UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to _________
Commission file number
| IMAGEWARE SYSTEMS, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
(Address of Principal Executive Offices)
(
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See 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 | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-12 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act: None
The number of shares of common stock, par value $0.01 per share, outstanding on May 20, 2022 was
INDEX
| Page | ||
| ITEM 1. |
||
| Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021 |
1 | |
| 2 | ||
| 3 | ||
| 4 | ||
| 6 | ||
| Notes to unaudited Condensed Consolidated Financial Statements |
7 | |
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
| ITEM 3. |
31 | |
| ITEM 4. |
32 | |
| ITEM 1. |
33 | |
| ITEM1A. |
33 | |
| ITEM 2. |
44 | |
| ITEM 3. |
44 | |
| ITEM 4. |
44 | |
| ITEM 5. |
44 | |
| ITEM 6. |
44 | |
| 45 | ||
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements. The words or phrases “would be," “will allow," “intends to," “will likely result," “are expected to," “will continue," “is anticipated," “estimate," “project," or similar expressions are intended to identify “forward-looking statements." Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including those risks factors contained in our Annual Report on Form 10-K for the year ended December 31, 2021, previously filed with the Securities and Exchange Commission (“SEC”) on April 15, 2022 is incorporated herein by reference. Statements made herein are as of the date of the filing of this Report with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events, or circumstances after the date of such statement.
ITEM 1. FINANCIAL STATEMENTS
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except for share and per share data)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ at March 31, 2022 and December 31, 2021. | ||||||||
| Inventory, net | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Deferred revenue | ||||||||
| Accrued expense | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Derivative liabilities | ||||||||
| Note payable, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Other long-term liabilities: | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Pension obligation | ||||||||
| Total Liabilities | ||||||||
| Mezzanine Equity: | ||||||||
| Series D Convertible Redeemable Preferred Stock, $ par value, shares designated; and issued at March 31, 2022 (unaudited) and December 31, 2021, respectively, and and shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively; liquidation preference of $ and $ at March 31, 2022 (unaudited) and December 31, 2021, respectively. | ||||||||
| Shareholders’ Deficit: | ||||||||
| Preferred stock, authorized shares: | ||||||||
| Series B Convertible Redeemable Preferred Stock, $ par value, shares designated; shares issued and shares outstanding at March 31, 2022 (unaudited) and December 31, 2021; liquidation preference $ and $ at March 31, 2022 (unaudited) and December 31, 2021, respectively. | ||||||||
| Common Stock, $ par value, shares authorized; and shares issued at March 31, 2022 (unaudited) and December 31, 2021, respectively, and and shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities, Mezzanine Equity and Shareholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In Thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended March 31 |
||||||||
| 2022 |
2021 |
|||||||
| Revenue: |
||||||||
| Product |
$ | $ | ||||||
| Maintenance |
||||||||
| Cost of revenue: |
||||||||
| Product |
||||||||
| Maintenance |
||||||||
| Gross profit |
||||||||
| Operating expense: |
||||||||
| General and administrative |
||||||||
| Sales and marketing |
||||||||
| Research and development |
||||||||
| Depreciation and amortization |
||||||||
| Loss from operations |
( |
) |
( |
) |
||||
| Interest expense, net |
||||||||
| (Gain) loss on change in fair value of derivative liabilities |
( |
) |
||||||
| Loss on extinguishment of derivative liabilities |
||||||||
| Other (income) expense, net |
( |
) |
||||||
| Other components of net periodic pension expense |
||||||||
| Loss before income taxes |
( |
) |
( |
) |
||||
| Income tax expense (income) |
||||||||
| Net loss |
( |
) |
( |
) |
||||
| Preferred dividends, preferred stock discount accretion and deemed dividends from preferred stock exchange |
( |
) |
( |
) |
||||
| Net loss available to common shareholders |
$ | ( |
) |
$ | ( |
) |
||
| Basic and diluted loss per common share – see Note 3: |
||||||||
| Basic and diluted loss per share available to common shareholders |
$ | ( |
) |
$ | ( |
) |
||
| Basic and diluted weighted-average shares outstanding |
||||||||
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, |
||||||||
| 2022 |
2021 |
|||||||
| Net loss |
$ | ( |
) |
$ | ( |
) |
||
| Other comprehensive income (loss): |
||||||||
| Foreign currency translation adjustment |
||||||||
| Comprehensive loss |
$ | ( |
) |
$ | ( |
) |
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In Thousands, except share amounts)
(Unaudited)
| Series A |
Series A-1 |
Series B |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible, |
Convertible, |
Convertible, |
Accumulated |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable |
Redeemable |
Redeemable |
Additional |
Other |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred |
Preferred |
Preferred |
Common Stock |
Treasury Stock |
Paid-In |
Comprehensive |
Accumulated |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Loss |
Deficit |
Total |
|||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
| Accretion of Preferred Stock discount |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series D Preferred stock, $(10.90)/share |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||||||||||||||||||
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In Thousands, except share amounts)
(Unaudited)
| Series A Convertible, Redeemable Preferred |
Series A-1 Convertible, Redeemable Preferred |
Series B Convertible, Redeemable Preferred |
Common Stock |
Treasury Stock |
Additional Paid-In |
Accumulated Other Comprehensive |
Accumulated |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Loss |
Deficit |
Total |
|||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
|||||||||||||||||||||||||||||||||||||
| Accretion of Preferred Stock discount |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to warrant exercise |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred to Common Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A-1 Preferred to Common Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series D Preferred to Common Stock |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series A preferred stock, $(10.50)/share |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series A-1 preferred stock, $(9.75)/share |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series D Preferred stock, $(90.90)/share |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||||||||||||||||
| Net loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
|||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | ( |
) |
$ | ( |
) |
||
| Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Amortization of debt discount |
||||||||
| Loss on disposal of fixed assets |
||||||||
| Stock-based compensation |
||||||||
| Issuance of common stock as compensation in lieu of cash |
||||||||
| Loss on extinguishment of derivative liability, net |
||||||||
| Change in fair value of derivative liabilities |
( |
) |
||||||
| Change in assets and liabilities: |
||||||||
| Accounts receivable |
||||||||
| Inventory |
( |
) |
||||||
| Other assets |
( |
) |
||||||
| Operating lease right-of-use assets |
( |
) |
( |
) |
||||
| Accounts payable |
( |
) |
||||||
| Deferred revenue |
( |
) |
( |
) |
||||
| Accrued expense |
( |
) |
||||||
| Pension obligation |
( |
) |
( |
) |
||||
| Total adjustments |
( |
) |
||||||
| Net cash used in operating activities |
( |
) |
( |
) |
||||
| Cash flows from investing activities |
||||||||
| Purchase of property and equipment |
( |
) |
||||||
| Net cash used in investing activities |
( |
) |
||||||
| Cash flows from financing activities |
||||||||
| Proceeds from issuance of notes payable |
||||||||
| Net cash provided by financing activities |
||||||||
| Effect of exchange rate changes on cash and cash equivalents |
||||||||
| Net decrease in cash and cash equivalents |
( |
) |
( |
) |
||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Summary of non-cash investing and financing activities: |
||||||||
| Stock dividends on Series A Convertible Redeemable Preferred Stock |
$ | $ | ||||||
| Stock dividends on Series A-1 Convertible Redeemable Preferred Stock |
$ | $ | ||||||
| Stock dividends on Series D Convertible Redeemable Preferred Stock |
$ | |||||||
| Accretion of discount on Series D Convertible Redeemable Preferred Stock |
$ | $ | ||||||
| Conversion of Series A Convertible Redeemable Preferred Stock into Common Stock |
$ | |||||||
| Conversion of Series A-1 Convertible Redeemable Preferred Stock into Common Stock |
$ | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 our patented 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 our Biometric Engine.
The Company's common stock, par value $
Liquidity, Going Concern and Management’s Plans
At March 31, 2022 and December 31, 2021, we had negative working capital of $
Historically, our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically, the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern.
To address our working capital requirements, management is actively seeking additional financing, of which no assurances can be given that we will be successful. In addition, the Company has instituted several cost cutting measures and has utilized cash proceeds available under the Credit Facility (defined below) with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (collectively, the “Lenders”), and under the purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to satisfy its working capital requirements (“LPC Purchase Agreement”).
During 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. In the event the Company is unable to consummate one or more of the above transactions, the Company will not be able to continue as a going concern. The Company continues to evaluate indications of interest as well as options to address its projected working capital requirements, and those discussions are ongoing, including discussions with the Company’s largest shareholder with whom the Company has entered a Term Loan and Security Agreement to provide up to $
To date, the Board of Directors (“Board”) has not entered into any financing or other arrangements, other than the Credit Facility and the LPC Purchase Agreement, 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. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders and may result in the loss of your entire investment.
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 of the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2022, 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, 2021, which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2021 as filed with the SEC on April 15, 2022.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, 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.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
Accounts Receivable
In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivables 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 receivables 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.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, and deferred revenue, the carrying amounts approximate fair value due to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use Assets
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately
The Company evaluates its operating lease right-of-use assets for impairment. Impairment is based on the excess of the carrying amount over the fair value, based on market value when available, or expected future economic benefits to the company from the operating lease right-of-use asset and is recorded in the period in which the determination is made. The Company recorded
Revenue Recognition
In accordance with ASC Topic 606 – Revenue from Contracts with Customers (“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 ASC 606 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; |
| • | Services; and |
| • | 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
Post-contract customer support (“PCS”) consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and PCS 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, 2022 and December 31, 2021, we had capitalized incremental costs of obtaining a contract with a customer of $
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, 2022 and 2021:
| Net Revenue | Three Months Ended March 31, | |||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Software and royalties | $ | $ | ||||||
| Hardware and consumables | ||||||||
| Services | ||||||||
| Maintenance | ||||||||
| Total revenue | $ | $ | ||||||
Customer Concentration
For the three months ended March 31, 2022, two customers accounted for approximately
For the three months ended March 31, 2021, two customers accounted for approximately
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06"). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas. ASU 2020-06 is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
NOTE 3. NET LOSS PER COMMON SHARE
Basic loss per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period, adjusted to include, if dilutive, potential dilutive shares consisting of convertible preferred stock, 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 loss 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, | |||||||
| 2022 | 2021 | |||||||
| Numerator for basic and diluted loss per share: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Preferred dividends and preferred stock discount accretion | ( | ) | ( | ) | ||||
| Net loss available to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Denominator for basic loss per share – weighted-average shares outstanding | ||||||||
| Basic and diluted loss per share available to common shareholders | $ | ( | ) | $ | ( | ) | ||
The following potential dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding, as their effect would have been antidilutive:
| Potential Dilutive Securities: | Common Share Equivalents at March 31, 2022 | Common Share Equivalents at December 31, 2021 | ||||||
| Convertible redeemable preferred stock – Series A | ||||||||
| Convertible redeemable preferred stock – Series A-1 | ||||||||
| Convertible redeemable preferred stock – Series B | ||||||||
| Convertible redeemable preferred stock – Series D | ||||||||
| Stock options | ||||||||
| Restricted stock units (“RSUs”) | ||||||||
| Warrants | ||||||||
| Total Potential Dilutive Securities | ||||||||
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $
Inventories of $
Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value and required reserve levels.
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 reporting unit, Identity Management, which, at March 31, 2022, had a negative carrying amount of approximately $
Other Assets
In conjunction with the LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2021,
NOTE 5. LEASES
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 – Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately
Our corporate headquarters is located in San Diego, California, where we now occupy approximately
Prior to entering into our current lease agreement in January 2021 and moving our corporate headquarters to a new location, we occupied
The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases.
For the three months ended March 31, 2022 and 2021, the Company recorded approximately $
The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as its term is less than 12 months.
At March 31, 2022, future minimum undiscounted lease payments are as follows:
| ($ in thousands) | ||||
| 2022 (nine months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | ||||
| Present Value effect on future minimum undiscounted lease payments at March 31, 2022 | ( | ) | ||
| Lease liability at March 31, 2022 | ||||
| Less current portion | ( | ) | ||
| Non-current lease liability at March 31, 2022 | $ |
NOTE 6. MEZZANINE EQUITY
Series D Convertible Redeemable Preferred Stock
On November 12, 2020, the Company filed the Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock (the “Series D Certificate”) with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred (described below in Note 9), and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities and are to be paid at the rate of
The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into Common Stock at any time that is at least ninety days following the issuance date, at the conversion price calculated by dividing the Stated Value by the conversion price of $
If, on any date that is at least five (5) years following the Issuance Date (as defined in the Series D Certificate), (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common Stock issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common Stock will be either (A) covered by an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), which is then available for the immediate resale of such Common Stock by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.
