock pursuant to option exercises
|
-
|
-
|
-
|
-
|
235,852
|
2
|
-
|
-
|
162
|
-
|
-
|
164
|
Recognition
of beneficial conversion feature on convertible debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
30
|
-
|
-
|
30
|
Modification
of preferred stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
92
|
-
|
(92)
|
-
|
Stock-based
compensation expense
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,272
|
-
|
-
|
1,272
|
Additional
minimum pension liability
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
209
|
-
|
209
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
27
|
-
|
27
|
Dividends
on Series A Preferred Stock, $(99.14)/share
|
-
|
-
|
-
|
-
|
3,074,008
|
31
|
-
|
-
|
3,220
|
-
|
(3,251)
|
-
|
Dividends
on Series B Preferred stock, $(0.21)/share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(51)
|
(51)
|
Dividends
on Series C Preferred Stock, $(1,042.38)/share
|
-
|
-
|
-
|
-
|
354,632
|
3
|
-
|
-
|
316
|
-
|
(319)
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(12,550)
|
(12,550)
|
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)
|
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
|
$(11,581)
|
$(12,550)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
Depreciation
and amortization
|
71
|
51
|
Amortization
of debt discounts and debt issuance costs
|
—
|
170
|
Stock-based
compensation
|
643
|
1,272
|
Warrants
issued in lieu of cash as compensation for services
|
9
|
26
|
(Gain)
loss from change in fair value of derivative
liabilities
|
(696)
|
232
|
Change
in assets and liabilities
|
|
|
Accounts
receivable
|
311
|
(414)
|
Inventory
|
(586)
|
50
|
Other
assets
|
66
|
(229)
|
Operating
lease right-of-use assets
|
168
|
—
|
Accounts
payable
|
(162)
|
221
|
Accrued
expense
|
37
|
600
|
Deferred
revenue
|
415
|
200
|
Contract
costs
|
(29)
|
—
|
Pension
obligation
|
67
|
61
|
Total
adjustments
|
314
|
2,240
|
|
|
|
Net
cash used by operating activities
|
(11,267)
|
(10,310)
|
|
|
|
Cash flows from investing activities
|
|
|
Purchase
of property and equipment
|
(31)
|
(240)
|
Net
cash used by investing activities
|
(31)
|
(240)
|
|
|
|
Cash flows from financing activities
|
|
|
Proceeds
from issuance of common stock, net
|
6,520
|
—
|
Proceeds
from exercise of stock options
|
166
|
162
|
Proceeds
from issuance of preferred stock, net of issuance
costs
|
—
|
8,789
|
Dividends
paid to preferred stockholders
|
(51)
|
(51)
|
|
|
|
Net
cash provided by financing activities
|
6,635
|
8,900
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
(1)
|
27
|
Net
increase (decrease) in cash and cash equivalents
|
(4,664)
|
(1,623)
|
Cash
and cash equivalents at beginning of year
|
5,694
|
7,317
|
Cash
and cash equivalents at end of year
|
$1,030
|
$5,694
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash
paid for interest
|
$—
|
$—
|
Cash
paid for income taxes
|
$—
|
$—
|
Summary
of non-cash investing and financing activities:
|
|
|
Exchange
of related party indebtedness for Series A Convertible Preferred
Stock
|
$—
|
$6,802
|
Beneficial
conversion feature of related party lines of credit
|
$—
|
$30
|
Stock
dividends on Series A Convertible Preferred Stock
|
$3,861
|
$3,251
|
Stock
dividends on Series C Convertible Redeemable Preferred
Stock
|
$1,030
|
$319
|
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 Preferred Stock into Common
Stock
|
$—
|
$4
|
Recognition
of derivative liabilities on preferred stock issuance
|
$—
|
$833
|
Deemed
dividend on preferred stock modification
|
$—
|
$92
|
Accretion
of discount on Series C Convertible Redeemable Preferred
Stock
|
$728
|
$200
|
Reduction
in additional minimum pension liability
|
$312
|
$209
|
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, 2019 AND 2018
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 and capital expenditure
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.
At
December 31, 2019, we had negative working capital of approximately
$1,653,000. Our principal sources of liquidity at December 31, 2019
consisted of cash and cash equivalents of $1,030,000.
Related Party Financings
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and were due no later than 21 days after
February 12, 2020. As of May 15, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members.
2020 Common Stock
Financings
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" or the "Investor"). 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 the Company's
common stock, par value $0.01 per share ("Common
Stock"), under the Triton
Purchase Agreement ( the ”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 the Investor to be set forth in each written notice sent to
the Investor by the Company (the "Purchase
Notice") and delivered to the
Investor (the "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 "Purchased
Shares"). The Closing of the
purchase of the Purchased Shares as set forth in the Purchase
Notice will occur no later than three business days following
receipt of the Purchased Shares by the
Investor.
The Offering was made pursuant to an effective
registration statement on Form S-3 (Registration Statement Number
333-225935), as previously filed with the Securities and Exchange
Commission (the "SEC") on July 10, 2018, and a related prospectus
supplement filed on February 21, 2020. The Offering will terminate
upon the earlier date of either (i) that date which the Investor
has purchased an aggregate of $2.0 million in Purchased Shares
pursuant to the Triton Purchase Agreement; or (i) March 31, 2020.
The Company intends to use the proceeds from the Offering for
general working capital purposes.
On
April 29, 2020, the Company closed on the offer and sale to Triton
of 6.0 million 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. The offering follows the offer and sale to Triton of 4.0
million shares of Common Stock for $0.16 per share, which offering
closed on March 10, 2020, resulting in gross proceeds to the
Company of $640,000. Aggregate net proceeds from this financing
approximated $1,389,000 after recognition of direct offering
costs.
On April 28, 2020 (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 $10,250,000 of the
Company's common stock, $0.01 par value per share (the
"Common
Stock").
Under the terms and subject to the conditions of
the Purchase Agreement, including stockholder approval of an
amendment to the Company’s Certificate of Incorporation to
increase the number of shares of the Company’s common stock
to 345 million shares, the Company has the right, but not the
obligation, to sell to Lincoln Park, and Lincoln Park is obligated
to purchase up to $10,250,000 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 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 30
business days to file the registration statement from the Execution
Date.
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 125,000 shares of Common Stock per business day,
which increases to up to 425,000 shares in the event the price of
the Company’s Common Stock is not below $0.55 per share (the
"Regular
Purchase") (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, the Purchase Agreement also provides for accelerated
purchases and other terms and conditions as more fully described in
Note 18.
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 April 2020, in connection with the execution of
the Purchase Agreement, the Company sold, and Lincoln Park
purchased, 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.
CARES Act Financing
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 (“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, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use 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.
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.
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 6, 2020, cash on hand approximated $2,012,000 of
which approximately $1,571,000 was the PPP loan and is to be used
primarily for payroll costs, rent and utilities. Based on the
Company’s rate of cash consumption in the first quarter of
2020 and the last quarter of 2019, the Company estimates it will
need additional capital in the third quarter of 2020 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 utilize cash
proceeds available under the Lincoln Park facility. Additionally,
management may seek additional equity and/or debt financing through
the issuance of additional debt and/or equity securities or may
seek strategic or other transactions intended to increase
shareholder value. 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,
deferred tax asset valuation allowances, recoverability of
goodwill, 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 C Preferred
Financing (defined below), fair value of Series A 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. 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;
●
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, 2018, we
had recorded approximately $147,000 in contract costs relating to
capitalized commissions. During the year ended December 31, 2019,
we recognized approximately $29,000 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 year ended December 31, 2019. We recorded no additional
contract costs in the year ended December 31, 2019. We recognized
approximately $132,000 of revenue during the year ended December
31, 2019 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
adoption of ASC 606 as of January 1, 2018 resulted in a cumulative
positive adjustment to beginning accumulated deficit and accounts
receivable of approximately $96,000. The following table sets forth
our disaggregated revenue for the years ended December 31, 2019 and
2018:
|
|
Net
Revenue
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$489
|
$1,334
|
Hardware and
consumables
|
96
|
133
|
Services
|
338
|
294
|
Maintenance
|
2,583
|
2,643
|
Total net
revenue
|
$3,506
|
$4,404
|
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 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,
2019, had a negative carrying amount of approximately $8,762,000.
Based on the results of the Company’s impairment testing, the
Company determined that its goodwill was not impaired as
of December 31, 2019 and December 31, 2018.
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, 2019, 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 host contract 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. Such amounts are recorded in the caption
“Change in fair value of derivative liabilities” in the
Company’s consolidated statements of operations. 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. During the twelve months ended December 31,
2018, the Company recorded an increase to these derivative
liabilities using fair value methodologies of approximately
$232,000 which resulted in a December 31, 2018 aggregated balance
of approximately $1,065,000
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, 2019
and 2018, 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 $7,000 and $0 at
December 31, 2019 and 2018, respectively.
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. For the year ended December 31, 2018, one
customer accounted for approximately 36% or $1,573,000 of total
revenue and had trade receivables of approximately $0 as of the end
of the year.
Stock-Based Compensation
At
December 31, 2019, 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. Stock-based compensation expense
related to equity options was approximately $643,000 and $1,272,000
for the years ended December 31, 2019 and 2018,
respectively.