On the fourth anniversary of the Issuance Date, or in the event of the consummation of a change of control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.
On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of
During the year ended December 31, 2021, the Company issued an aggregate of
During the three months ended March 31, 2022, the Company issued
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 Redeemable Preferred Stocks (“ASR 268”). The Company evaluated the provisions of the Series D Preferred and determined that the provisions of the Series D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series D Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control (as defined in the Series D Certificate), the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.
The Company noted that the Series D Preferred instruments were hybrid instruments that contain several embedded features. In November 2014, the FASB issued ASU 2014-16 to amend ASC 815, “Derivatives and Hedging”, (“ASC 815”) and require the use of the whole instrument approach (described below) to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity.
The whole instrument approach requires an issuer or investor to consider the economic characteristics and risks of the entire hybrid instrument, including all of its stated and implied substantive terms and features. Under this approach, all stated and implied features, including the embedded feature being evaluated for bifurcation, must be considered. Each term and feature should be weighed based on the relevant facts and circumstances to determine the nature of the host contract. This approach results in a single, consistent determination of the nature of the host contract, which is then used to evaluate each embedded feature for bifurcation. That is, the host contract does not change as each feature is evaluated.
The revised guidance further clarifies that the existence or omission of any single feature, including an investor-held, fixed-price, noncontingent redemption option, does not determine the economic characteristics and risks of the host contract. Instead, an entity must base that determination on an evaluation of the entire hybrid instrument, including all substantive terms and features.
However, an individual term or feature may be weighed more heavily in the evaluation based on facts and circumstances. An evaluation of all relevant terms and features, including the circumstances surrounding the issuance or acquisition of the equity share, as well as the likelihood that an issuer or investor is expected to exercise any options within the host contract, to determine the nature of the host contract, requires judgement.
Using the whole instrument approach, the Company concluded that the host instrument of the Series D Preferred were more akin to debt than equity as the majority of identified features contain more characteristics of debt.
The Company evaluated the identified embedded features of the Series D Preferred host instrument and determined that certain features meet the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument.
The Company has bifurcated from the Series D Preferred host instrument the conversion option, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $
The following table summarizes the share activity of Series D Preferred for the three months ended March 31, 2022:
| Series D Convertible Redeemable Preferred | ||||
| Total shares of Series D Preferred Stock - December 31, 2021 | ||||
| Conversion of Series D Preferred into Common Stock | ||||
| Issuance of Series D Preferred as payment of dividends due | ||||
| Total shares of Series D Preferred Stock - March 31, 2022 | ||||
The carrying value of the Company’s Series D Preferred was approximately $
NOTE 7. DERIVATIVE LIABILITIES
The Company accounts for its derivative instruments under the provisions of ASC 815, “Derivatives and Hedging”. Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contracts that qualify as derivative instruments and require bifurcation.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series D Preferred host instrument required bifurcation. The Company valued these bifurcatable features at fair value. Such liabilities aggregated approximately $
The change in fair value of such amounts is recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. For the three months ended March 31, 2022, the Company recorded an increase to its derivative liabilities using fair value methodologies of approximately $
NOTE 8. LINE OF CREDIT
December 2021 Credit Facility with Nantahala Capital Management
On December 29, 2021, the Company entered into a Term Loan and Security Agreement with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $
On the Closing Date, the Company received in initial draw-down on the Credit Facility of $
For a more detailed description of this related party credit facility, see Note 12, Related Parties.
NOTE 9. EQUITY
The Company’s Certificate of Incorporation, as amended, authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board may determine.
On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of
As of March 31, 2022, we had
Our Board has designated five series of Preferred Stock; (i) Series A Preferred, (ii) Series A-1 Preferred, (iii) Series B Preferred, (iv) Series C Preferred and (v) Series D Preferred. As of March 31, 2022, there were
Series B Convertible Redeemable Preferred Stock
The Company had
Common Stock
The following table summarizes outstanding Common Stock activity during the three months ended March 31, 2022:
| Common Stock | ||||
| Shares outstanding at December 31, 2021 | ||||
| Shares issued pursuant to option exchange and RSU vesting | ||||
| Shares outstanding at March 31, 2022 | ||||
Warrants
As of March 31, 2022, warrants to purchase
During the three months ended March 31, 2022, there were
NOTE 10. STOCK-BASED COMPENSATION
Stock Options
As of March 31, 2022, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Plan. Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Internal Revenue Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Stock Award 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 amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to
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” (“ASC 718”). The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.
ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14.
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. The Company utilized estimated forfeiture rate of
A summary of the activity under the Company’s stock option plans is as follows:
| Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | ||||||||||
| Balance at December 31, 2021 | $ | |||||||||||
| Granted | $ | |||||||||||
| Expired/Cancelled | $ | |||||||||||
| Exercised | ||||||||||||
| Balance at March 31, 2022 | $ | |||||||||||
There were options granted during the three months ended March 31, 2022.
During the three months ended March 31, 2022, there were
At March 31, 2022, a total of
The intrinsic value of options exercisable and outstanding at March 31, 2021 was The aggregate intrinsic value for all options outstanding as of March 31, 2021 was There were
The Company periodically issues Restricted Stock Units (“RSUs”) to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.
A summary of the activity related to RSUs is as follows:
| RSU’s | Weighted-Average Issuance Price | |||||||
| Balance at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Expired/Cancelled | ( | ) | $ | |||||
| Vested | ( | ) | $ | |||||
| Balance at March 31, 2022 | $ | |||||||
There were RSUs granted during the three months ended March 31, 2022.
During the three months ended March 31, 2022, the Company recorded compensation expense of approximately $
Stock-Based Compensation
Stock-based compensation related to equity options, RSUs and warrants has been classified as follows in the accompanying consolidated statements of income (loss) (in thousands):
| Three months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cost of revenue | $ | $ | ||||||
| General and administrative | ||||||||
| Sales and marketing | ||||||||
| Research and development | ||||||||
| Total | $ | $ | ||||||
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), 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, 2022 | ||||||||||||||||
| ($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | ||||||||||||||||
| Pension assets | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | ||||||||||||||
| Totals | $ | $ | ||||||||||||||
| Fair Value at December 31, 2021 | ||||||||||||||||
| ($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | ||||||||||||||||
| Pension assets | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
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 the 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, 2022 and December 31, 2021, the Company had embedded features contained in the Series D Preferred host instrument (issued in November 2020) that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $
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, 2022 are a risk-free rate of
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, 2022 and 2021 are presented below:
| ($ in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||
| Pension assets: | ||||||||
| Fair value at beginning of period | $ | $ | ||||||
| Return on plan assets | ||||||||
| Company contributions and benefits paid, net | ( | ) | ||||||
| Effect of exchange rate changes | ( | ) | ( | ) | ||||
| Fair value at end of period | $ | $ | ||||||
The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three months ended March 31, 2022 is presented below:
| ($ in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||
| Derivative liabilities: | ||||||||
| Fair value at beginning of period | $ | $ | ||||||
| Derivative liability from issuance of Preferred Series D | ||||||||
| Decrease in derivative liability from conversions of Preferred Series D | ( | ) | ||||||
| Change in fair value included in earnings | ( | ) | ||||||
| Fair value at end of period | $ | $ | ||||||
NOTE 12. RELATED PARTY TRANSACTIONS
December 2021 Credit Facility with Nantahala Capital Management
On December 29, 2021 (the “Closing Date”), the Company entered into a Term Loan and Security Agreement (the “Agreement”) with certain funds and separate accounts managed by Nantahala Capital Management, LLC (collectively, “Nantahala”), as lenders, and other lenders set forth on the signature pages thereto (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $
All loans (each a “Loan”, and collectively, the “Loans”) under the Credit Facility will bear interest at a rate of
The Company may prepay amounts borrowed under the Credit Facility in whole or in part, at a price equal to
Consulting Agreement
On March 1, 2022, the Company entered into a consulting agreement with a member of the Company’s Board of Directors (the “Consulting Agreement”). The Consulting Agreement provides for the provision of certain strategic financing and corporate development activities . The term of the agreement is for a period of three months and expires June 1, 2022. The maximum consulting fee is $
NOTE 13. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024 (the “Employment Agreement”). The Company may terminate the Employment Agreement with or without cause. Subject to the conditions and other limitations set forth in the Employment Agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the Employment Agreement) by the Company or by the executive:
Under the terms of the Employment Agreement, if employment is terminated by the Company without cause or there is a change of control, then the executive shall be entitled to severance payments equal to the executive’s annual salary and shall remain enrolled in the Company’s health, dental, and life insurance plans for the lesser of twelve (12) months or the remaining period prior to expiration of the Employment Period (as defined in the Employment Agreement) plus the executive shall be entitled to any bonus due as of the effective date of such termination.
Litigation
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
NOTE 14. SUBSEQUENT EVENTS
During the period from April 1, 2022 through May 23, 2022, the Company issued
During the period from April 1, 2022 through May 23, 2022, the Company borrowed an additional $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All forward-looking statements included in this report are based on information available to us as of the date hereof and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known or unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those items discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and in Item 1A of Part II of this Quarterly Report.
The following discussion of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements included elsewhere within this Quarterly Report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for our products, such as the timing of new product introductions by us and by our competitors and our customers’ political and budgetary constraints. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. As used in this Quarterly Report, “we”, “us”, “our”, “Imageware”, “Imageware Systems”, “IWS", or the “Company” refers to Imageware Systems, Inc., a Delaware corporation, and all of its subsidiaries.
Overview
Imageware Systems, Inc. (“Imageware,” the “Company,” “we,” “our”) provides biometric solutions to identify, verify, and authenticate people based on their true identity, rather than on what keys and codes they have. A pioneer in the field, Imageware was the first multimodal biometric solution provider in history and holds dozens of patents, including some of the most cited patents in the industry. Our Cloud-based and on-premises solutions provide faster, more accurate identification to better secure communities, data, and assets. In fact, governments, law enforcement agencies, and public and private enterprises worldwide trust Imageware with critical identity solutions which manage millions of identities every day.
Our patented Imageware Biometric Engine® is one of the most accurate and fastest biometrics matching engines in the industry, capable of our patented biometrics fusion. We are a “biometrics first” company, leveraging unique human characteristics to provide unparalleled accuracy for identification while protecting your identity.
Our product portfolio, called the Imageware Identity Platform, is built around three key areas: Enroll & Identify, Badge & Credential, and Authenticate. All of these areas are built on top of the Imageware Biometric Engine. The Platform is a fully-modular, customizable, and pre-integrated portfolio of capabilities to support state and local law enforcement, Federal agencies, and enterprises alike.
Enroll & Identify
The Enroll & Identify area includes four key modules: Imageware Proof, Imageware Capture, Imageware Identify, and Imageware Investigate.
Imageware Proof enables an entity to prove someone’s identity from their biometrics, government issued ID, and 3rd party databases (such as credit bureau data). Imageware Capture enables the fastest capture of biographic and biometric detail (such as face, fingerprint, palm print, iris, and SMT’s) in the industry. Imageware Identify enables a user to identify someone from their biometrics in seconds. Imageware Investigate enables an officer to create digital lineups very quickly.
Badge & Credential
The Badge & Credential area includes two key modules: Imageware Credential (formerly EPI Suite) and Imageware Digital ID. Imageware Credential enables a user to design, build, and print badges for access control systems. This includes tickets, smart badges, wristbands, Personal Identity Verification (“PIV”) cards, and more. Imageware Digital ID is a decentralized identity service that enables self-sovereign identity underpinned by blockchain technology tied to biometrics.
Authenticate
The Authenticate area includes Imageware Authenticate, which enables users to leverage multimodal biometrics hosted in a central server or cloud to log in to services and applications from any device. Imageware Authenticate is easily integrated into existing solutions leveraging OpenID Connect (“OIDC”), Security Assertion Mark-up Language (“SAML”), or OAuth2 protocols, and includes a software development kit (“SDK”) for partners and customers to easily embed into their existing applications.
Imageware Biometric Engine
The Imageware Biometric Engine® is a patented biometric identity and authentication database built for multi-biometric enrollment, management and authentication. It is hardware agnostic and can utilize different types of biometric algorithms from any vendor. 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, enabling developers and system integrators to implement biometric solutions or integrate biometric capabilities, into existing applications.
Imageware Law Enforcement
Our modules are leveraged across many industries and use cases with minimal customization needed. One of the key areas includes our Law Enforcement 2.0 solution which enables state, local and Federal 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 browser-based platform. Our Imageware Law Enforcement 2.0 solution includes Imageware Capture, Imageware Identify, Imageware Investigate, Imageware Credential, and Imageware Authenticate. Other modules can also be easily leveraged as needed.
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“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 Securities and Exchange Commission (“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.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations.
Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended March 31, 2022 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2021.
Results of Operations
This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes contained elsewhere in this Quarterly Report.
Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020
| Three Months Ended March 31, |
||||||||||||||||
| Net Product Revenue |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| (dollars in thousands) |
||||||||||||||||
| Software and royalties |
$ | 141 | $ | 39 | $ | 102 | 262 | % |
||||||||
| Percentage of total net product revenue |
67 | % |
70 | % |
||||||||||||
| Hardware and consumables |
$ | 43 | $ | 13 | $ | 30 | 231 | % |
||||||||
| Percentage of total net product revenue |
21 | % |
23 | % |
||||||||||||
| Services |
$ | 26 | $ | 4 | $ | 22 | 550 | % |
||||||||
| Percentage of total net product revenue |
12 | % |
7 | % |
||||||||||||
| Total net product revenue |
$ | 210 | $ | 56 | $ | 154 | 275 | % |
||||||||
Software and royalty revenue increased approximately $102,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021. This increase is attributable to higher identification project related revenue of approximately $87,000, higher law enforcement software revenue of approximately $30,000, higher sales of boxed identity management software sold through our distribution channel of approximately $3,000 offset by lower identification royalties of approximately $18,000.
Revenue from the sale of hardware and consumables increased approximately $30,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to an increase in both hardware and consumables procurement by our law enforcement customers.
Services revenue is comprised primarily of software integration services, system installation services and customer training. Such revenue increased approximately $22,000 during the three months ended March 31, 2022 as compared to the corresponding period of 2021 due to an increase in the service element of project related work completed during the three months ended March 31, 2022.
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, potential partnerships and current pilot programs, we believe that we will see an increase in government procurement and implementations with respect to identity management initiatives; however, government procurement initiatives, implementations and pilots are frequently delayed and extended and we cannot predict the timing of such initiatives.
As discussed more fully elsewhere in this Quarterly Report, the full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.
During the three months ended March 31, 2022, we have focused on strategically modernizing our modules within the Imageware Identity Platform, prioritized by market opportunities. We relaunched Imageware Authenticate (formerly GoVerify ID®) in February 2021. This relaunch includes a new container and microservices-based architecture along with refreshed mobile and desktop clients. We believe these updates will result in additional customers implementing our Imageware Authenticate solution. Additionally, we launched Imageware Capture, our first module of the Law Enforcement 2.0 solution in October 2021 and Imageware Investigate in December 2021. These are the first of many modules that we plan to build and modernize throughout 2022 and beyond. Prior to releasing Imageware Investigate, we closed our largest software-as-a-service (SaaS) deal in the Company’s history with Imageware Investigate. Management believes that these initiatives will result in the expansion of our solutions into state & local law enforcement, federal government, and enterprises alike.
| Maintenance Revenue |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Total maintenance revenue |
$ | 635 | $ | 677 | $ | (42 | ) |
(6 | )% |
|||||||
Maintenance revenue was approximately $635,000 for the three months ended March 31, 2022, as compared to approximately $677,000 for the corresponding period in 2021. Identity management maintenance revenue generated from identification software solutions was approximately $323,000 for the three months ended March 31, 2022 as compared to approximately $361,000 during the comparable period in 2021. Law enforcement maintenance revenue was approximately $312,000 and $316,000 for the three months ended March 31, 2022 and 2021, respectively. The decrease of $4,000 in law enforcement software maintenance revenue for the three months ended March 31, 2022 as compared to the corresponding period of 2021 is reflective of the expiration of certain maintenance contracts. The decrease of $38,000 in our Identity Management maintenance revenue for the three months ended March 31, 2022 as compared to the corresponding period of 2021 is also reflective of the expiration of certain maintenance contracts.
We anticipate growth of our maintenance revenue through the retention of existing customers combined with the expansion of our installed base resulting from the completion of project-oriented work; however, we cannot predict the timing of this anticipated growth.
| Cost of Product Revenue |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Software and royalties |
$ | 5 | $ | — | $ | 5 | 100 | % |
||||||||
| Percentage of software and royalty product revenue |
4 | % |
0 | % |
||||||||||||
| Hardware and consumables |
$ | 27 | $ | 9 | $ | 18 | 200 | % |
||||||||
| Percentage of hardware and consumables product revenue |
63 | % |
69 | % |
||||||||||||
| Services |
$ | — | $ | — | $ | — | — | % |
||||||||
| Percentage of services product revenue |
0 | % |
0 | % |
||||||||||||
| Total product cost of revenue |
$ | 32 | $ | 9 | $ | 23 | 256 | % |
||||||||
| Percentage of total product revenue |
15 | % |
16 | % |
||||||||||||
The cost of software and royalty product revenue increased approximately $5,000 due primarily to higher software and royalty revenue for the three months ended March 31, 2022 of approximately $102,000. The cost of software and royalty product revenue as a percentage of software and royalty revenue increased to 4% during the three months ended March 31, 2022 as compared to 0% for the corresponding 2021 period as the 2021 period contained revenue being comprised of solutions containing no third-party software costs or software customization. In addition to changes in costs of software and royalty product revenue caused by revenue level fluctuations, costs of products can vary as a percentage of product revenue from period to period depending upon level of software customization and third-party software license content included in product sales during a given period.
The cost of revenue for our hardware and consumables sales increased by approximately $18,000 for the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to higher hardware and consumable revenue of $30,000.
| Maintenance Cost of Revenue |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Total maintenance cost of revenue |
$ | 100 | $ | 110 | $ | (10 | ) |
(9 | )% |
|||||||
| 16 | % |
16 | % |
|||||||||||||
Cost of maintenance revenue decreased approximately $9,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to reductions in fixed maintenance costs through headcount reductions.
| Product Gross Profit |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Software and royalties |
$ | 136 | $ | 39 | $ | 97 | 249 | % |
||||||||
| Percentage of software and royalty product revenue |
96 | % |
100 | % |
||||||||||||
| Hardware and consumables |
$ | 16 | $ | 4 | $ | 12 | 300 | % |
||||||||
| Percentage of hardware and consumables product revenue |
21 | % |
31 | % |
||||||||||||
| Services |
$ | 26 | $ | 4 | $ | 22 | 550 | % |
||||||||
| Percentage of services product revenue |
100 | % |
100 | % |
||||||||||||
| Total product gross profit |
$ | 178 | $ | 47 | $ | 131 | 279 | % |
||||||||
| Percentage of total product revenue |
85 | % |
84 | % |
||||||||||||
Software and royalty gross profit increased approximately $97,000 for the three months ended March 31, 2022 from the corresponding period in 2021 due primarily to higher software and royalty revenue of approximately $102,000. In addition to changes in costs of software and royalty product revenue caused by revenue level fluctuations, costs of products can vary as a percentage of product revenue from period to period depending upon level of software customization and third-party software license content included in product sales during a given period.
Hardware and consumables gross profit increased approximately $12,000 for the three months ended March 31, 2022 from the corresponding period in 2021 due primarily to higher hardware and consumables revenue of approximately $30,000 offset by higher cost of hardware and consumables revenue of approximately $18,000.
Services gross profit increased approximately $22,000 for the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to higher service revenue of approximately $22,000 for the three months ended March 31, 2022 as compared to the corresponding period in 2021.
| Maintenance Gross Profit |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Total maintenance gross profit |
$ | 535 | $ | 567 | $ | (32 | ) |
(6 | )% |
|||||||
| Percentage of total maintenance revenue |
84 | % |
84 | % |
||||||||||||
Gross profit related to maintenance revenue decreased 6% or approximately $32,000 for the three months ended March 31, 2022 as compared to the corresponding period in 2021. This decrease reflects lower maintenance revenue of approximately $42,000 combined with lower cost of maintenance revenue of approximately $10,000. Lower maintenance revenue reflects the expiration of certain maintenance contracts and lower maintenance cost of revenue reflects reductions in fixed maintenance costs through headcount reductions. Maintenance gross profit can change from period to period depending upon both the level and complexity of engineering service resources utilized in the provision of maintenance services.
| Operating Expense |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| General and administrative |
$ | 1,176 | $ | 1,347 | $ | (171 | ) |
(13 | )% |
|||||||
| Percentage of total net revenue |
139 | % |
184 | % |
||||||||||||
| Sales and marketing |
$ | 626 | $ | 724 | $ | (98 | ) |
(14 | )% |
|||||||
| Percentage of total net revenue |
74 | % |
99 | % |
||||||||||||
| Research and development |
$ | 868 | $ | 1,168 | $ | (300 | ) |
(26 | )% |
|||||||
| Percentage of total net revenue |
103 | % |
159 | % |
||||||||||||
| Depreciation and amortization |
$ | 6 | $ | 18 | $ | (12 | ) |
(67 | )% |
|||||||
| Percentage of total net revenue |
1 | % |
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 $171,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021 is comprised of the following major components:
| ● |
Decrease in personnel related expense of approximately $86,000 due to headcount reductions; |
| ● |
Decrease in professional services of approximately $246,000 from reductions in contractor fees, professional services and Board of Director fees of approximately $136,000, lower general corporate expense of $18,000, , lower audit related fees of approximately $89,000, lower patent related expense of approximately $64,000 and lower legal fees of approximately $9,000 offset by higher contract services of approximately $65,000 and higher investor relations fees of approximately $5,000. |
| ● |
Increase in licenses, dues and other costs of approximately $7,000; |
|
| ● |
Increase in stock-based compensation expense of approximately $299,000; |
|
| ● |
Decrease in financing expense of approximately $32,000; |
| ● |
Decrease in rent, office related expenses and other of approximately $120,000 due primarily to the sublease of certain office facilities; |
| ● |
Increase in insurance costs of approximately $3,000; and |
| ● |
Increase in bad debt expense of approximately $4,000. |
We continue to focus our efforts on achieving additional future operating efficiencies by reviewing and improving upon existing business processes and evaluating our cost structure. We believe these efforts will allow us to continue to gradually decrease our level of general and administrative expense expressed as a percentage of total revenue.
Sales and Marketing
Sales and marketing expense consists primarily of the salaries, commissions, other incentive compensation, employee benefits and travel expense of our sales, marketing, and business development functions. The dollar decrease of approximately $98,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021 is primarily comprised of the following major components:
| ● |
Decrease in personnel related expense of approximately $135,000 driven primarily by the effect of headcount reductions; |
| ● |
Decrease in contract services and dues and subscriptions of approximately $33,000 resulting from decreased utilization of certain sales contract services of approximately $48,000 offset by dues and subscriptions of approximately $15,000; |
| ● |
Increase in travel, trade show expense of approximately $19,000 due to the resumption of sales travel and trade show attendance; |
| ● |
Increase in stock-based compensation expense of approximately $106,000; and |
|
| ● |
Decrease in advertising and demo equipment expense and other miscellaneous selling related expense of approximately $28,000; and |
| ● |
Decrease in our Mexico sales office and other expense of approximately $27,000 due to headcount reductions at this location. |
Research and Development
Research and development expense consists primarily of salaries, employee benefits and outside contractors for new product development, product enhancements, custom integration work and related facility costs. Such expense decreased approximately $300,000 for the three months ended March 31, 2022 as compared to the corresponding period in 2021 due primarily to the following major components:
| ● |
Decrease in personnel related expense of approximately $394,000 driven primarily by the effect of headcount decreases; |
| ● |
Increase in contractor fees and contract services of approximately $98,000 resulting from the replacement of certain function with contract labor; |
| ● |
Increase in stock based-compensation expense of approximately $100,000; and |
| ● |
Decrease in office related expense, engineering tools, supplies, communications (including internet) and travel of approximately $104,000. |
Depreciation and Amortization
During the three months ended March 31, 2022 and 2021, depreciation and amortization expense was approximately $6,000 and $18,000, 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, 2022 and 2021, we recognized net interest expense of $53,000 and $0, respectively. Interest expense for the three months ended March 31, 2022 is comprised of approximately $24,000 in coupon interest related to borrowings under our 2021 Credit Facility and approximately $29,000 from amortization of debt discount associated with the 2021 Credit Facility.