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, 2019 and 2018 ranged from 64%
to 57%. 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, 2019 and 2018 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, 2019 and 2018
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 0% for corporate officers, 4.1% for members
of the Board of Directors and 6.0% for all other employees. The
Company reviews the expected forfeiture rate annually to determine
if that percent is still reasonable based on historical
experience.
Restricted
stock units are recorded at the grant date fair value with
corresponding compensation expense recorded ratably over the
requisite service period.
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, 2019 and 2018.
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, 2019 and 2018 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 $1,000 for the year ended December 31,
2019, and increased approximately $27,000 for the year ended
December 31, 2018.
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, 2019 and December 31, 2018.
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
|
$(11,581)
|
$(12,550)
|
Preferred
dividends, deemed dividends and accretion
|
(5,670)
|
(3,913)
|
Net
loss available to common shareholders
|
$(17,251)
|
$(16,463)
|
|
|
|
Denominator
for basic and diluted loss per share — weighted-average
shares outstanding
|
104,372,048
|
95,210,572
|
|
|
|
Basic and diluted loss per share:
|
|
|
Net
loss available to common shareholders
|
$(0.17)
|
$(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, 2019
|
Common Share Equivalents at
December 31, 2018
|
Convertible
redeemable preferred stock – Series A
|
32,580,000
|
32,580,000
|
Convertible
redeemable preferred stock – Series B
|
46,029
|
46,029
|
Convertible
redeemable preferred stock – Series C
|
10,000,000
|
10,000,000
|
Stock
options
|
7,204,672
|
7,227,248
|
Warrants
|
1,733,856
|
1,813,856
|
Total
Potential Dilutive Securities
|
51,564,557
|
51,667,133
|
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.
2016-13. In June 2016, the FASB
issued Accounting Standard Update (“ASU No. 2016-13”), Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. ASU No. 2016-13 changes the impairment model
for most financial assets and certain other instruments. For trade
and other receivables, held-to-maturity debt securities, loans and
other instruments, entities will be required to use a new
forward-looking “expected loss” model that will replace
today’s “incurred loss” model and generally will
result in the earlier recognition of allowances for losses. For
available-for-sale debt securities with unrealized losses, entities
will measure credit losses in a manner similar to current practice,
except that the losses will be recognized as an allowance. This
guidance is effective for fiscal years beginning after December 15,
2019 including interim periods within those fiscal years. The
adoption of this standard will not have a material impact on the
Company’s consolidated financial
statements.
FASB ASU No.
2018-13. In August 2018, the
FASB issued ASU 2018-13, “Fair Value Measurement
(Topic 820) —Disclosure Framework —Changes to the
Disclosure Requirements for Fair Value
Measurement” (“ASU 2018-13”). The amendments in this update improve
the effectiveness of fair value measurement disclosures. ASU
2018-13 is effective for fiscal years ending after December 15,
2019. Early adoption is permitted. The adoption of this standard
should be applied to all periods presented. The adoption of this
standard will not have a material impact on the Company’s
consolidated financial statements.
FASB ASU No.
2018-14. In August 2018, the
FASB issued ASU 2018-14, “Compensation
—Retirement Benefits —Defined Benefit Plans
—General (Subtopic 715-20) —Disclosure Framework
—Changes to the Disclosure Requirements for Defined Benefit
Plans” (“ASU 2018-14”). The amendments in this update remove
defined benefit plan disclosures that are no longer considered
cost-beneficial, clarify the specific requirements of disclosures,
and add disclosure requirements identified as relevant. ASU 2018-14
is effective for fiscal years ending after December 15, 2020. Early
adoption is permitted. The adoption of this standard should be
applied to all periods presented. The adoption of this standard
will not have a material impact on the Company’s consolidated
financial statements.
FASB ASU No.
2018-15. In August 2018, the
FASB issued ASU 2018-15, “Intangibles
—Goodwill and Other —Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service
Contract” (“ASU 2018-15”). The amendments in this update align the
requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software (and hosting arrangements
that include an internal-use software license). ASU 2018-15 is
effective for fiscal years ending after December 15, 2019. Early
adoption is permitted. The adoption of this standard did not have a
material impact on the Company’s consolidated financial
statements.
FASB ASU No.
2018-18. In November 2018, the
FASB issued ASU No. 2018-18, “Collaborative Arrangements
(Topic 808): Clarifying the Interaction Between Topic 808 and Topic
606”. The ASU
provides more comparability in the presentation of revenue for
certain transactions between collaborative arrangement participants
and only allows a company to present units of account in
collaborative arrangements that are within the scope of the revenue
recognition standard together with revenue accounted for under the
revenue recognition standard. The parts of the collaborative
arrangement that are not in the scope of the revenue recognition
standard should be presented separately from revenue accounted for
under the revenue recognition standard. The amendments in ASU
No. 2018-18 are effective for fiscal years beginning after December
15, 2019, and interim periods within those fiscal
years. The adoption of this standard will not have a
material impact on the Company’s consolidated financial
statements.
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.
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, 2019
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$1,713
|
$—
|
$—
|
$1,713
|
Totals
|
$1,713
|
$—
|
$—
|
$1,713
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$369
|
$—
|
$—
|
$369
|
Totals
|
$369
|
$—
|
$—
|
$369
|
|
Fair Value at December 31, 2018
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$1,734
|
$—
|
$—
|
$1,734
|
Totals
|
$1,734
|
$—
|
$—
|
$1,734
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$1,065
|
$—
|
$—
|
$1,065
|
Totals
|
$1,065
|
$—
|
$—
|
$1,065
|
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, 2019, the Company had embedded
features contained in the Series C Preferred host instrument
(issued in September 2018) that qualified
for derivative liability treatment. The
recorded fair market value of these features was approximately
$369,000 and $1,065,000 at December 31, 2019 and 2018,
respectively, and are classified as a current liability in the
consolidated balance sheets as of December 31, 2019 and 2018. 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 the lattice framework,
Monte-Carlo simulations and other fair value methodologies in the
determination of the fair value of derivative liabilities.
As
more fully described in Note 14 to these Consolidated Financial
Statements, on September 10, 2018, the Company’s Board of
directors declared a Dividend Warrant for Holders of Series A
Preferred. The Company evaluated this warrant issuance in
conjunction with the Series A Preferred becoming junior to the
Series C Preferred in liquidation preference and determined such
warrants and changes in liquidation preference to be in effect a
modification of the Series A Preferred. To determine the effect of
this modification, the Company, using fair value methodologies,
determined the value of the Series A Preferred both pre and post
warrant issuance. The valuation indicated an increase in the fair
value of the Series A Preferred post issuance of approximately
$92,000. The Company recorded this incremental increase as a deemed
dividend.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events. Significant assumptions used in the fair value
methodologies during 2019 and 2018 are a risk-free rate of 2.47% to
1.57%, equity volatility of 75.0% to 57%, effective life of 4.69
years to 1.69 years , and a preferred stock dividend rate of
10.0%.Additionally, management has made certain estimates regarding
the timing of potential change of control events.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
The
reconciliations of Level 3 pension assets measured at fair value in
2019 and 2018 are presented below:
($
in thousands)
|
|
|
|
|
|
Pension
assets:
|
|
|
Fair
value at beginning of year
|
$1,734
|
$1,806
|
Return
on plan assets
|
80
|
82
|
Company
contributions and benefits paid, net
|
(68)
|
(70)
|
Effect
of rate changes
|
(33)
|
(84)
|
Fair
value at end of year
|
$1,713
|
$1,734
|
The
reconciliations of Level 3 derivative liabilities measured at fair
value in 2019 and 2018 are presented below:
($
in thousands)
|
|
|
|
|
|
Derivative
liabilities
|
|
|
Fair
value at beginning of year
|
$1,065
|
$-
|
Issuances
from Series C Preferred Financing
|
-
|
833
|
Change
in fair value included in earnings
|
(696)
|
232
|
Fair
value at end of year
|
$369
|
$1,065
|
4. INTANGIBLE ASSETS AND GOODWILL
The
carrying amounts of the Company’s patent intangible assets
were $70,000 and $82,000 as of December 31, 2019 and 2018,
respectively, which includes accumulated amortization of $589,000
and $577,000 as of December 31, 2019 and 2018,
respectively. Amortization expense for patent intangible
assets was $12,000 for the years ended December 31, 2019 and 2018.
Patent intangible assets are being amortized on a straight-line
basis over their remaining life of approximately 6.5 years. There
was no impairment of the Company’s intangible assets during
the years ended December 31, 2019 and 2018.
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 2019, 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, 2019, had a negative
carrying amount of approximately $8,762,000. Based on the results
of the Company's impairment testing, the Company determined that
its goodwill was not impaired during the years ended
December 31, 2019 and 2018.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
Fiscal Year Ended December 31,
|
Estimated Amortization
Expense
($ in thousands)
|
2020
|
$12
|
2021
|
12
|
2022
|
12
|
2023
|
12
|
2024
|
12
|
Thereafter
|
10
|
Totals
|
$70
|
5. RELATED PARTIES
Convertible Lines of Credit
At
January 1, 2018, the Company had certain convertible Lines of
Credit borrowing facilities with two members of the Company’s
Board of Directors. Before their termination, (described more fully
below), these convertible Lines of Credit bore interest at 8% per
annum and were convertible into that number of shares of the
Company’s common stock equal to the quotient obtained by
dividing the outstanding balance by $1.25. These convertible Lines
of Credit had a maturity date of December 31, 2018.
The
Company evaluated the Lines of Credit and determined that the
instruments contained a contingent beneficial conversion feature,
i.e. an embedded conversion right that enabled the holder to obtain
the underlying Common Stock at a price below market value. The
beneficial conversion feature was contingent, as the terms of the
conversion did not permit the Company to compute the number of
shares that the holder would receive if the contingent event
occurred (i.e. future borrowings under the Line of Credit). The
Company has considered the accounting for this contingent
beneficial conversion feature using the guidance in ASC 470, Debt.
The guidance in ASC 470 states that a contingent beneficial
conversion feature in an instrument shall not be recognized in
earnings until the contingency is resolved. The beneficial
conversion features of borrowings under the Line of
Credit were to be measured using the intrinsic value
calculated at the date the contingency is resolved using the
conversion price and trading value of the Company’s Common
Stock at the date the Lines of Credit were issued (commitment
date).
For the years ended December 31, 2019 and 2018,
the Company recorded approximately $0 and $30,000,
respectively, in debt discount
attributable to beneficial conversion feature and accreted
approximately $0 and $162,000, respectively, of debt
discount. Such expense is
recorded as a component of interest expense in the Company’s
consolidated statements of operations.
On
September 10, 2018, the Company entered into an agreement with the
board members, pursuant to which they agreed to exchange
approximately $6.3 million and $0.6 million, respectively, of
outstanding debt (including accrued and unpaid interest) owed under
the terms of their respective Lines of Credit for an aggregate of
6,896 shares of the Company’s Series A Preferred. As a result
of this exchange, all indebtedness, liabilities and other
obligations arising under the Lines of Credit were terminated,
cancelled and deemed satisfied in full. Because the holders of
the Lines of Credit are members of the Company’s Board of
Directors and shareholders of the Company, they are considered
related parties and the exchange transaction is considered a
capital transaction and is recorded within the equity accounts of
the Company.
Notes Payable
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and are due no later than 21 days after
February 12, 2020. As of May 15, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members.
Professional Services Agreement
During
the year ended December 31, 2018, the Company entered into
professional services agreement with a firm whose managing director
is also a member of the Company’s Board of Directors. During
the year ended December 31, 2018, the Company recorded and paid
one-half of the aggregate fee of $50,000 with the remaining payment
being made during the year ended December 31, 2019.
6. INVENTORY
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.
Inventories of
$29,000 as of December 31, 2018
were comprised of work in process of $21,000 representing direct
labor costs on in-process projects and finished goods of
$8,000 net of reserves for
obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive
levels, deterioration and other factors in evaluating net
realizable value and required reserve levels.
7. PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2019 and 2018, consisted
of:
($ in thousands)
|
|
|
|
|
|
Equipment
|
$996
|
$967
|
Leasehold
improvements
|
77
|
77
|
Furniture
|
257
|
255
|
|
1,330
|
1,299
|
Less
accumulated depreciation
|
(1,114)
|
(1,055)
|
|
$216
|
$244
|
Total
depreciation expense for the years ended December 31, 2019 and 2018
was approximately $59,000 and $39,000, respectively.
8. ACCRUED EXPENSE
Principal
components of accrued expense consist of:
($ in thousands)
|
|
|
|
|
|
Compensated
absences
|
$385
|
$352
|
Wages,
payroll taxes and sales commissions
|
6
|
44
|
Customer
deposits
|
18
|
30
|
Rent
|
—
|
14
|
Royalties
|
72
|
72
|
Pension
and employee benefit plans
|
58
|
48
|
Accrued
financing fees
|
500
|
100
|
Professional
services
|
121
|
45
|
Income
and sales taxes
|
50
|
79
|
Dividends
|
40
|
42
|
Other
|
62
|
62
|
|
$1,312
|
$888
|
9. INCOME TAXES
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income
Taxes, (ASC
740). Deferred income taxes are
recognized for the tax consequences related to temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for tax
purposes at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is
established when necessary based on the weight of available
evidence, if it is considered more likely than not that all or some
portion of the deferred tax assets will not be realized. Income tax
expense is the sum of current income tax plus the change in
deferred tax assets and liabilities. The Company has
established a valuation allowance against its deferred tax asset
due to the uncertainty surrounding the realization of such
asset.
The
significant components of the income tax provision are as
follows:
($ in thousands)
|
|
Current
|
|
|
Federal
|
$—
|
$—
|
State
|
—
|
—
|
Foreign
|
10
|
11
|
|
|
|
Deferred
|
|
|
Federal
|
—
|
—
|
State
|
—
|
—
|
Foreign
|
—
|
—
|
|
|
|
|
$10
|
$11
|
The following is a schedule of the deferred tax assets and
liabilities as of December 31, 2019 and 2018:
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
Net
operating loss carryforwards
|
$21,981
|
$19,881
|
Stock
based compensation
|
1,678
|
2,318
|
Reserves
and accrued expense
|
118
|
45
|
Gross
deferred tax assets
|
23,777
|
22,244
|
Valuation
allowance
|
(23,643)
|
(22,159)
|
Gross deferred tax assets after valuation
allowance
|
134
|
85
|
Deferred
tax liability - Intangible and fixed assets
|
(134)
|
(85)
|
|
|
|
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
|
$(2,432)
|
$(2,636)
|
State
income tax, net of federal benefit
|
(579)
|
(1,051)
|
Change
in net operating loss carryforwards
|
879
|
(3,012)
|
Equity
compensation
|
617
|
—
|
Non-deductible
interest
|
(146)
|
36
|
Foreign
tax rate differential
|
184
|
210
|
Other
|
3
|
3
|
Net
change in valuation allowance on deferred tax assets
|
1,484
|
6,461
|
|
|
|
|
$10
|
$11
|
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, 2019, the Company had federal net operating loss
carryforwards of approximately $63,216,000, that begin to expire in
2023. The Company has federal net operating losses of approximately
$23,753,000 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 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 2015 through 2019 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, 2019, the 2015
– 2019 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 2019 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.
10. 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. The Company determined that it
had no arrangements representing finance leases.
The
Company’s operating leasing arrangements are summarized
below:
●
The
Company’s corporate headquarters is located in San Diego,
California, where it occupies 8,511 square feet of office space at
an average cost of approximately $28,000 per month. This
facility’s lease was entered into by the Company in July
2018. This lease commenced on November 1, 2018 and terminates on
April 30, 2025;
●
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;
●
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,
2020.
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, 2019, the Company recorded
approximately $673,000 in lease expense using the straight-line
method. For the twelve months ended December 31, 2018, prior to the
adoption of ASC 842, the Company recorded approximately $672,000 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,
2019 is 4.52 years. Cash payments under operating leases aggregated
approximately $481,000 for the twelve months ended December 31,
2019 and are included in operating cash flows.
The
Company’s lease liability was computed using the present
value of future lease payments. The Company has utilized the
practical expedient regarding lease and non-lease components and
combined such components into a single combined component in the
determination of the lease liability. The Company has excluded the
lease of its office space in Mexico City, Mexico in the
determination of the lease liability as of January 1, 2019 as its
term is less than 12 months.
At
December 31, 2019, future minimum undiscounted lease payments are
as follows:
($ in
thousands)
|
|
2020
|
671
|
2021
|
642
|
2022
|
652
|
2023
|
425
|
2024
|
387
|
Thereafter
|
130
|
Total
|
2,907
|
Short-term
leases not included in lease liability
|
(22)
|
Present
Value effect on future minimum undiscounted lease payments at
December 31, 2019
|
(796)
|
Lease
liability at December 31, 2019
|
$2,089
|
Less
current portion
|
(373)
|
Non-current
lease liability at December 31, 2019
|
$1,716
|
11. CONTINGENT LIABILITIES
Employment Agreements
The
Company has employment agreements with its Chief Executive Officer
and its Chief Technical Officer. The Company may terminate the
agreements with or without cause. Subject to the conditions and
other limitations set forth in each respective employment
agreement, each executive will be entitled to the following
severance benefits if the Company terminates the executive’s
employment without cause or in the event of an involuntary
termination (as defined in the employment agreements) by the
Company or by the executive:
Under
the terms of the agreement, the Chief Executive Officer will be
entitled to the following severance benefits if we terminate his
employment without cause or in the event of an involuntary
termination: (i) a lump sum cash payment equal to twenty-four
months’ base salary; (ii) continuation of fringe benefits and
medical insurance for a period of three years; and (iii) immediate
vesting of 50% of outstanding stock options and restricted stock
awards. In the event that the Chief Executive Officer’s
employment is terminated within six months prior to or thirteen
months following a change of control (as defined in the employment
agreements), the Chief Executive Officer is entitled to the
severance benefits described above, except that 100% of the Chief
Executive Officer’s outstanding stock options and restricted
stock awards will immediately vest.