Other (income) expense, net
During the three months ended March 31, 2022, we recognized other income of approximately $5,000 from certain miscellaneous receipts. During the three months ended March 31, 2021, we recognized other expense of approximately $82,000 from the write-off of certain furniture and fixtures and recognized other income of approximately $57,000 from the settlement of certain liabilities at less than their carrying amount.
Change in Fair Value of Derivative Liabilities
For the three months ended March 31, 2022, we recognized expense of approximately $667,000 from the decrease of derivative liabilities arising from the consummation of the Series D Financing in November 2020. Such increase was determined by management using fair value methodologies and is included as income under the caption “Change in fair value of derivative liabilities” in our condensed consolidated statement of operations for three months ended March 31, 2022.
For the three months ended March 31, 2021, we recognized income of approximately $1,172,000 from the decrease of derivative liabilities arising from the consummation of the Series D Financing in November 2020. Such decrease was determined by management using fair value methodologies and is included as income under the caption “Change in fair value of derivative liabilities” in our condensed consolidated statement of operations for three months ended March 31, 2021.
Loss on Extinguishment of Derivative Liabilities and Debt
During the three months ended March 31, 2021, we recognized a loss on the extinguishment of derivative liabilities of approximately $335,000 pursuant to the conversion of 354 shares of Series D Preferred into Common Stock. Such loss is included in the caption “Loss on extinguishment of derivative liabilities and debt” in our condensed consolidated statement of operations for three months ended March 31, 2021.
There were no extinguishments of derivative liabilities during the three months ended March 31, 2022.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
Going Concern and Management’s Plans
Historically, our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically, the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations, and this condition is currently expected to continue for the foreseeable future. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern. Due to the Company’s deteriorating liquidity, management has determined that there is substantial doubt about the Company’s ability to continue as a going concern.
At March 31, 2022 and December 31, 2021, we had negative working capital of $10,289,000 and $8,046,000, respectively. Included in our negative working capital as of March 31, 2022 and December 31, 2021 are $6,024,000 and $5,292,000, respectively, of derivative liabilities which are not required to be settled in cash except in the event of the consummation of a change of control or at any time after the fourth anniversary of the Series D Preferred issuance, at which time the holders of the Series D Preferred may require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Series D Liquidation Preference Amount. At March 31, 2022 the Liquidation Preference Amount totaled $23,469,000. Considering the financings consummated in 2021, 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 in the near term and the next twelve months from the date of this filing. At May 20, 2022, cash on hand approximated $215,000. Based on the Company’s rate of cash consumption during the year ended December 31, 2021, the first quarter ended March 31, 2022 and the second quarter ended June 30, 2022, the Company estimates it will need additional capital in the second quarter of 2022 and its prospects for obtaining that capital are uncertain. As a result of the Company’s historical losses, financial condition, and challenges raising additional capital given the volatile capital markets, there is substantial doubt about the Company’s ability to continue as a going concern.
To address our working capital requirements, management is actively seeking additional financing, of which no assurances can be given that we will be successful. In addition, the Company has instituted several cost cutting measures and has utilized cash proceeds available under the Credit Facility with the Lenders (See Note 1), and under the purchase agreement with Lincoln Park to satisfy its working capital requirements (“LPC Purchase Agreement”) (See Note 1). In addition, as reported in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 23, 2021, on August 12, 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. Other than the LPC Purchase Agreement with Lincoln Park and our Credit Facility with Nantahala, which are currently restricted in our ability to access additional capital, there are currently no financing arrangements to support our projected cash shortfall. We currently have no other 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. The consummation of a transaction will involve substantial dilution to the Company’s stockholders.
In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital, generate positive cash flows from operations, or otherwise consummate a transaction that addresses the Company’s working capital requirements. There is no assurance that the Company will be able to obtain additional capital, consummate a transaction that addresses its liquidity concerns, or operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Operating Activities
We used net cash of $1,441,000 in operating activities for the three months ended March 31, 2022, which consisted of net loss of $2,698,000 and a decrease in working capital and other assets and liabilities of $37,000. Those amounts are offset by approximately $1,294,000 of non-cash expenses comprised of $667,000 from the change in fair value of derivative liabilities, $592,000 in stock-based compensation, $6,000 in depreciation and amortization and $29,000 in amortization expense of debt discount on our line of credit. During the three months ended March 31, 2022, we generated cash of $174,000 from decreases in current assets combined with $78,000 from decreases in our operating leases right-of-use assets and used cash of $133,000 through decreases in current liabilities and deferred revenue.
We used net cash of $3,290,000 in operating activities for the three months ended March 31, 2021, which consisted of net loss of $1,885,000 and an increase in working capital and other assets and liabilities of $767,000. Those amounts are in addition to approximately $638,000 of non-cash income, including $1,172,000 in income from the change in fair value of derivative liabilities offset by $78,000 in stock-based compensation, $18,000 in depreciation and amortization $82,000 in non-cash expense from the disposal of fixed assets, $21,000 from the issuance of Common Stock as compensation in lieu of cash and $335,000 from loss on extinguishment of derivative liabilities. During the three months ended March 31, 2021, we used cash of $459,000 from increases in current assets combined with $10,000 from decreases in our operating leases right-of-use assets and used cash of $298,000 through decreases in current liabilities and deferred revenue.
Investing Activities
There was no net cash used or provided by investing activities during the three months ended March 31, 2022.
During the three months ended March 31, 2021, we used cash of $53,000 to fund capital expenditures of computer hardware.
Financing Activities
Cash generated from financing activities for the three months ended March 31, 2022 consisted of approximately $1,050,000 received by the Company in the form of drawdowns from its Credit Facility.
There was no net cash used or provided by financing activities during the three months ended March 31, 2021.
Inflation
We do not believe that inflation has had a material impact on our historical operations or profitability.
Off-Balance Sheet Arrangements
At March 31, 2022, 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 Quarterly Report.
Recently Issued Accounting Standards
Please refer to the section “Recently Issued Accounting Standards” in Note 2 of our Notes to the unaudited Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business extends to countries outside the United States, and we intend to continue to expand our foreign operations. As a result, our revenue and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure Controls and Procedures
Our management, Chief Executive Officer and Principal Financial and Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. The term “disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2022. This conclusion was based on the material weaknesses in our internal control over financial reporting as further described below.
Material Weaknesses
During the second quarter of our fiscal year 2021, we identified material weaknesses in our internal control over financial reporting related to our financial statement close process and policies. We did not have adequate review policies and procedures in place to ensure the timely, effective review of the measurement of the fair value of certain derivative liabilities. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis.
Remediation Efforts to Address Material Weaknesses
To remediate the material weaknesses described above, management is adding controls to further enhance and revise the design of the existing controls including:
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Establishing policies and procedures to ensure timely review, by qualified personnel, of inputs and assumptions used in measuring fair value of certain financial instruments as well as the journal entries to record the change in fair value. |
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Reassessing the design and operation of internal controls over financial reporting and review procedures over the preparation of our financial statements. |
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Maintaining adequate internal qualified personnel to properly supervise and review the information provided by the outside consulting technical experts to ensure certain significant complex transactions and technical matters were properly accounted for. |
This material weakness did not result in any restatements of our audited and unaudited consolidated financial statements or disclosures for any prior period previously reported by us.
Changes in Internal Controls Over Financial Reporting
During the three months ended March 31, 2022, the Company implemented additional review procedures to address the material weakness identified and discussed above. Other than the institution of additional review procedures, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Our business is subject to significant risks. You should carefully consider the risks described below and the other information in this Quarterly Report, including our financial statements and related notes, before you decide to invest in our Common Stock. If any of the following risks or uncertainties actually occur, our business, results of operations or financial condition could be materially harmed, the trading price of our Common Stock could decline, and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.
RISKS RELATED TO OUR LIQUIDITY, BUSINESS AND INDUSTRY
Available cash resources are currently insufficient to provide for our working capital needs. As a result, we need to raise additional capital in the near term to continue as a going concern.
At March 31, 2022 and December 31, 2021, we had negative working capital of $10,289,000 and $8,046,000, respectively. Our principal source of liquidity at March 31, 2022 and December 31, 2021 consisted of cash and cash equivalents of $832,000 and $1,202,000, respectively. At May 20, 2022, cash on hand approximated $215,000, with an additional $342,000 available under the existing Credit Facility at the Lender’s discretion. No assurances can be given that the Lenders will advance the additional $342,000 under the Credit Facility. Considering the financings consummated in 2021 and 2022, as well as our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash is insufficient to satisfy our cash requirements. These factors raise substantial doubt about our ability to continue as a going concern. To address our working capital requirements, management is actively seeking additional equity and/or debt financing through the issuance of additional debt and/or equity securities and is contemporaneously seeking strategic or other transactions intended to increase shareholder value. There are currently no formal committed financing arrangements to support our projected cash shortfall during the next twelve months, 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.
The Company’s cash and cash equivalents may fall below the minimum threshold required under the Credit Facility, which may result in an event of default under the terms of the Credit Agreement.
The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement in connection with the request to obtain the remaining funds under the Credit Facility, or otherwise in the event we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may constitute an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.
To continue as a going concern, the Company is currently exploring strategic options and is reviewing its assets, the outcome of which is uncertain and may involve substantial dilution to shareholders and/or a loss of your entire investment.
As reported in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 23, 2021, on August 12, 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. To date, the Company has not received any offers or other indications of interest acceptable to the Company’s Board, and no assurances can be given that the Company will be successful in consummating any or a combination of such alternatives. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders and may involve the loss of your entire investment. In the event the Company is unable to consummate one or more transactions, the Company may not be able to continue as a going concern.
We have a history of significant recurring losses totaling approximately $207.0 million at March 31, 2022 and $204.3 million at December 31, 2021, and these losses may continue in the future.
As of March 31, 2022 and December 31, 2021, we had an accumulated deficit of approximately $207.0 million and $204.3 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 operating results have fluctuated in the past and are likely to fluctuate in the future.
Our operating results have fluctuated in the past. These fluctuations in operating results are the consequence of the following, amongst other things:
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Varying demand for and market acceptance of our technology and products; |
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Changes in our product or customer mix; |
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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; |
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Our ability to introduce, certify and deliver new products and technologies on a timely basis; |
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The announcement or introduction of products and technologies by our competitors; |
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Competitive pressures on selling prices; |
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Costs associated with acquisitions and the integration of acquired companies, products and technologies; |
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Our ability to successfully integrate acquired companies, products and technologies; |
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Our accounting and legal expense; and |
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General economic conditions. |
These factors, some of which are not within our control, will likely continue in the future. To respond to these and other factors, we may need to make business decisions that could result in failure to meet financial expectations. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. Most of our expense, such as employee compensation and inventory, is relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our revenue for a particular period was below our expectations, we may not be able to proportionately reduce our operating expense for that period. Any revenue shortfall would have a disproportionately negative effect on our operating results for the period.
We depend upon a small number of large system sales ranging from $100,000 to in excess of several million dollars and we may fail to achieve one or more large system sales in the future.
Historically, we have derived a substantial portion of our revenue from a small number of sales of large, relatively expensive systems, typically ranging in price from $100,000 to $2,000,000. If we fail to receive orders for these large systems in a given sales cycle on a consistent basis, our business could be significantly harmed. Further, our quarterly results are difficult to predict because we cannot predict in which quarter, if any, large system sales will occur in a given year. As a result, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance. In some future quarters, our operating results may be below the expectations of securities analysts and investors, in which case the market price of our Common Stock may decrease significantly.
Our lengthy sales cycle may cause us to expend significant resources for one year or more in anticipation of a sale to certain customers, yet we still may fail to complete the sale.
When considering the purchase of a large identity management product, potential customers may take as long as eighteen months to evaluate different solutions and obtain approval for the purchase. Under these circumstances, if we fail to complete a sale, we will have expended significant resources and received no revenue in return. Generally, customers consider a wide range of issues before committing to purchase our products, including product benefits, ability to operate with their current systems, product reliability and their own budgetary constraints. While potential customers are evaluating our products, we may incur substantial selling costs and expend significant management resources in an effort to accomplish potential sales that may never occur. In times of economic recession, our potential customers may be unwilling or unable to commit resources to the purchase of new and costly systems.
A number of our customers and potential customers are local, state, and federal government agencies that are subject to unique political and budgetary constraints and have special contracting requirements, which may affect our ability to obtain new and retain current government customers.