Under
the terms of the employment agreement with our Chief Technical
Officer, this executive will be entitled to the following severance
benefits if we terminate his employment without cause or in the
event of an involuntary termination: (i) a lump sum cash payment
equal to six months of base salary; and (ii) continuation of their
fringe benefits and medical insurance for a period of six months.
In the event that his employment is terminated within six months
prior to or thirteen months following a change of control (as
defined in the employment agreements), he is entitled to the
severance benefits described above, except that 100% of his
outstanding stock options and restricted stock awards will
immediately vest.
Effective
September 15, 2017, the employment agreements for the
Company’s Chief Executive Officer and Chief Technical Officer
were amended to extend the term of each executive officer’s
employment agreement until December 31, 2018, and on January 30,
2019, both agreements were amended again to further extend the term
of each executive officer’s employment agreement until
December 31, 2019. Such employment agreements were not renewed and
expired on December 31, 2019.
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.
12. 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
Convertible Redeemable Preferred stock (the
“Series C
COD”) with the Secretary
of State for the State of Delaware – Division of
Corporations, designating 1,000 shares of the Company’s
preferred stock, par value $0.01 per share, as Series C Preferred,
each share with a stated value of $10,000 per share (the
“Stated
Value”). 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
(“Conversion
Shares”) 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 COD.
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 COD). Subject to the terms and
conditions set forth in the Series C COD, 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 COD) 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. 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.
On
September 10, 2018, the Company offered and sold a total of 890
shares of Series C Preferred at a purchase price of $10,000 per
share, and on September 21, 2018, the Company offered and sold an
additional 110 shares of Series C Preferred at a purchase price of
$10,000 per share. The total gross proceeds to the Company from the
Series C Financing were $10,000,000. Issuance costs incurred in
conjunction with the Series C Financing were approximately
$1,211,000. Such costs have been recorded as a discount on the
Series C Preferred Stock and will be accreted to the point of
earliest redemption which is the third anniversary of the Series C
Financing or September 10, 2021 using the effective interest rate
method. The accretion of these costs is recorded as a deemed
dividend.
The Company had 1,000 shares of Series C Preferred
outstanding as of September 30, 2018. The Company issued the
holders of Series C Preferred 55,736 shares of Common Stock
on September 30, 2018, as payment of dividends due on that date and
on December 31, 2018, the Company issued the holders of Series C
Preferred 298,896 shares of Common Stock as payment of dividends
due on that date.
There were no issuances or conversions of Series C Preferred during
the year ended December 31, 2019. 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. Such shares
of Common Stock were paid as dividends on the following
dates:
●
157,945 shares of Common Stock on March 31, 2019,
●
266,793 shares of Common Stock on June 30, 2019,
●
495,688 shares of Common Stock on September 30, 2019
and
●
937,012 shares of Common Stock on December 31, 2019.
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.
The
Company noted that the Series C 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. ASU 2014-16 is effective for
public business entities for fiscal years, and interim periods
within those years, beginning after December 15, 2015.
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 is 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 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.
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 will be accreted to the
point of earliest redemption which is the third anniversary of the
Series C Financing or September 10, 2021 using the effective
interest rate method. The accretion of these features is recorded
as a deemed dividend.
For the
twelve months ended December 31, 2019 and 2018, the Company
recorded the accretion of the Series C discount of approximately
$728,000 and $200,000, respectively, using the effective interest
rate method.
The
Company reflected the following in Mezzanine Equity for the Series
C Preferred Stock as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
(amounts in
thousands, except share amounts)
|
|
|
|
|
|
Issuance of Series
C Preferred Stock
|
1,000
|
$10,000
|
|
|
|
Discount -
transaction costs
|
—
|
$(1,211)
|
|
|
|
Net
Proceeds
|
—
|
$8,789
|
|
|
|
Discount -
bifurcated derivative
|
—
|
$(833)
|
|
|
|
Accretion of
discount - deemed dividend
|
—
|
$200
|
|
|
|
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
|
13. 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.
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, designating 31,021 shares of the
Company’s preferred stock, par value $0.01 per share, as
Series A Preferred. Shares of Series A Preferred accrue dividends
at a rate of 8% per annum if the Company chooses to pay accrued
dividends in cash, and 10% per annum if the Company chooses to pay
accrued dividends in shares of Common Stock. Each share of Series 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 $1.15 (“Conversion
Shares”). 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.
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, 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.
On
September 10, 2018, the Company filed an Amendment to the
Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock with the Delaware Division of
Corporations to increase the number of shares of Series A Preferred
authorized for issuance thereunder to 38,000 shares.
On
September 10, 2018, the Company entered into exchange agreements
with two members of the Company's Board of Directors, Messrs.
Goldman and Crocker, pursuant to which Goldman and Crocker agreed
to exchange approximately $6.3 million and $0.6 million,
respectively, of outstanding debt (including accrued and unpaid
interest) owed under the terms of their respective Lines of Credit
for an aggregate of 6,896 shares of Series A Preferred. See
Note 5. - Related Parties for a further description of the Lines of
Credit.
On September 10, 2018 the Company’s Board of
Directors also declared a Special Dividend for Holders of the
Series A Preferred, pursuant to which each Holder received a
Dividend Warrant to purchase 39.87 shares of Common Stock for every
share of Series A Preferred held, which resulted in the issuance of
Dividend Warrants to the Holders as a group to purchase an
aggregate of 1,493,856 shares of Common Stock. Each Dividend
Warrant has an exercise price of $0.01 per share, and is
exercisable immediately upon issuance; provided,
however, that a Dividend
Warrant may only be exercised concurrently with the conversion
of shares of Series A Preferred held by a Holder into shares of
Common Stock. In addition, each Dividend Warrant held by a Holder
shall expire on the earliest to occur of (i) the conversion of all
Series A Preferred held by such Holder into Common Stock, (ii) the
redemption by the Company of all outstanding shares of Series A
Preferred held by such Holder, (iii) the Dividend Warrant no longer
representing the right to purchase any shares of Common Stock, and
(iv) the tenth anniversary of the date of
issuance.
The
Company evaluated this warrant issuance in conjunction with the
Series A Preferred becoming junior to the Series C Preferred in
liquidation preference and determined such warrants and changes in
liquidation preference to be in effect a modification of the Series
A Preferred. To determine the effect of this modification, the
Company, using fair value methodologies, determined the value of
the Series A Preferred both pre and post warrant issuance. The
valuation indicated an increase in the fair value of the Series A
Preferred post issuance of approximately $92,000. The Company
recorded this increase as a deemed dividend.
The Company had 37,467 shares of Series A
Preferred outstanding as of December 31, 2019 and 2018,
respectively. At December 31, 2019 and 2018, the Company had
cumulative undeclared dividends of $0. There were no
conversions of Series A Preferred into Common Stock during the year
ended December 31, 2019. During the year ended December 31, 2018,
certain holders of Series A Preferred converted 450 shares of
Series A Preferred into 391,304 shares of the Company’s
Common Stock. The Company issued the
holders of Series A Preferred an aggregate of 6,959,523
shares of
Common Stock during the year ended December 31, 2019 as payment of
dividends due during the 2019 year and issued an aggregate
of 3,074,008 shares of Common Stock
during the year ended December 31, 2018 as payment of dividends due
during the 2018 year.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B
Convertible Preferred stock, par value $0.01 per share
(“Series B
Preferred”), outstanding
as of December 31, 2019 and 2018. At December 31, 2019 and 2018,
the Company had cumulative undeclared dividends of approximately
and $8,000. There were no conversions of Series B Preferred into
Common Stock during the year ended December 31, 2019 and 2018. The
Company paid dividends of approximately $51,000 to the holders of
our Series B Preferred during the twelve months ended December 31,
2019 and December 31, 2018.
Common Stock
On
February 8, 2018, the Company filed with the Secretary of the State
of Delaware a Certificate of Amendment to its Certificate of
Incorporation, as amended, to increase the authorized number of
shares of its Common Stock to from 150,000,000 shares to
175,000,000 shares.
The
following table summarizes outstanding Common Stock activity for
the following periods:
|
|
Shares
outstanding at December 31, 2017
|
94,167,836
|
Shares issued pursuant to payment of stock dividend on Series A
Preferred
|
3,074,008
|
Shares
issued as payment of stock dividend on Series C
Preferred
|
354,632
|
Shares
issued pursuant to conversion of Series A Preferred
|
391,304
|
Shares issued pursuant to option exercises
|
235,852
|
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
|
Warrants
As of December 31, 2019, warrants to purchase
1,733,856 shares
of Common Stock at prices ranging from $0.01 to $1.46 were
outstanding. All warrants are exercisable as of December 31, 2019
and expire as of July 29, 2020, except for an aggregate of
1,643,856 warrants, which become exercisable only upon the
attainment of specified events. Such warrants expire at various
dates through September 2028.The intrinsic value of warrants
outstanding at December 31, 2019 was $0. The Company has excluded
from this computation any intrinsic value of the 1,493,856 warrants
issued to the Series A Preferred stockholders due to the conversion
exercise contingency more fully described
above.
During
the year ended December 31, 2018, the Company issued an aggregate
of 40,000 warrants to certain members of the Company’s
advisory board. The Company determined the grant date fair value of
these warrants using the Black-Scholes option valuation model and
recorded approximately $9,000 in expense for the year ended
December 31, 2018. The Company used the following assumptions in
the application of the Black-Scholes option valuation model: an
exercise price ranging between $1.09 and $1.17, a term of 2.0
years, a risk-free interest rate of 2.58%, a dividend yield of 0%
and volatility of 59%. Such expense is recorded in the
Company’s consolidated statement of operations as a component
of general and administrative expense. The Company also issued,
during the year ended December 31, 2018, an aggregate of 50,000
warrants to a certain professional services provider firm. The
Company determined the grant date fair value of these warrants
using the Black-Scholes option valuation model and recorded
approximately $17,000 in expense for the year ended December 31,
2018. The Company used the following assumptions in the application
of the Black-Scholes option valuation model: an exercise price of
$1.14, a term of 2.0 years, a risk-free interest rate of 2.58%, a
dividend yield of 0% and volatility of 51%. Such expense is
recorded in the Company’s consolidated statement of
operations as a component of general and administrative
expense.
The
following table summarizes warrant activity for the following
periods:
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
Balance
at December 31, 2017
|
230,000
|
$0.91
|
Granted
|
1,583,856
|
$0.08
|
Expired
/ Canceled
|
—
|
$—
|
Exercised
|
—
|
$—
|
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
|
There
were no warrants issued or exercised during the twelve months ended
December 31, 2019 and 80,000 warrants expired unexercised during
the 2019 year.
14. STOCK-BASED COMPENSATION
Stock Options
As of December 31, 2019, the Company had one
active stock-based compensation plan: the 1999 Stock Option Plan
(the “1999 Plan”).
1999 Plan
The Company’s 1999 Stock Award Plan (the
“1999
Plan”) was adopted by the
Company’s Board of Directors on December 17, 1999. Under the
terms of the 1999 Plan, the Company could, originally, issue up to
350,000 non-qualified or incentive stock options to purchase Common
Stock of the Company. During the year ended December 31, 2014, the
Company subsequently amended and restated the 1999 Plan, whereby it
increased the share reserve for issuance to approximately 7.0
million shares of the Company’s Common Stock. Subsequently,
in February 2018, the Company amended and restated the 1999 Plan,
whereby it increased the share reserve for issuance by an
additional 2.0 million shares. The 1999 Plan prohibits the
grant of stock option or stock appreciation right awards with an
exercise price less than fair market value of Common Stock on the
date of grant. The 1999 Plan also generally prohibits the
“re-pricing” of stock options or stock appreciation
rights, although awards may be bought-out for a payment in cash or
the Company’s stock. The 1999 Plan permits the grant of
stock-based awards other than stock options, including the grant of
“full value” awards such as restricted stock, stock
units and performance shares. The 1999 Plan permits the
qualification of awards under the plan (payable in either stock or
cash) as “performance-based compensation” within the
meaning of Section 162(m) of the Revenue Code. The number of
options issued and outstanding and the number of options remaining
available for future issuance are shown in the table below. The
number of authorized shares available for issuance under the plan
at December 31, 2019 was 401,919.
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. Stock-based compensation expense
related to equity options was approximately $643,000 and $1,272,000
for the years ended December 31, 2019 and 2018,
respectively.
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, 2019 and 2018 ranged from 64%
to 57%. 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, 2019 and 2018 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, 2019 and 2018
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 0% for corporate officers, 4.1% for members
of the Board of Directors and 6.0% for all other employees. The
Company reviews the expected forfeiture rate annually to determine
if that percent is still reasonable based on historical
experience.
A
summary of the activity under the Company’s stock option
plans is as follows:
|
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
Balance
at December 31, 2017
|
6,093,512
|
$1.23
|
5.8
|
Granted
|
1,545,500
|
$1.67
|
—
|
Expired/Cancelled
|
(175,912)
|
$1.33
|
—
|
Exercised
|
(235,852)
|
$0.70
|
—
|
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
|
At
December 31, 2019, a total of 7,204,672 options were outstanding,
of which 6,004,187 were exercisable at a weighted average price of
$1.35 per share with a remaining weighted average contractual term
of 4.6 years. The Company expects that, in addition to
the 6,004,187 options that were exercisable as of December 31,
2019, another 1,200,485 will ultimately vest resulting in a
combined total of 7,204,672. Those 7,204,672 shares have
a weighted average exercise price of $1.32 and an aggregate
intrinsic value of approximately $1,000 as of December 31, 2019.
Stock-based compensation expense related to equity options was
approximately $643,000 and $1,272,000 for the years ended December
31, 2019 and 2018, respectively.
The weighted-average
grant-date fair value per share of options granted to employees
during the years ended December 31, 2019 and 2018 was
$0.47 and $0.94,
respectively. At December 31, 2019, the total remaining
unrecognized compensation cost related to unvested stock options
amounted to approximately $683,000, which will be
amortized over the weighted-average remaining requisite service
period of 1.7 years.
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. During the year ended December 31, 2018, there were
235,852 options exercised for cash resulting in the issuance of
235,852 shares of the Company’s Common Stock and proceeds of
approximately $164,000.
The intrinsic value of options exercised during
the years ended December 31, 2019 and 2018 was approximately
$222,000 and $175,000, respectively. The intrinsic value of options
exercisable at December 31, 2019 and 2018 was approximately
$0 and $248,000,
respectively. The intrinsic value of options that vested
during 2019 was approximately $0. The aggregate intrinsic value for
all options outstanding as of December 31, 2019 and 2018 was
approximately $1,000 and $248,000,
respectively.
In
January 2018, the Company issued an aggregate of 324,000 options to
purchase shares of the Company’s Common Stock to certain
members of the Company’s Board of Directors in return for
their service on the Board from January 1, 2018 through December
31, 2018. Such options vest at the rate of 27,000 options per month
on the last day of each month during the 2018 year. The options
have an exercise price of $1.75 per share and a term of 10 years.
Pursuant to this issuance, the Company recorded compensation
expense of approximately $320,000 during the year ended December
31, 2018 based on the grant-date fair value of the options
determined using the Black-Scholes option-valuation
model.
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
|
$13
|
$19
|
General
and administrative
|
347
|
840
|
Sales
and marketing
|
148
|
216
|
Research
and development
|
135
|
197
|
|
|
|
Total
|
$643
|
$1,272
|
Common Stock Reserved for Future Issuance
The
following table summarizes the Common Stock reserved for future
issuance as of December 31, 2019:
|
|
Convertible
preferred stock – Series A, Series B and Series
C
|
42,626,029
|
Stock options
outstanding
|
7,204,672
|
Warrants
outstanding
|
1,733,856
|
Authorized for
future grant under stock option plans
|
401,919
|
15. 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 2018, the Company authorized contributions of
approximately $166,000 for the 2018 plan year of which $128,000
were paid prior to December 31, 2018. In 2019, the Company
authorized contributions of approximately $184,000 for the 2019
plan year of which $138,000 were paid prior to December 31,
2019.
16. PENSION PLAN
One
of the Company’s dormant foreign subsidiaries maintains a
defined benefit pension plan that provides benefits based on length
of service and final average earnings. The following table sets
forth the benefit obligation, fair value of plan assets, and the
funded status of the Company’s plan; amounts recognized in
the Company’s consolidated financial statements; and the
assumptions used in determining the actuarial present value of the
benefit obligations as of December 31:
($ in thousands)
|
|
|
Change in benefit obligation:
|
|
|
Benefit
obligation at beginning of year
|
$3,610
|
$3,830
|
Service
cost
|
—
|
—
|
Interest
cost
|
70
|
72
|
Actuarial
(gain) loss
|
436
|
(34)
|
Effect
of exchange rate changes
|
(67)
|
(174)
|
Effect
of curtailment
|
—
|
—
|
Benefits
paid
|
(80)
|
(84)
|
Benefit
obligation at end of year
|
3,969
|
3,610
|
|
|
|
Change in plan assets:
|
|
|
Fair
value of plan assets at beginning of year
|
1,734
|
1,806
|
Actual
return of plan assets
|
80
|
82
|
Company
contributions
|
12
|
13
|
Benefits
paid
|
(80)
|
(84)
|
Effect
of exchange rate changes
|
(33)
|
(83)
|
Fair
value of plan assets at end of year
|
1,713
|
1,734
|
Funded
status
|
(2,256)
|
(1,876)
|
Unrecognized
actuarial loss (gain)
|
1,778
|
1,542
|
Unrecognized
prior service (benefit) cost
|
—
|
—
|
Additional
minimum liability
|
(1,778)
|
(1,542)
|
Unrecognized
transition (asset) liability
|
—
|
—
|
Net
amount recognized
|
$(2,256)
|
$(1,876)
|
|
|
|
Components of net periodic benefit cost are as
follows:
|
|
|
Service
cost
|
$—
|
$—
|
Interest
cost on projected benefit obligations
|
70
|
72
|
Expected
return on plan assets
|
(53)
|
(56)
|
Amortization
of prior service costs
|
—
|
—
|
Amortization
of actuarial loss
|
92
|
102
|
Net
periodic benefit costs
|
$109
|
$118
|
|
|
|
The weighted average assumptions used to determine net periodic
benefit cost for the years ended December 31, were
|
|
|
Discount
rate
|
1.3%
|
2.0%
|
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
|
$3,969
|
$3,610
|
Accumulated
benefit obligation
|
$3,969
|
$3,610
|
Fair
value of plan assets
|
$1,713
|
$1,734
|
As
of December 31, 2019, the following benefit payments are expected
to be paid as follows (in thousands):
2020
|
$81
|
2021
|
$95
|
2022
|
$97
|
2023
|
$103
|
2024
|
$122
|
2025
— 2029
|
$687
|
The
Company made contributions to the plan of approximately $12,000
during the year ended December 31, 2019, and $13,000 during the
year ended December 31, 2018. The company anticipates making
contributions at similar levels during the next fiscal
year.