A significant number of our customers are government agencies. These agencies often do not set their own budgets and therefore have little control over the amount of money they can spend from quarter-to-quarter or year-to-year. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. Due to political and budgetary processes and other scheduling delays that may frequently occur relating to the contract or bidding process, some government agency orders may be canceled or substantially delayed, and the receipt of revenue or payments from these agencies may be substantially delayed. In addition, future sales to government agencies will depend on our ability to meet government contracting requirements, certain of which may be onerous or impossible to meet, resulting in our inability to obtain a particular contract. Common requirements in government contracts include bonding requirements, provisions permitting the purchasing agency to modify or terminate at will the contract without penalty, and provisions permitting the agency to perform investigations or audits of our business practices, any of which may limit our ability to enter into new contracts or maintain our current contracts.
Two customers accounted for approximately 37% of our total revenue during the three months ended March 31, 2022, and three customers accounted for approximately 51% of our total revenue during the year ended December 31, 2021. 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, 2022, two customers accounted for approximately 37% or $314,000 of total revenue. During the year ended December 31, 2021, three customers accounted for approximately 51% or $1,787,000 of total revenue. If these customers were to significantly reduce their relationship with the Company, or in the event that we are unable to replace the revenue through the sale of our products to additional customers, our financial condition and results from operations could be negatively impacted, and such impact would be material.
We face competition from companies with greater financial, technical, sales, marketing and other resources, and, if we are unable to compete effectively with these competitors, our market share may decline, and our business could be harmed.
We face competition from other established companies. A number of our competitors have longer operating histories, larger customer bases, significantly greater financial, technological, sales, marketing and other resources than we do. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or client requirements, more quickly develop new products or devote greater resources to the promotion and sale of their products and services than we can. Likewise, their greater capabilities in these areas may enable them to better withstand periodic downturns in the identity management solutions industry and compete more effectively on the basis of price and production. In addition, new companies may enter the markets in which we compete, further increasing competition in the identity management solutions industry.
We believe that our ability to compete successfully depends on a number of factors, including the type and quality of our products and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully against current or future competitors, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products, any of which would adversely impact our results of operations and financial condition.
RISKS RELATED TO OUR TECHNOLOGY
We occasionally rely on systems integrators to manage our large projects, and if these companies do not perform adequately, we may lose business.
We occasionally act as a subcontractor to systems integrators who manage large projects that incorporate our systems. We cannot control these companies, and they may decide not to promote our products or may price their services in such a way as to make it unprofitable for us to continue our relationship with them. Further, they may fail to perform under agreements with their customers, in which case we might lose sales to these customers. If we lose our relationships with these companies, our business, financial condition and results of operations may suffer.
Some third parties integrate our software into their platforms or solutions. Any delay in the integration of our software or the launch of third-party products may materially affect our results from operations and financial condition.
We sell some of our software through larger product partners and/or resellers that will either resell our product alongside theirs, Original Equipment Manufacture a white label version of our products, or sell our products fully integrated into their offerings. In these cases, we are dependent upon the successful rollout of our products by our distribution partners. Any delays negatively affect our results from operations and financial condition.
If our security measures or those of our third-party data center hosting facilities, Cloud computing platform providers, or third-party service partners, are breached, and unauthorized access is obtained to a customer’s data, our data or our IT systems, or authorized access is blocked or disabled, our services may be perceived as not being secure, customers may curtail or stop using our services, and we may incur significant legal and financial exposure and liabilities.
Our services involve the storage and transmission of our customers’ and our customers’ customers’ proprietary and other sensitive data, including financial information and other personally identifiable information. While we have security measures in place, they may be breached as a result of efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states. Our security measures could also be compromised by employee error or malfeasance, which could result in someone obtaining unauthorized access to, or denying authorized access to our Information Technology systems, our customers’ data or our data, including our intellectual property and other confidential business information. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords or other information to gain access to our customers’ data, our data or our IT systems.
We take extraordinary measures to ensure identity authentication of users who access critical IT infrastructure, including but not limited to, two-factor, multi-factor and biometric identity verification. This substantially reduces the threat of unauthorized access by bad actors using compromised user credentials.
Because the techniques used to breach, obtain unauthorized access to, or sabotage IT systems change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate or implement adequate measures to prevent against such techniques.
Our services operate in conjunction with and are dependent on products and components across a broad ecosystem and, if there are security vulnerabilities in one of these components, a security breach could occur. In addition, our internal IT systems continue to evolve, and we are often early adapters of new technologies and new ways of sharing data and communicating internally and with partners and customers, which increases the complexity of our IT systems. These risks are mitigated by our ability to maintain and improve business and data governance policies and processes and internal security controls, including our ability to escalate and respond to known and potential risks.
In addition, our customers may authorize third-party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our servers. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our services.
A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data. A security breach could also result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability. Finally, the detection, prevention and remediation of known or potential security vulnerabilities, including those arising from third-party hardware or software may result in additional direct and indirect costs, for example additional infrastructure capacity to mitigate any system degradation that could result from remediation efforts.
RISKS RELATED TO INTELLECTUAL PROPERTY
If the patents we own or license, or our other intellectual property rights, do not adequately protect our products and technologies, we may lose market share to our competitors and our business, financial condition and results of operations would be adversely affected.
Our success depends significantly on our ability to protect our rights to the technologies used in our products. We rely on patent protection, trade secrets, as well as a combination of copyright and trademark laws and nondisclosure, confidentiality and other contractual arrangements to protect our technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. In addition, we cannot be assured that any of our current and future pending patent applications will result in the issuance of a patent to us. The U.S. Patent and Trademark Office (“PTO”) may deny or require significant narrowing of claims in our pending patent applications, and patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or may not be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. These proceedings could result in adverse decisions as to the claims included in our patents.
Our issued and licensed patents and those that may be issued or licensed in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Additionally, upon expiration of our issued or licensed patents, we may lose some of our rights to exclude others from making, using, selling or importing products using the technology based on the expired patents. We also must rely on contractual rights with the third parties that license technology to us to protect our rights in the technology licensed to us. Although we have taken steps to protect our intellectual property and technology, there is no assurance that competitors will not be able to design around our patents. We also rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology. We seek to protect our know-how and other unpatented proprietary technology with confidentiality agreements and intellectual property assignment agreements with our employees. However, such agreements may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop similar or identical designs or other proprietary information. In addition, we rely on the use of registered and common law trademarks with respect to the brand names of some of our products. Our common law trademarks provide less protection than our registered trademarks. Loss of rights in our trademarks could adversely affect our business, financial condition and results of operations.
Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If we fail to apply for intellectual property protection or if we cannot adequately protect our intellectual property rights in these foreign countries, our competitors may be able to compete more effectively against us, which could adversely affect our competitive position, as well as our business, financial condition and results of operations.
If third parties claim that we infringe their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling certain products.
Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. We face the risk of claims that we have infringed on third parties’ intellectual property rights. Searching for existing intellectual property rights may not reveal important intellectual property and our competitors may also have filed for patent protection, which is not yet a matter of public knowledge, or claimed trademark rights that have not been revealed through our availability searches. Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful. Any claims of patent or other intellectual property infringement, even those without merit, could:
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Increase the cost of our products; |
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Be expensive and time consuming to defend; |
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Result in us being required to pay significant damages to third parties; |
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Force us to cease making or selling products that incorporate the challenged intellectual property; |
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Require us to redesign, reengineer or rebrand our products; |
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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; |
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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; |
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Divert the attention of our management; and |
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Result in our customers or potential customers deferring or limiting their purchase or use of the affected products until the litigation is resolved. |
In addition, new patents obtained by our competitors could threaten a product’s continued life in the market even after it has already been introduced.
REGULATORY AND LEGAL RISK FACTORS
Failure to comply with federal, state and international laws and regulations and our contractual obligations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.
We collect and maintain significant amounts of personal data and other data relating to our customers and employees. A variety of federal, state and international laws and regulations, and certain industry standards, govern or apply to our collection, use, retention, sharing and security of consumer data. We are subject to certain laws, regulations, contractual obligations and industry standards (including, for example, the Payment Card Industry Data Security Standard, or PCI-DSS) relating to privacy, data protection, information security and consumer protection, which are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not comply or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our privacy policies or with any federal, state or international laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal or contractual obligations relating to privacy, data protection, information security or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease or modify our use of certain data sets. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers or an inability to process credit card payments and may result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
Foreign laws and regulations relating to privacy, data protection, information security and consumer protection often are more restrictive than those in the United States. The European Union (“EU”), for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection and consumer protection than the United States. In May 2018 the European Union's new regulation governing data practices and privacy called the General Data Protection Regulation, or GDPR, became effective and substantially replaced the data protection laws of the individual European Union member states. The law requires companies to meet more stringent requirements regarding the handling of personal data of individuals in the EU than were required under predecessor EU requirements. In the United Kingdom, a Data Protection Bill that substantially implements the GDPR also became law in May 2018. The law also increases the penalties for non-compliance, which may result in monetary penalties of up to €20.0 million or 4% of a company's worldwide turnover, whichever is higher. The GDPR and other similar regulations require companies to give specific types of notice and in some cases seek consent from consumers and other data subjects before collecting or using their data for certain purposes, including some marketing activities. Outside of the European Union, many countries have laws, regulations, or other requirements relating to privacy, data protection, information security, and consumer protection, and new countries are adopting such legislation or other obligations with increasing frequency. Many of these laws may require consent from consumers for the use of data for various purposes, including marketing, which may reduce our ability to market our products. There is no harmonized approach to these laws and regulations globally. Consequently, we increase our risk of non-compliance with applicable foreign data protection laws by operating internationally. We may need to change and limit the way we use personal information in operating our business and may have difficulty maintaining a single operating model that is compliant. In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, information security and consumer protection. For example, California recently adopted the California Consumer Privacy Act of 2018 (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for businesses. The CCPA includes a statutory damages framework and private rights of action against businesses that fail to comply with certain CCPA terms or implement reasonable security procedures and practices to prevent data breaches. The CCPA went into effect in January 2020. The effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. As a general matter, compliance with laws, regulations, and any applicable rules or guidance from self-regulatory organizations relating to privacy, data protection, information security and consumer protection, may result in substantial costs and may necessitate changes to our business practices, which may compromise our growth strategy, adversely affect our ability to acquire customers, and otherwise adversely affect our business, financial condition and operating results.
We may have additional tax assessments.
We are subject to income taxes in the United States. Significant judgments are required in determining our provisions for income taxes. In the course of preparing our tax provisions and returns, we must make calculations where the ultimate tax determination may be uncertain. Our tax returns are subject to examination by the Internal Revenue Service (“IRS”) and state tax authorities. There can be no assurance as to the outcome of these examinations. If the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.
We operate in foreign countries and are exposed to risks associated with foreign political, economic and legal environments and with foreign currency exchange rates.
We operate in foreign countries. 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 have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
During the second quarter of our fiscal year 2021, we identified material weaknesses in our internal control over financial reporting related to our financial statement close process and policies. We did not have adequate review policies and procedures in place to ensure the timely, effective review of the measurement of the fair value of certain derivative liabilities. Additionally, during the fourth quarter of fiscal year 2021, we identified an additional material weakness in our internal control over financial reporting. We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures relating to segregation of duties and controls over the preparation and review of journal entries, account reconciliations and consolidation. These material weaknesses did not result in a misstatement to the financial statements. However, if we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, these material weaknesses could result in a misstatement of our account balances or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected.
GOVERNANCE RISKS AND RISKS RELATED TO OUR SECURITIES
Our Common Stock is subject to “penny stock” rules.
Our Common Stock is currently defined as a “penny stock” under Rule 3a51-1 promulgated under the Exchange Act which are subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose additional sales practice requirements on broker-dealers that sell penny stocks to persons other than established customers and institutional accredited investors. Among other things, for transactions covered by these rules, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, these rules may affect the ability of broker-dealers to sell our Common Stock and affect the ability of holders to sell their shares of our Common Stock in the secondary market. To the extent our Common Stock is subject to the penny stock regulations, the market liquidity for our shares will be adversely affected.
Our stock price has been volatile, and your investment in our Common Stock could suffer a decline in value.
There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our Common Stock. You may not be able to resell your shares at or above the price you pay for those shares due to fluctuations in the market price of our Common Stock caused by changes in our operating performance or prospects and other factors.