In
accordance with the Company’s adoption of ASU 2017-07, the
components of net periodic pension expense is shown in the
Company’s Consolidated Statement of Operations for the years
ended December 31, 2019 and 2018 under “Other components of
net periodic pension expense”.
The
measurement date used to determine the benefit information of the
plan was January 1, 2020.
17. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is the
combination of the additional minimum liability related to the
Company’s defined benefit pension plan, recognized pursuant
to ASC 715-30, “Compensation - Retirement
Benefits - Defined Benefit Plans – Pension” and the accumulated gains or losses from
foreign currency translation adjustments. The Company translates
foreign currencies of its German, Canadian and Mexican subsidiaries
into U.S. dollars using the period end exchange rate. Revenue and
expense were translated using the weighted-average exchange rates
for the reporting period. All items are shown net of
tax.
As
of December 31, 2019 and 2018, the components of accumulated other
comprehensive loss were as follows:
($ in thousands)
|
|
|
|
|
|
Additional
minimum pension liability
|
$(1,456)
|
$(1,144)
|
Foreign
currency translation adjustment
|
(285)
|
(284)
|
Ending
balance
|
$(1,741)
|
$(1,428)
|
18. SUBSEQUENT EVENTS
CARES Act
On
March 27, 2020, President Trump signed the CARES Act 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.
Financing and liquidity developments
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount was to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and was due no later than 21 days after
February 12, 2020. As of May 15, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members.
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" or the "Investor"), which 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 the Company's
Common Stock under the Triton Purchase Agreement ( the
“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 the Investor to be set forth in each written notice sent to
the Investor by the Company (the "Purchase
Notice") and delivered to the
Investor (the "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 "Purchased
Shares"). The Closing of the
purchase of the Purchased Shares as set forth in the Purchase
Notice will occur no later than three business days following
receipt of the Purchased Shares
by the Investor.
The
Offering was made pursuant to an effective registration statement
on Form S-3, as previously filed with the SEC on July 10, 2018, and
a related prospectus supplement filed on February 21, 2020. The
Offering will terminate upon the earlier date of either (i) that
date which the Investor has purchased an aggregate of $2.0 million
in Purchased Shares pursuant to the Purchase Agreement; or (i)
March 31, 2020. The Company intends to use the proceeds from the
Offering for general working capital purposes.
On
April 29, 2020, the Company closed on the offer and sale to Triton
of 6.0 million 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. The offering follows the offer and sale to Triton of 4.0
million shares of Common Stock for $0.16 per share, which offering
closed on March 10, 2020, resulting in gross proceeds to the
Company of $640,000.
On April 28, 2020 (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 $10,250,000 of the
Company's Common Stock.
Under the terms and subject to the conditions of
the Purchase Agreement, including stockholder approval of an
amendment to the Company’s Certificate of Incorporation to
increase the number of shares of the Company’s capital stock
to 350 million shares, the Company has the right, but not the
obligation, to sell to Lincoln Park, and Lincoln Park is obligated
to purchase up to $10,250,000 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 30
business days to file the registration statement from the Execution
Date.
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 125,000 shares of Common Stock per business day,
which increases to up to 425,000 shares in the event the price of
the Company’s Common Stock is not below $0.55 per share (the
"Regular
Purchase") (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 Park 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"),
provided that the closing price of the Company's Common Stock on
the business day immediately preceding such business day is not
below $0.25 (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 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 issued to Lincoln Park 2,500,000 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 sold, and Lincoln Park purchased, 1.0
million shares of Common Stock for a purchase price of $100,000
(“Original
Purchase”).
On May 4, 2020, the Company entered into a loan
agreement (“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 this program, the
Company received proceeds of approximately $1,571,000, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use 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.
Organizational Developments
On
February 26, 2020, the Company announced the appointment of Kristin
Taylor as President and Chief Executive Officer of the Company,
effective March 2, 2020. Ms. Taylor replaced S. James Miller, Jr.
who resigned as Chief Executive Officer of the Company effective
March 2, 2020 but will remain as Executive Chair of the Board of
Directors.
The
Company and Ms. Taylor entered into an employment agreement
effective April 20, 2020. A copy of the employment contract that
sets forth Ms. Taylor’s base compensation, equity
compensation and termination provisions was filed with the SEC on
April 15, 2020 on Form 8-K.
On
April 1, 2020, John Cronin resigned from his position as a member
of the Board of Directors of the Company. Mr. Cronin indicated that
his resignation from the Board of Directors was not the result of
any disagreements with respect to the Company’s operations,
policies, or practices. Mr. Cronin will continue his work with the
Company on intellectual property matters, including intellectual
property monetization.
The
Company announced the appointment of Jonathan D. Morris as Senior
Vice President and Chief Financial Officer effective May 1, 2020. A
copy of the press release announcing Mr. Morris’ appointment
was filed with the SEC on May 6, 2020 on Form 8-K.
In
April 2020, the Company issued 506,250 shares of its Common Stock
to certain terminated employees as part of such employees’
severance in exchange for 1,012,500 outstanding options held by
such employees. Such shares of stock vested
immediately.
COVID–19
In
March 2020, the World Health Organization declared COVID-19 a
global pandemic. This contagious disease outbreak, which has
continued to spread, has adversely affected workforces, customers,
economies, and financial markets globally. It has also
disrupted the normal operations of many businesses. 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.
8,200,000 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.
,
2020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution.
The
following table indicates the expenses to be incurred in connection
with the offering described in this registration statement, other
than underwriting discounts and commissions, all of which will be
paid by us. All amounts are estimated except the Securities and
Exchange Commission registration fee.
|
|
SEC Registration
Fee
|
$ 415
|
Legal Fees and
Expenses
|
40,000
|
Accounting Fees and
Expenses
|
15,000
|
Transfer Agent and
Registrar fees and expenses
|
1,000
|
Miscellaneous
Expenses
|
5,000
|
|
|
Total
expenses
|
$ 61,415
|
Item 14. Indemnification of Directors and Officers.
Our Certificate of Incorporation, as amended
(“Charter”) and bylaws contain provisions relating to
the limitation of liability and indemnification of directors and
officers. Our Charter provides that a director will not be
personally liable to us or our stockholders for monetary damages
for breach of fiduciary duty as a director, except for
liability:
●
for any breach of
the director’s duty of loyalty to us or our
stockholders;
●
for acts or
omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
●
under Section 174
of the Delaware General Corporation Law (the “DGCL”); or
●
for any transaction
from which the director derived any improper personal
benefit.
Our
Charter also provides that if the DGCL is amended to authorize
corporate action further eliminating or limiting the personal
liability of directors, then the liability of our directors will be
eliminated or limited to the fullest extent permitted by the
DGCL.
Our bylaws provide that we will indemnify our
directors and officers to the fullest extent not prohibited by the
DGCL; provided,
however, that we may limit
the extent of such indemnification by individual contracts with our
directors and executive officers; and provided, further, that we
are not required to indemnify any director or executive officer in
connection with any proceeding (or part thereof) initiated by such
person or any proceeding by such person against us or our
directors, officers, employees or other agents
unless:
●
such
indemnification is expressly required to be made by
law;
●
the proceeding was
authorized by the Board of Directors; or
●
such
indemnification is provided by us, in our sole discretion, pursuant
to the powers vested in us under the DGCL.
Our
bylaws provide that we shall advance, prior to the final
disposition of any proceeding, promptly following request therefor,
all expenses by any director or executive officer in connection
with any such proceeding upon receipt of any undertaking by or on
behalf of such person to repay said amounts if it should be
determined ultimately that such person is not entitled to be
indemnified under Article 8 of our bylaws or otherwise.
Notwithstanding the foregoing, unless otherwise determined, no
advance shall be made by us if a determination is reasonably and
promptly made by the Board of Directors by a majority vote of a
quorum of directors who were not parties to the proceeding, or if
such a quorum is not obtainable, or even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in
a written opinion, that the facts known to the decision-making
party at the time such determination is made demonstrate clearly
and convincingly that such person acted in bad faith or in a manner
that such person did not believe to be in or not opposed to our
best interests.
Our
bylaws also authorize us to purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to Article
8 of our bylaws.
Section
145(a) of the DGCL authorizes a corporation to indemnify any person
who was or is a party, or is threatened to be made a party, to a
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation), by reason of
the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action,
suit or proceeding, if the person acted in good faith and in a
manner the person reasonably believed to be in, or not opposed to,
the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe
the person’s conduct was unlawful.
Section
145(b) of the DGCL provides in relevant part that a corporation may
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit
by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorneys’
fees) actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation
and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
The
DGCL also provides that indemnification under Section 145(d) can
only be made upon a determination that indemnification of the
present or former director, officer or employee or agent is proper
in the circumstances because such person has met the applicable
standard of conduct set forth in Section 145(a) and
(b).
Section
145(g) of the DGCL also empowers a corporation to purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any
such capacity, or arising out of such person’s status as
such, whether or not the corporation would have the power to
indemnify such person against such liability under Section 145 of
the DGCL.
Section
102(b)(7) of the DGCL permits a corporation to provide for
eliminating or limiting the personal liability of one of its
directors for any monetary damages related to a breach of fiduciary
duty as a director, as long as the corporation does not eliminate
or limit the liability of a director for acts or omissions which
(1) which breached the director’s duty of loyalty to the
corporation or its stockholders, (2) which were not in good faith
or which involve intentional misconduct or knowing violation of
law, (3) under Section 174 of the DGCL; or (4) from which the
director derived an improper personal benefit.
We
have obtained directors’ and officers’ insurance to
cover our directors and officers for certain
liabilities.
Item 15. Recent Sales of Unregistered
Securities
Set
forth below is information regarding all securities sold by us
within the last three years which were not registered under the
Securities Act. Also included is the consideration received by us
for such securities and information relating to the section of the
Securities Act, or rule of the SEC, under which exemption from
registration was claimed.
On
September 18, 2017, we entered into Exchange Agreements with
holders of all outstanding shares of Series E Preferred, all
outstanding shares of Series F Preferred and all outstanding shares
of Series G Preferred, pursuant to which we cancelled their
respective shares of preferred stock in exchange for the same
number of shares of Series A Preferred. As a result, we issued to
the holders an aggregate of 20,021 shares of Series A
Preferred.
In
September 2018, we sold and issued an aggregate of 1,000 shares of
our Series C Preferred at a price of $10,000 per share to certain
accredited investors in private placement transactions, resulting
in gross proceeds of approximately $10.0 million. In addition, we
agreed to file a registration statement to register the shares of
Common Stock issuable upon the conversion of the shares of Series C
Preferred as well as those shares of Common Stock issuable as
payment of accrued dividends on shares of Series C Preferred
purchased by the accredited investors.
On September 10, 2018, we entered into Exchange Agreements with
Neal Goldman and Charles Crocker, pursuant to which Messrs. Goldman
and Crocker exchanged approximately $6.3 million and $0.6 million,
respectively, of outstanding debt (including accrued and unpaid
interest) owed under the terms of their respective lines of credit
for the issuance of an aggregate of 6,896 shares of Series A
Preferred.
On September 10, 2018, we granted warrants to
purchase an aggregate of 1,493,856 shares of Common Stock with an
exercise price of $0.01 per share to all holders of our Series A
Preferred as a special dividend. Holders of our Series A Preferred
received warrants to purchase 39.87 shares of Common Stock for
every share of Series A Preferred held. Each warrant was
exercisable immediately upon issuance; provided,
however, that the warrants may
only be exercised concurrently with the conversion of shares
of Series A Preferred held by the holders into shares of Common
Stock. In addition, each warrant expires on the earliest to occur
of (i) the conversion of all Series A Preferred held by the holders
into Common Stock, (ii) our redemption of all outstanding shares of
Series A Preferred held by the holders, (iii) the warrant no longer
representing the right to purchase any shares of Common Stock, and
(iv) the tenth anniversary of the date of
issuance.
We
believe that each of the offers, sales and issuances of securities
described in Item 15 were exempt from registration under the
Securities Act pursuant to Regulation D under the Securities Act or
pursuant to Section 4(a)(2) of the Securities Act regarding
transactions not involving a public offering. The recipients of
securities in each of these transactions represented their
intention to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the stock
certificates and instruments issued in such transactions. All
recipients had adequate access, through their relationships with
us, to information about us.
Item 16. Exhibits and Financial Statement
Schedules
(a)
Exhibits. The following
exhibits included in the Exhibit Index are incorporated by
reference to this registration statement.
(b)
Financial Statements. See
page F-1 for an index of the financial statements included in the
Registration Statement.
Exhibit Index
Exhibit
No.
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Description
|
|
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Agreement and Plan
of Merger, dated October 27, 2005 (incorporated by reference to
Annex A to the Company’s Definitive Proxy Statement on
Schedule 14A, filed November 15, 2005).
|
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Certificate of
Incorporation (incorporated by reference to Annex B to the
Company’s Definitive Proxy Statement on Schedule 14A, filed
November 15, 2005).
|
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Certificate of
Amendment to Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on
Form 8-K, filed October 14, 2011).
|
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Amended and
Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K, filed February 16,
2017).
|
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Certificate of
Designations, Preferences and Rights of the Series E Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed February 2,
2015).
|
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Certificate of
Designations, Preferences and Rights of the Series F Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed September 9,
2016).
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Certificate of
Designations, Preferences and Rights of the Series G Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed December 30,
2016).
|
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Amendment No. 1 to
the Certificate of Designations, Preferences and Rights of the
Series E Convertible Preferred Stock (incorporated by reference to
Exhibit 3.2 to the Company’s Current Report on Form 8-K,
filed December 30, 2016).
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Certificate of
Designations, Preferences and Rights of the Series A Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed September 19,
2017).
|
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Certificate of
Elimination of the Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock and Series G Convertible Preferred
Stock (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed October 19,
2017).
|
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Certificate of
Amendment to Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on
Form 8-K, filed February 13, 2018).
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Certificate of
Designations, Preferences, and Rights of Series C Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed September 13,
2018).
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Amendment No. 1 to the Certificate
of Designations, Preferences, and Rights of Series A Convertible
Preferred Stock (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K, filed September 13,
2018).
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Certificate of
Amendment to the Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form
8-K filed on June 12, 2020).
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Form of Amendment
to Warrant, dated March 21, 2012, (incorporated by reference to
Exhibit 4.16 to the Company's Annual Report on Form 10-K, filed
April 4, 2012).
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Form of Warrant,
dated September 10, 2018 (incorporated by reference to Exhibit 3.3
to the Company’s Current Report on Form 8-K, filed September
13, 2018).
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Opinion of Disclosure Law Group, a
Professional Corporation, filed
herewith
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Employment
Agreement, dated September 27, 2005, between the Company and S.
James Miller (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed September 30,
2005).
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Form of
Indemnification Agreement entered into by the Company with its
directors and executive officers (incorporated by reference to
Exhibit 10.4 to the Company’s Registration Statement on Form
SB-2 (No. 333-93131), filed December 20, 1999, as
amended).
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Amended and
Restated 1999 Stock Plan Award (incorporated by reference to
Appendix B of the Company’s Definitive Proxy Statement on
Schedule 14A, filed November 21, 2007).
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Form of Stock
Option Agreement (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed July 14,
2005).
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2001 Equity
Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-QSB, filed November 14,
2001).
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Securities Purchase
Agreement, dated September 25, 2007, by and between the Company and
certain accredited investors (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed
September 26, 2007).
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Office Space Lease
between I.W. Systems Canada Company and GE Canada Real Estate
Equity, dated July 25, 2008 (incorporated by reference to Exhibit
10.39 to the Company’s Annual Report on Form 10-K, filed
February 24, 2010).
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Form of Securities
Purchase Agreement, dated August 29, 2008 by and between the
Company and certain accredited investors (incorporated by reference
to Exhibit 10.40 to the Company’s Annual Report on Form 10-K,
filed February 24, 2010).
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Change of Control
and Severance Benefits Agreement, dated September 27, 2008, between
Company and Charles Aubuchon (incorporated by reference to Exhibit
10.41 to the Company’s Annual Report on Form 10-K, filed
February 24, 2010).
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Change of Control
and Severance Benefits Agreement, dated September 27, 2008, between
Company and David Harding (incorporated by reference to Exhibit
10.42 to the Company’s Annual Report on Form 10-K, filed
February 24, 2010).
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First Amendment to
Employment Agreement, dated September 27, 2008, between the Company
and S. James Miller (incorporated by reference to Exhibit 10.43 to
the Company’s Annual Report on Form 10-K, filed February 24,
2010).
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Form of Convertible
Note dated November 14, 2008 (incorporated by reference to Exhibit
10.45 to the Company’s Annual Report on Form 10-K, filed
February 24, 2010).
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Second Amendment to
Employment Agreement, dated April 6, 2009, between the Company and
S. James Miller (incorporated by reference to Exhibit 10.50 to the
Company’s Annual Report on Form 10-K, filed February 24,
2010).
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Office Space Lease
between the Company and Allen W. Wooddell, dated July 25, 2008
(incorporated by reference to Exhibit 10.54 to the Company’s
Annual Report on Form 10-K, filed February 24, 2010).