Some specific factors that may have a significant effect on our Common Stock market price include:
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Actual or anticipated fluctuations in our operating results or future prospects; |
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Our announcements or our competitors’ announcements of new products; |
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The public’s reaction to our press releases, our other public announcements and our filings with the SEC; |
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Strategic actions by us or our competitors, such as acquisitions or restructurings; |
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New laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
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Changes in accounting standards, policies, guidance, interpretations or principles; |
| ● |
Changes in our growth rates or our competitors’ growth rates; |
| ● |
Developments regarding our patents or proprietary rights or those of our competitors; |
| ● |
Our inability to raise additional capital as needed; |
| ● |
Substantial sales of Common Stock underlying warrants and preferred stock; |
| ● |
Concern as to the efficacy of our products; |
| ● |
Changes in financial markets or general economic conditions; |
| ● |
Sales of Common Stock by us or members of our management team; and |
| ● |
Changes in stock market analyst recommendations or earnings estimates regarding our Common Stock, other comparable companies or our industry generally. |
Our future sales of our Common Stock could adversely affect its price and our future capital-raising activities could involve the issuance of equity securities, which would dilute shareholders’ investments and could result in a decline in the trading price of our Common Stock.
We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for additional capital at that time. Sales of substantial amounts of our Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our Common Stock and our ability to raise capital. We may issue additional Common Stock in future financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of Common Stock. The market price for our Common Stock could decrease as the market takes into account the dilutive effect of any of these issuances. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to the market price of our Common Stock. A negative reaction by investors and securities analysts to any discounted sale of our equity securities could result in a decline in the trading price of our Common Stock.
The holders of our Preferred Stock (as defined below) have certain rights and privileges that are senior to our Common Stock, and we may issue additional shares of Preferred Stock without stockholder approval that could have a material adverse effect on the market value of the Common Stock.
Our Board of Directors has the authority to issue a total of up to 5.0 million shares of preferred stock, par value $0.01 per share (“Preferred Stock”) and to fix the rights, preferences, privileges, and restrictions, including voting rights, of the Preferred Stock, which typically are senior to the rights of the Common Stock, without any further vote or action by the holders of our Common Stock. The rights of the holders of our Common Stock will be subject to, and may be adversely affected by, the rights of the holders of the Preferred Stock that have been issued or might be issued in the future. Preferred Stock also could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. This could delay, defer, or prevent a change in control. Furthermore, holders of our Preferred Stock may have other rights, including economic rights, senior to the Common Stock. As a result, their existence and issuance could have a material adverse effect on the market value of the Common Stock. We have in the past issued and may from time to time in the future issue, Preferred Stock for financing or other purposes with rights, preferences, or privileges senior to the Common Stock. As of March 31, 2022, we had two series of Preferred Stock outstanding, the Series B Preferred and the Series D 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, 2022 and December 31, 2021, there were 239,400 shares of Series B Preferred outstanding. As of March 31, 2022 and December 31, 2021, we had cumulative undeclared dividends on our Series B Preferred of approximately $21,000 and $8,000, respectively.
The provisions of our Series D Preferred prohibit the payment of dividends on our Common Stock unless the dividends on our preferred shares are first paid. In addition, upon a liquidation, dissolution or sale of our business, the holders of our Series D Preferred will be entitled to receive, in preference to any distribution to the holders of Common Stock, initial distributions of $1,000 per share, plus all accrued but unpaid dividends. As of March 31, 2022 and December 31, 2021, there were 23,469.4 and 23,216.4 shares of Series D Preferred outstanding, respectively. As of March 31, 2022 and December 31, 2021, we had no cumulative undeclared dividends on our Series D Preferred.
The conversion of our Series B Preferred Stock and Series D Preferred Stock and the exercise of currently outstanding warrants, stock options and vesting of Restricted Stock Units could result in significant dilution to the holders of our common stock.
The holders of our Series B Preferred Stock and Series D Preferred Stock may elect to convert their shares of Preferred Stock into shares of Common Stock. As of March 31, 2022, 239,400 shares of Series B Preferred Stock, which are convertible into 46,980 shares of Common Stock; and 23,469.4 shares of Series D Preferred Stock, which are convertible into 402,562,607 shares of Common Stock, were outstanding. In addition to our outstanding shares of Preferred Stock, as of March 31, 2022, there were outstanding warrants to purchase 3,150,000 shares of our Common Stock, outstanding stock options to purchase 4,818,876 shares of our Common Stock and outstanding Restricted Stock Units that upon vesting will result in the issuance of 81,019,401 shares of our Common Stock.
The conversion of our Series B Preferred Stock and Series D Preferred Stock, as well as the exercise of our outstanding warrants, outstanding stock options and the vesting of our Restricted Stock Units could result in significant dilution to existing common shareholders, adversely affect the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity securities.
Upon the occurrence of certain events, we may be required to redeem all or a portion of our Preferred Stock.
Holders of certain of our Preferred Stock may require us to redeem all or any portion of such Holder’s shares Preferred Stock within specific date from issuance or in the event of the consummation of a Change of Control (as such term is defined in the Certificate of Designations, Preferences and Rights of each class of Preferred Stock). We cannot assure you that we will maintain sufficient cash reserves or that our business will generate cash flow from operations at levels sufficient to permit us to redeem our shares of Preferred Stock if and when required to do so. In the event we have insufficient cash available or do not have access to additional third-party financings on commercially reasonable terms or at all to complete such redemption, our business, results of operations, and financial condition may be materially adversely affected.
Certain large shareholders may have certain personal interests that may affect the Company.
As a result of the securities issued to Nantahala Capital Management, LLC, and the related entities controlled by Nantahala Capital Management, (i) Blackwell Partners LLC - Series A, (ii) Nantahala Capital Partners Limited Partnership, (iii) Nantahala Capital Partners II Limited Partnership, (iv) Nantahala Capital Partners SI, LP, (v) NCP QR Limited Partnership, and (vi) Silver Creek CS SAV, L.L.C. (collectively, “Nantahala”), Nantahala beneficially owns, in the aggregate, approximately 37.5% of the Company’s outstanding voting securities as of May 20, 2022. As a result, Nantahala has the potential ability to exert influence over the outcome of issues requiring approval by the Company’s shareholders. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other shareholders or preventing transactions in which shareholders might otherwise recover a premium for their shares over current market prices.
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control of the Company.
Provisions in our Amended and Restated Certificate of Incorporation (the “Amended Charter”) and bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our certificate of incorporation authorizes Preferred Stock, which carries special rights, including voting and dividend rights. With these rights, holders of Preferred Stock could make it more difficult for a third party to acquire us.
Our Amended Charter designates courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and the federal district courts for the United States of America for claims brought under the Securities Act of 1933, as amended, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
The Amended Charter requires that, to the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware), will, to the fullest extent permitted by law, be the sole and exclusive forum for each of the following:
| ● |
Any derivative action or proceeding brought on behalf of the Company; |
| ● |
Any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Company to the Company or the Company’s stockholders; |
| ● |
Any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the Delaware General Corporation Law or the Company’s Amended Charter, or the Amended and Restated Bylaws; or |
| ● |
Any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine. |
Furthermore, the Amended Charter sets forth that the federal district courts of the United States of America are the exclusive forum for the resolution of any causes of action arising under the Securities Act of 1933, as amended (the “Securities Act”).
Because the applicability of the exclusive forum provision is limited to the extent permitted by law, we believe that the exclusive forum provision would not apply to suits brought to enforce any duty or liability created by the Securities Exchange Act of 1934, as amended (“Exchange Act”), or any other claim for which the federal courts have exclusive jurisdiction. We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law and federal law under the Securities Act in the types of lawsuits to which they apply, the provisions may have the effect of discouraging lawsuits against our directors and officers.
We do not expect to pay cash dividends on our Common Stock for the foreseeable future.
We have never paid cash dividends on our Common Stock and do not anticipate that any cash dividends will be paid on the Common Stock for the foreseeable future. The payment of any cash dividend by us will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, capital, regulatory requirements and financial condition. Furthermore, the terms of our Series B Preferred and Series D Preferred directly limit our ability to pay cash dividends on our Common Stock.
GENERAL RISK FACTORS
Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position.
Threats to IT security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our products and services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch coordinated attacks. Nation state and state sponsored actors can deploy significant resources to plan and carry out exploits. Inadequate account security practices may also result in unauthorized access to confidential data. Employees or third parties may intentionally compromise our or our users’ security or systems or reveal confidential information. Malicious actors may employ the IT supply chain to introduce malware through software updates or compromised supplier accounts or hardware.
Cyberthreats are constantly evolving and becoming increasingly sophisticated and complex, increasing the difficulty of detecting and successfully defending against them. We may have no current capability to detect certain vulnerabilities, which may allow them to persist in the environment over long periods of time. Cyberthreats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers. Breaches of our network or data security could disrupt the security of our systems and business applications, impair our ability to provide services to our customers and result in product development delays, compromise confidential or technical business information harming our reputation or competitive position, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improve technologies or remediate the impacts of attacks, or otherwise adversely affect our business.
While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or nature of these impacts at this time.
Due to the COVID-19 pandemic we have been limited in our ability to: (i) conduct face-to-face meetings with customers and prospective customers, (ii) present in-person demonstrations of our software solutions, (iii) attend trade shows and conferences which typically generate future sales opportunities, or (iv) meet with prospective strategic partners. These effects caused by the COVID-19 pandemic will likely have an adverse impact on our operating and financial results over at least the next several quarters.
The extent to which our operating and financial results will continue to be affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; the impact of the emergence of new variants of the virus that causes COVID-19; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus, including vaccine development and distribution. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate our other risk factors described in this Form 10-K.
Certain key personnel have terminated their employment with the Company. Given that we are dependent on key personnel, the loss of any additional personnel, including our Chief Executive Officer, could materially and adversely affect our plan of operations and ability to obtain financing.
We are dependent to a significant extent upon the efforts and abilities of our executive officers and other key personnel. During the current fiscal year, we have lost certain key personnel due to the absence of meaningful equity incentives, among other causes. The loss of the services of any additional key employees, including our Chief Executive Officer, and any negative market or industry perception arising from the loss of such services, could have a material adverse effect on us, our plan of operations and ability to obtain financing. Our business will also be dependent upon our ability to attract and retain qualified personnel. Acquiring and keeping these personnel has proven difficult as the market value of our Common Stock has declined and could cost substantially more than estimated. We cannot be certain that we will be able to retain such personnel or attract a high caliber of personnel in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the three months ended March 31, 2022 that were not previously reported.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6 . EXHIBITS
| (a) |
EXHIBITS |
|
| Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) |
||
| Certification by the Acting Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) |
||
| Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
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| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| IMAGEWARE SYTEMS, INC |
|||
| Date: May 23, 2022 |
By: |
/s/ Kristin Taylor |
|
| Kristin Taylor Chief Executive Officer (Principal Executive Officer) and President |
|||
| Date: May 23, 2022 |
By: |
/s/ Jeffrey Hotze |
|
| Corporate Controller (Principal Financial and Accounting Officer) |
|||
Exhibit 31.1
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and pursuant to Rule 13a-14(a) and Rule 15d-14 under the Securities Exchange Act of 1934
I, Kristin Taylor, Chief Executive Officer of the Company, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Imageware Systems, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c. |
Evaluated the effectiveness of the registrant’s disclosure and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Imageware Systems, Inc. |
|||
|
Date: May 23, 2022 |
By: |
/s/ Kristin Taylor |
|
|
Kristin Taylor |
|||
|
Chief Executive Officer and President (Principal Executive Officer) |
|||
Exhibit 31.2
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and pursuant to Rule 13a-14(a) and Rule 15d-14 under the Securities Exchange Act of 1934
I, Jeffrey Hotze, Acting Principal Financial and Accounting Officer of the Company, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Imageware Systems, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c. |
Evaluated the effectiveness of the registrant’s disclosure and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Imageware Systems, Inc. |
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|
Date: May 23, 2022 |
By: |
/s/ Jeffrey Hotze |
|
|
Corporate Controller (Principal Financial Officer) |
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Exhibit 32.1
CERTIFICATION
Kristin Taylor, Chief Executive Officer of Imageware Systems, Inc. (the “Company”), and Jeffrey Hotze, Acting Chief Financial Officer of the Company, each hereby certifies pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350) that, to the best of their knowledge:
1. The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
2. The information contained in the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2022 fairly presents, in all material respects, the financial condition of the Company.
IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 23rd day of May, 2022.
|
/s/ Kristin Taylor |
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|
Kristin Taylor |
|||
|
Chief Executive Officer and President (Principal Executive Officer) |
|||
|
/s/ Jeffrey Hotze |
|||
|
Corporate Controller |
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|
(Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Imageware Systems, Inc. and will be retained by Imageware Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Net loss | $ (2,698) | $ (1,885) |
| Other comprehensive income (loss): | ||
| Foreign currency translation adjustment | 21 | 54 |
| Comprehensive loss | $ (2,677) | $ (1,831) |
Condensed Consolidated Statements of Shareholders' Deficit (Unaudited) - USD ($) $ in Thousands |
Series D Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series A Preferred Stock [Member]
|
Series D Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series A-1 Preferred Stock [Member]
|
Series D Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series B Preferred Stock [Member]
|
Series D Preferred Stock Dividends [Member]
Common Stock [Member]
|
Series D Preferred Stock Dividends [Member]
Treasury Stock [Member]
|
Series D Preferred Stock Dividends [Member]
Additional Paid-in Capital [Member]
|
Series D Preferred Stock Dividends [Member]
AOCI Attributable to Parent [Member]
|
Series D Preferred Stock Dividends [Member]
Retained Earnings [Member]
|
Series D Preferred Stock Dividends [Member] |
Series A Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series A Preferred Stock [Member]
|
Series A Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series A-1 Preferred Stock [Member]
|
Series A Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series B Preferred Stock [Member]
|
Series A Preferred Stock Dividends [Member]
Common Stock [Member]
|
Series A Preferred Stock Dividends [Member]
Treasury Stock [Member]
|
Series A Preferred Stock Dividends [Member]
Additional Paid-in Capital [Member]
|
Series A Preferred Stock Dividends [Member]
AOCI Attributable to Parent [Member]
|
Series A Preferred Stock Dividends [Member]
Retained Earnings [Member]
|
Series A Preferred Stock Dividends [Member] |
Series A-1 Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series A Preferred Stock [Member]
|
Series A-1 Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series A-1 Preferred Stock [Member]
|
Series A-1 Preferred Stock Dividends [Member]
Preferred Stock Outstanding [Member]
Series B Preferred Stock [Member]
|
Series A-1 Preferred Stock Dividends [Member]
Common Stock [Member]
|
Series A-1 Preferred Stock Dividends [Member]
Treasury Stock [Member]
|
Series A-1 Preferred Stock Dividends [Member]
Additional Paid-in Capital [Member]
|
Series A-1 Preferred Stock Dividends [Member]
AOCI Attributable to Parent [Member]
|
Series A-1 Preferred Stock Dividends [Member]
Retained Earnings [Member]
|
Series A-1 Preferred Stock Dividends [Member] |
Conversion of Series A Preferred to Common Stock [Member]
Preferred Stock Outstanding [Member]
Series A Preferred Stock [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
Preferred Stock Outstanding [Member]
Series A-1 Preferred Stock [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
Preferred Stock Outstanding [Member]
Series B Preferred Stock [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
Common Stock [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
Treasury Stock [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
Additional Paid-in Capital [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
AOCI Attributable to Parent [Member]
|
Conversion of Series A Preferred to Common Stock [Member]
Retained Earnings [Member]
|
Conversion of Series A Preferred to Common Stock [Member] |
Conversion of Series A-1 Preferred to Common Stock [Member]
Preferred Stock Outstanding [Member]
Series A Preferred Stock [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
Preferred Stock Outstanding [Member]
Series A-1 Preferred Stock [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
Preferred Stock Outstanding [Member]
Series B Preferred Stock [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
Common Stock [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
Treasury Stock [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
Additional Paid-in Capital [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
AOCI Attributable to Parent [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member]
Retained Earnings [Member]
|
Conversion of Series A-1 Preferred to Common Stock [Member] |
Preferred Stock Outstanding [Member]
Series A Preferred Stock [Member]
|
Preferred Stock Outstanding [Member]
Series A-1 Preferred Stock [Member]
|
Preferred Stock Outstanding [Member]
Series B Preferred Stock [Member]
|
Common Stock [Member] |
Treasury Stock [Member] |
Additional Paid-in Capital [Member] |
AOCI Attributable to Parent [Member] |
Retained Earnings [Member] |
Total |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance (in shares) at Dec. 31, 2020 | 14,911 | 14,782 | 239,400 | 180,096,317 | (6,704) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Dec. 31, 2020 | $ 0 | $ 0 | $ 2 | $ 1,801 | $ (64) | $ 193,652 | $ (1,989) | $ (213,225) | $ (19,823) | |||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Preferred Stock discount | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | (1,817) | 0 | 0 | (1,817) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued pursuant to option exchange and RSU vesting (in shares) | 0 | 0 | 0 | 161,168 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | $ 0 | $ 0 | $ 0 | $ 2 | $ 0 | 76 | 0 | 0 | 78 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ (248) | $ 0 | $ 0 | $ (248) | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 0 | 0 | 0 | 0 | 0 | 0 | 54 | 0 | 54 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | 0 | 0 | (1,885) | (1,885) | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash (in shares) | 0 | 0 | 0 | 242,647 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash | $ 0 | $ 0 | $ 0 | $ 2 | $ 0 | 19 | 0 | 0 | 21 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to warrant exercise (in shares) | 0 | 0 | 0 | 400 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to warrant exercise | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
| Conversion of stock (in shares) | (8,762) | 0 | 0 | 43,819,500 | 0 | 0 | (8,860) | 0 | 44,300,000 | 0 | 0 | 0 | 0 | 6,115,324 | 0 | |||||||||||||||||||||||||||||||||||||||
| Conversion of stock | $ 0 | $ 0 | $ 0 | $ 438 | $ 0 | $ (438) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 443 | $ 0 | $ (443) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 59 | $ 0 | 630 | 0 | (2) | 687 | |||||||||||||||||||||||||||
| Dividends on preferred stock (in shares) | 0 | 0 | 0 | 1,050,826 | 0 | 0 | 0 | 0 | 963,266 | 0 | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | $ 0 | $ 0 | $ 0 | $ 11 | $ 0 | $ 81 | $ 0 | $ (92) | $ 0 | $ 0 | $ 0 | $ 0 | $ 10 | $ 0 | $ 73 | $ 0 | $ (83) | $ 0 | ||||||||||||||||||||||||||||||||||||
| Balance (in shares) at Mar. 31, 2021 | 6,149 | 5,922 | 239,400 | 276,749,448 | (6,704) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Mar. 31, 2021 | $ 0 | $ 0 | $ 2 | $ 2,766 | $ (64) | 191,585 | (1,935) | (215,287) | (22,933) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance (in shares) at Dec. 31, 2021 | 0 | 0 | 239,400 | 347,240,045 | (6,704) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Dec. 31, 2021 | $ (0) | $ (0) | $ 2 | $ 3,471 | $ (64) | 187,148 | (1,396) | (204,253) | (15,092) | |||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Preferred Stock discount | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | (1,531) | 0 | 0 | $ (1,531) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued pursuant to option exchange and RSU vesting (in shares) | 0 | 0 | 0 | 41,901 | 0 | 41,901 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | 592 | 0 | 0 | $ 592 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ (253) | $ 0 | $ 0 | $ (253) | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 0 | 0 | 0 | 0 | 0 | 0 | 21 | 0 | 21 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | 0 | 0 | (2,698) | (2,698) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance (in shares) at Mar. 31, 2022 | 0 | 0 | 239,400 | 347,281,946 | (6,704) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Mar. 31, 2022 | $ 0 | $ 0 | $ 2 | $ 3,471 | $ (64) | $ 185,956 | $ (1,375) | $ (206,951) | $ (18,961) |
Note 1 - Description of Business and Operations |
3 Months Ended |
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Mar. 31, 2022 | |
| Notes to Financial Statements | |
| Business Description and Basis of Presentation [Text Block] |
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 our patented 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 our Biometric Engine.
The Company's common stock, par value $0.01 per share (the “Common Stock”), trades under the symbol “IWSY" on the OTCQB Marketplace.
Liquidity, Going Concern and Management’s Plans
At March 31, 2022 and December 31, 2021, we had negative working capital of $10,289,000 and $8,046,000, respectively. Included in our negative working capital as of March 31, 2022 are $6,024,000 of derivative liabilities which are not required to be settled in cash except in the event of the consummation of a change of control or at any time after the fourth anniversary of the private placement of our Series D Convertible Preferred Stock, par value $0.01 ("Series D Preferred"), consummated in November and December, 2020 (the “Series D Financing”), at which anniversary the holders of the Series D Preferred may require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the liquidation preference of the Series D Preferred. At March 31, 2022 the liquidation preference totaled $23,469,000.
Historically, our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically, the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern.
To address our working capital requirements, management is actively seeking additional financing, of which no assurances can be given that we will be successful. In addition, the Company has instituted several cost cutting measures and has utilized cash proceeds available under the Credit Facility (defined below) with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (collectively, the “Lenders”), and under the purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to satisfy its working capital requirements (“LPC Purchase Agreement”).
During 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. In the event the Company is unable to consummate one or more of the above transactions, the Company will not be able to continue as a going concern. The Company continues to evaluate indications of interest as well as options to address its projected working capital requirements, and those discussions are ongoing, including discussions with the Company’s largest shareholder with whom the Company has entered a Term Loan and Security Agreement to provide up to $2,500,000 (the “Credit Facility”). As of May 20, 2022 approximately $342,000 remains available under the Credit Facility in such Lender’s discretion, and no assurances can be given that the Lenders will consent to the release of the additional $342,000 under the Credit Facility. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.
To date, the Board of Directors (“Board”) has not entered into any financing or other arrangements, other than the Credit Facility and the LPC Purchase Agreement, 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. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders and may result in the loss of your entire investment.
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 of the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. |
Note 2 - Significant Accounting Policies and Basis of Presentation |
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| Significant Accounting Policies [Text Block] |
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2022, 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, 2021, which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2021 as filed with the SEC on April 15, 2022.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, 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.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
Accounts Receivable
In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivables 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 receivables 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.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, and deferred revenue, the carrying amounts approximate fair value due to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use Assets
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% using a capital asset pricing model. The Company has utilized the practical expedient regarding lease and non-lease 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 evaluates its operating lease right-of-use assets for impairment. Impairment is based on the excess of the carrying amount over the fair value, based on market value when available, or expected future economic benefits to the company from the operating lease right-of-use asset and is recorded in the period in which the determination is made. The Company recorded no impairment during the three months ended March 31, 2022.
Revenue Recognition
In accordance with ASC Topic 606 – Revenue from Contracts with Customers (“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 ASC 606 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:
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
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
Post-contract customer support (“PCS”) consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and PCS 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, 2022 and December 31, 2021, we had capitalized incremental costs of obtaining a contract with a customer of $0 and recorded additional contract costs during the three months ended March 31, 2022.
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, 2022 and 2021:
Customer Concentration
For the three months ended March 31, 2022, two customers accounted for approximately 37% or $314,000 of our total revenue and had trade receivables at March 31, 2022 of $35,000.
For the three months ended March 31, 2021, two customers accounted for approximately 45% or $333,000 of our total revenue and had trade receivables of $249,000 at March 31, 2021.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06"). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas. ASU 2020-06 is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
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Note 3 - Net Income (Loss) Per Common Share |
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| Earnings Per Share [Text Block] |
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, 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 loss for the respective periods.
The table below presents the computation of basic and diluted loss per share:
The following potential dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding, as their effect would have been antidilutive:
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Note 4 - Select Balance Sheet Details |
3 Months Ended |
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Mar. 31, 2022 | |
| Notes to Financial Statements | |
| Supplemental Balance Sheet Disclosures [Text Block] |
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $24,000 as of March 31, 2022 were comprised of work in process of $7,000, representing direct labor costs on in-process projects and finished goods of $17,000 net of reserves for obsolete and slow-moving items of $3,000.
Inventories of $25,000 as of December 31, 2021 were comprised of work in process of $7,000, representing direct labor costs on in-process projects and finished goods of $18,000 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.
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 reporting unit, Identity Management, which, at March 31, 2022, had a negative carrying amount of approximately $18,961,000. Based on the results of the Company's impairment testing, the Company determined that its goodwill was impaired as of March 31, 2022 and December 31, 2021 as the fair value of our Identity Management reporting unit exceeded that reporting unit’s carrying value. However, the Company has experienced decreases in its market capitalization and if our market capitalization continues to decrease, future impairment of goodwill may result.