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Third Amendment to
Employment Agreement, dated December 10, 2009, between the Company
and S. James Miller (incorporated by reference to Exhibit 10.60 to
the Company’s Annual Report on Form 10-K, filed February 24,
2010).
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|
|
Securities Purchase
Agreement, dated December 12, 2011, by and between the Company and
certain accredited investors (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed
December 21, 2011).
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Note Exchange
Agreement, dated December 12, 2011, by and between the Company and
certain accredited investors (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K, filed
December 21, 2011).
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Fourth Amendment to
Employment Agreement, dated March 10, 2011, between the Company and
S. James Miller, (incorporated by reference to Exhibit 10.40 to the
Company’s Annual Report on Form 10-K, filed January 17,
2012).
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Fifth Amendment to
Employment Agreement, dated January 31, 2012, between the Company
and S. James Miller, Jr., (incorporated by reference to Exhibit
10.44 to the Company’s Annual Report on Form 10-K, filed
April 4, 2012.
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|
|
Employment
Agreement, dated January 1, 2013, between the Company and Wayne
Wetherell (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed March 7,
2013).
|
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|
Employment
Agreement, dated January 1, 2013, between the Company and David
Harding (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, filed March 7, 2013).
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|
Convertible
Promissory Note dated March 27, 2013 issued by the Company to Neal
Goldman (incorporated by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K, filed April 1,
2013).
|
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|
Amendment to
Convertible Promissory Note, dated March 12, 2014 (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K, filed March 13, 2014).
|
|
|
Note Exchange
Agreement, dated January 29, 2015 (incorporated by reference to the
Company’s Current Report on Form 8-K, filed February 2,
2015).
|
|
|
Sixth Amendment to
Employment Agreement, by and between S. James Miller and the
Company, dated November 1, 2013 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K, filed
November 7, 2013).
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|
Seventh Amendment
to Employment Agreement, by and between S. James Miller, Jr. and
the Company, dated January 9, 2015 (incorporated by reference to
the Company’s Current Report on Form 8-K, filed January 15,
2015).
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Second Amendment to
Employment Agreement, by and between Wayne Wetherell and the
Company, dated January 9, 2015 (incorporated by reference to the
Company’s Current Report on Form 8-K, filed January 15,
2015).
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|
Second Amendment to
Employment Agreement, by and between David E. Harding and the
Company, dated January 9, 2015 (incorporated by reference to the
Company’s Current Report on Form 8-K, filed January 15,
2015).
|
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|
Amendment No. 3 to
Convertible Promissory Note, dated December 8, 2014 (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed December 10, 2014).
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|
Third Amendment to
Employment Agreement, by and between Wayne Wetherell and the
Company, dated December 14, 2015 (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K, filed
December 21, 2015).
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|
Third Amendment to
Employment Agreement, by and between David E. Harding and the
Company, dated December 14, 2015 (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K, filed
December 21, 2015).
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|
Eighth Amendment to
Employment Agreement, by and between S. James Miller and the
Company, dated December 14, 2015 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K, filed
December 21, 2015).
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|
Amendment No. 4 to
Convertible Promissory Note, dated March 8, 2016 (incorporated by
reference to the Company's Current Report on Form 8-K, filed March
10, 2017).
|
|
|
Convertible
Promissory Note, dated March 9, 2016 (incorporated by reference to
the Company's Current Report on Form 8-K, filed March 10,
2017).
|
|
|
Form of Securities
Purchase Agreement, dated September 7, 2016 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed September 9, 2016).
|
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|
Amendment No. 5 to
Convertible Promissory Note, dated January 23, 2017 (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report
on Form 10-K, filed January 26, 2017).
|
|
|
Form of
Subscription Agreement for Series G Convertible Preferred Stock
(incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed December 30, 2016).
|
|
|
Form of Exchange
Agreement (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed December 30,
2016).
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|
Ninth Amendment to
Employment Agreement, by and between James Miller, Jr. and the
Company, dated October 20, 2016 (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K,
filed December 30, 2016).
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Fourth Amendment to
Employment Agreement, by and between Wayne Wetherell and the
Company, dated October 20, 2016 (incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K,
filed December 30, 2016).
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|
Fourth Amendment to
Employment Agreement, by and between David E. Harding and the
Company, dated October 20, 2016 (incorporated by reference to
Exhibit 10.5 to the Company’s Current Report on Form 8-K,
dated December 30, 2016).
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|
Amendment No. 2 to
Convertible Promissory Note, dated May 10, 2017 (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q, filed May 12, 2017).
|
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|
Amendment No. 6 to
Convertible Promissory Note, dated May 10, 2017 (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q, filed May 12, 2017).
|
II-6
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|
Form of
Subscription Agreement for Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed September 19, 2017).
|
|
|
Form of Exchange
Agreement (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed September 19,
2017).
|
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|
Fifth Amendment to
Employment Agreement, by and between David E. Harding and the
Company, dated February 7, 2018 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K,
dated February 13, 2018).
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Tenth Amendment to
Employment Agreement, by and between James Miller, Jr. and the
Company, dated February 8, 2018 (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K,
dated February 13, 2018).
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|
Form of Securities
Purchase Agreement for Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed September 13, 2018).
|
|
|
Form of
Registration Rights Agreement (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K, filed
September 13, 2018).
|
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|
Placement Agency
Agreement, by and between the Company and Northland Capital Markets
(incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K, filed September 13, 2018).
|
|
|
Form of Exchange
Agreement (incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K, filed September 13,
2018).
|
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|
Eleventh Amendment
to Employment Agreement, by and between James Miller, Jr. and the
Company, dated January 31, 2019 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K,
dated February 1, 2019).
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Sixth Amendment to
Employment Agreement, by and between David Harding and the Company,
dated January 31, 2019 (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K, dated February
1, 2019).
|
|
|
Securities Purchase
Agreement by and between the Company and Triton, dated February 20,
2020 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, dated February 27,
2020.
|
|
|
Purchase Agreement,
by and between ImageWare Systems, Inc. and Lincoln Park Capital
Fund, LLC, dated April 28, 2020 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K,
dated April 30, 2020).
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|
Registration Rights
Agreement, by and between ImageWare Systems, Inc. and Lincoln Park
Capital Fund, LLC, dated April 28, 2020 (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K,
dated April 30, 2020).
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|
Note Payable
Agreement by and between ImageWare Systems, Inc. and COMERICA BANK,
dated April 30, 2020 (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, dated May 11,
2020).
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|
|
Purchase Agreement,
by and between ImageWare Systems, Inc. and Lincoln Park Capital
Fund, LLC, dated April 28, 2020 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K,
dated April 30, 2020).
|
|
|
Registration Rights
Agreement, by and between ImageWare Systems, Inc. and Lincoln Park
Capital Fund, LLC, dated April 28, 2020 (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K,
dated April 30, 2020).
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|
Note Payable
Agreement by and between ImageWare Systems, Inc. and COMERICA BANK,
dated April 30, 2020 (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, dated May 11,
2020).
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List of Subsidiaries (incorporated
by referenced to Exhibit 21.1 to the Company’s Annual Report
on Form 10-K filed February 24, 2010).
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Consent of
Disclosure Law Group, a Professional Corporation (included in
Exhibit 5.1)
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Consent of Independent Registered
Public Accounting Firm – Mayer Hoffman McCann P.C.,
filed herewith .
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Power
of Attorney (included on the
signature page of the Registration Statement on Form S-1, filed on
June 15, 2020).
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*
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To be filed by amendment.
|
Item 17. Undertakings
The
undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each
purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
(a) The
undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)
To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in
the effective registration statement;
(iii)
To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however,
that Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this
section do not apply if the registration statement is on Form S-1
and the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with or
furnished to the Commission by the Registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any
liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the
offering.
(4) That, for
the purpose of determining liability under the Securities Act to
any purchaser:
(i)
Each
prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included
in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of
first use.
(b) The
undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan’s
annual report pursuant to section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering
thereof.
(c)
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
referenced in Item 14 of this Registration Statement, or
otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication
of such issue.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused
this registration statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in
the City of San Diego, State of
California, on the 2nd day of July,
2020.
|
ImageWare Systems, Inc.
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Date: July 2, 2020
|
By:
|
/s/
Kristin Taylor
|
|
|
|
Kristin Taylor
|
|
|
|
Chief Executive Officer
(Principal Executive Officer
|
|
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
Date:
July
2, 2020
|
|
/s/
*
|
|
|
Kristin Taylor
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
/s/
*
|
|
|
Jonathan Morris
|
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
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/s/
*
|
|
|
S. James Miller, Jr.
|
|
|
Chairman of the Board
|
|
|
|
|
|
/s/
*
|
|
|
David Carey
|
|
|
Director
|
|
|
|
|
|
/s/
*
|
|
|
Neal Goldman
|
|
|
Director
|
|
|
|
|
|
/s/
*
|
|
|
Steve Hamm
|
|
|
Director
|
|
|
|
|
|
/s/
*
|
|
|
Dana Kammersgard
|
|
|
Director
|
|
|
|
|
|
/s/
*
|
|
|
David Loesch
|
|
|
Director
|
*
By: /s/ Kristin
Taylor
Attorney-in-Fact