Other Assets
In conjunction with the LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2021, 1,000,000 shares of Common Stock as consideration for entering into the LPC Purchase Agreement. Pursuant to this issuance, the Company recorded $70,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid-in capital in proportion to securities sold under the LPC Purchase Agreement. At March 31, 2022, the Company had approximately $70,000 in deferred stock issuance costs included in the caption “Other assets” in its condensed consolidated balance sheets. |
Note 5 - Leases |
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| Lessee, Operating Leases [Text Block] |
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 (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5%, as the discount rates implicit in the Company’s leases cannot be readily determined. At March 31, 2022, such assets and liabilities aggregated approximately $808,000 and $1,181,000, respectively. At December 31, 2021, such assets and liabilities aggregated approximately $847,000 and $1,298,000, respectively. The Company determined that it had no arrangements representing finance leases.
Our corporate headquarters is located in San Diego, California, where we now occupy approximately 500 square feet of office space at a cost of approximately $2,000 per month. We entered into this facility’s lease in February 2021, with the new lease commencing on March 1, 2021 on a month-to-month basis.
Prior to entering into our current lease agreement in January 2021 and moving our corporate headquarters to a new location, we occupied 8,511 square feet of office space in San Diego, California, at a cost of approximately $28,000 per month. In January 2021, we entered in a subleasing agreement for our previously occupied corporate headquarters located in San Diego, California. The term of the sublease commenced on April 1, 2021 and expires on April 30, 2025, coterminous with the expiration of the Company’s master lease. Sublease payments due to the Company approximate $26,000 per month over the term of the sublease.
The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases.
For the three months ended March 31, 2022 and 2021, 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, 2022 is 1.33 years. Cash payments under operating leases are included in operating cash flows and aggregated approximately $162,000 and $166,000 for the three months ended March 31, 2022 and 2021, respectively.
The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as its term is less than 12 months.
At March 31, 2022, future minimum undiscounted lease payments are as follows:
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Note 6 - Mezzanine Equity |
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NOTE 6. MEZZANINE EQUITY
Series D Convertible Redeemable Preferred Stock
On November 12, 2020, the Company filed the Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock (the “Series D Certificate”) with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred (described below in Note 9), and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities and are to be paid at the rate of 4% of the Stated Value (as defined in the Series D Certificate) per share per annum in the form of shares of Series D Preferred. Holders of Series D Preferred shall vote together with holders of Common Stock on an as-converted basis, and not as a separate class, except (i) the holders of Series D Preferred, voting as a separate class, shall be entitled to elect two directors, (ii) the holders of Series D Preferred have the right to vote as a separate class regarding the waiver of certain protective provisions set forth in the Series D Certificate, and (iii) as otherwise required by law.
The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into Common Stock at any time that is at least ninety days following the issuance date, at the conversion price calculated by dividing the Stated Value by the conversion price of $0.0583 per share of Common Stock, subject to adjustments as set forth in Section 5(e) of the Series D Certificate. The shares of Common Stock issuable upon conversion of the Series D Preferred shall be subject to the following registration rights: (i) one demand registration starting three months after the Closing; (ii) two demand registrations starting one year after the Closing; and (iii) unlimited piggy-back and Form S-3 registration rights with reasonable and customary terms.
If, on any date that is at least five (5) years following the Issuance Date (as defined in the Series D Certificate), (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common Stock issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common Stock will be either (A) covered by an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), which is then available for the immediate resale of such Common Stock by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.
On the fourth anniversary of the Issuance Date, or in the event of the consummation of a change of control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.
On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of 11,560 shares of its Series D Preferred, resulting in gross proceeds to the Company of $11.56 million, less fees and expenses. The gross proceeds include approximately $2.2 million in principal amount due and payable under the terms of certain term loans issued by the Company on September 29, 2020 (“Bridge Note”), which Bridge Notes were converted into Series D Preferred at Closing (the “Conversion”). The issuance and sale of the Series D Preferred was made pursuant to that certain Securities Purchase Agreement, dated September 28, 2020 (the “Purchase Agreement”), by and between the Company and the investors, for the purchase price of $1,000 per share of Series D Preferred. The Conversion and Series D Financing was undertaken pursuant to Section 3(a)(9) and/or Rule 506 promulgated under the Securities Act. On December 23, 2020, the Company sold an additional 500 shares of Series D Preferred resulting in gross proceeds to the Company of $500,000, less fees and expenses.
During the year ended December 31, 2021, the Company issued an aggregate of 999 shares of Series D Preferred as payment of dividends due to the Series D Preferred stockholders. During the year ended December 31, 2021, certain holders of Series D Preferred converted 646 shares of Series D Preferred into 11,149,123 shares of Common Stock which includes 70,221 shares of Common Stock issued for dividends up to the date of conversion.
During the three months ended March 31, 2022, the Company issued 253 shares of Series D Preferred Stock as payment of dividends due to the Series D Preferred stockholders. There were no conversions of Series D Preferred into Common Stock during the three months ended March 31, 2022.
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 Redeemable Preferred Stocks (“ASR 268”). The Company evaluated the provisions of the Series D Preferred and determined that the provisions of the Series D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series D Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control (as defined in the Series D Certificate), the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.
The Company noted that the Series D Preferred instruments were hybrid instruments that contain several embedded features. In November 2014, the FASB issued ASU 2014-16 to amend ASC 815, “Derivatives and Hedging”, (“ASC 815”) and require the use of the whole instrument approach (described below) to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity.
The whole instrument approach requires an issuer or investor to consider the economic characteristics and risks of the entire hybrid instrument, including all of its stated and implied substantive terms and features. Under this approach, all stated and implied features, including the embedded feature being evaluated for bifurcation, must be considered. Each term and feature should be weighed based on the relevant facts and circumstances to determine the nature of the host contract. This approach results in a single, consistent determination of the nature of the host contract, which is then used to evaluate each embedded feature for bifurcation. That is, the host contract does not change as each feature is evaluated.
The revised guidance further clarifies that the existence or omission of any single feature, including an investor-held, fixed-price, noncontingent redemption option, does not determine the economic characteristics and risks of the host contract. Instead, an entity must base that determination on an evaluation of the entire hybrid instrument, including all substantive terms and features.
However, an individual term or feature may be weighed more heavily in the evaluation based on facts and circumstances. An evaluation of all relevant terms and features, including the circumstances surrounding the issuance or acquisition of the equity share, as well as the likelihood that an issuer or investor is expected to exercise any options within the host contract, to determine the nature of the host contract, requires judgement.
Using the whole instrument approach, the Company concluded that the host instrument of the Series D Preferred were more akin to debt than equity as the majority of identified features contain more characteristics of debt.
The Company evaluated the identified embedded features of the Series D Preferred host instrument and determined that certain features meet the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument.
The Company has bifurcated from the Series D Preferred host instrument the conversion option, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $26,011,000 at issuance and have been recorded as a discount to the Series D Preferred. During the three months ended March 31, 2022 and 2021, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $1,531,000 and $1,817,000, respectively, using the effective interest rate method as a deemed dividend.
The following table summarizes the share activity of Series D Preferred for the three months ended March 31, 2022:
The carrying value of the Company’s Series D Preferred was approximately $10,478,000 and $8,759,000 net of discount of approximately $12,991,000 and $14,458,000 as of March 31, 2022 and December 31, 2021, respectively. |
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Note 7 - Derivative Liabilities |
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
NOTE 7. DERIVATIVE LIABILITIES
The Company accounts for its derivative instruments under the provisions of ASC 815, “Derivatives and Hedging”. Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contracts that qualify as derivative instruments and require bifurcation.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series D Preferred host instrument required bifurcation. The Company valued these bifurcatable features at fair value. Such liabilities aggregated approximately $6,024,000 and $5,292,000 at March 31, 2022 and December 31, 2021, respectively, and are classified as current liabilities on the Company’s condensed consolidated balance sheets under the caption “Derivative liabilities”. The Company will revalue these features at each balance sheet date and record any change in fair value in the determination of period net income or loss.
The change in fair value of such amounts is recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. For the three months ended March 31, 2022, the Company recorded an increase to its derivative liabilities using fair value methodologies of approximately $667,000. For the three months ended March 31, 2021, the Company recorded a decrease to its derivative liabilities using fair value methodologies of approximately $1,172,000. |
Note 8 - Line of Credit |
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NOTE 8. LINE OF CREDIT
December 2021 Credit Facility with Nantahala Capital Management
On December 29, 2021, the Company entered into a Term Loan and Security Agreement with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $2,500,000. Nantahala collectively owns, or otherwise controls, approximately 37.3% of our issued and outstanding voting securities.
On the Closing Date, the Company received in initial draw-down on the Credit Facility of $600,000. Subsequent to the initial draw-down and through May 20, 2022, the Company received additional draw-downs aggregating $1,450,000. The Company expects to use the proceeds from the Credit Facility for working capital requirements and corporate purposes. As of May 20, 2022, there is approximately $342,000 outstanding under the Credit Facility in such Lender’s discretion, and no assurances can be given that the Lenders will consent to the release of the additional $342,000 under the LOC. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.
For a more detailed description of this related party credit facility, see Note 12, Related Parties.
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Note 9 - Equity |
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NOTE 9. EQUITY
The Company’s Certificate of Incorporation, as amended, authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board may determine.
On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of 179 million to 350 million, consisting of 345 million shares of Common Stock and 5 million shares of Preferred Stock. On September 28, 2020, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 345 million shares to 1.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective October 13, 2020. On February 16, 2021, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 1.0 billion shares to 2.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective April 21, 2021.
As of March 31, 2022, we had 347,281,946 and 347,275,242 shares of Common Stock issued and outstanding, respectively. As of December 31, 2021, we had 347,240,045 and 347,233,341 shares of Common Stock issued and outstanding, respectively. Our authorized but unissued shares of Common Stock are available for issuance without action by our shareholders. All shares of Common Stock now outstanding are fully paid and non-assessable.
Our Board has designated five series of Preferred Stock; (i) Series A Preferred, (ii) Series A-1 Preferred, (iii) Series B Preferred, (iv) Series C Preferred and (v) Series D Preferred. As of March 31, 2022, there were no shares of Series A Preferred outstanding, no shares of Series A-1 Preferred outstanding, 239,400 shares of series B Preferred outstanding, no shares of Series C Preferred outstanding, and 23,469 shares of Series D Preferred outstanding.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B Convertible Preferred Stock (“Series B Preferred”) outstanding as of March 31, 2022 and December 31, 2021. At March 31, 2022 and December 31, 2021, the Company had cumulative undeclared dividends of approximately $21,000 and $8,000, respectively. There were no conversions of Series B Preferred into Common Stock during the three months ended March 31, 2022 and 2021.
Common Stock
The following table summarizes outstanding Common Stock activity during the three months ended March 31, 2022:
Warrants
As of March 31, 2022, warrants to purchase 3,150,000 shares of Common Stock at prices ranging from $0.048 to $0.80 were outstanding. At March 31, 2022, 1,466,680 warrants are exercisable. All warrants expire at various dates between August 5, 2026 and August 5, 2028 with the exception of 150,000 warrants whose expiration date is 3 years from initial vesting, such vesting based on certain events. The intrinsic value of warrants outstanding at March 31, 2022 was $0.
During the three months ended March 31, 2022, there were no warrant issuances, cancellations, expirations or exercises. The weighted-average exercise price of warrants outstanding was $0.10 per share. The Company recorded approximately $15,000 in share-based payment expense related to warrants for the three months ended March 31, 2022.
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Note 10 - Stock-based Compensation |
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| Share-Based Payment Arrangement [Text Block] |
NOTE 10. STOCK-BASED COMPENSATION
Stock Options
As of March 31, 2022, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Plan. Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Internal Revenue Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Stock Award 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 amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to 145.0 million shares. Such amendment became effective on April 21, 2021. As of March 31, 2022, there were 63,747,077 shares available for issuance under the 2020 Plan.
The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”). The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.
ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14.
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. The Company utilized estimated forfeiture rate of 25% for options granted during the three months ended March 31, 2022. 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:
There were options granted during the three months ended March 31, 2022.
During the three months ended March 31, 2022, there were no options that expired unexercised and there were no options exercised.
At March 31, 2022, a total of 4,818,876 options were outstanding, of which 3,633,444 were exercisable at a weighted average price of $0.08 per share with a remaining weighted average contractual term of 3.2 years. The Company expects that, in addition to the 3,633,444 options that were exercisable as of March 31, 2022, another 1,185,432 will ultimately vest resulting in a combined total of 4,818,876. Those 4,818,876 shares have a weighted average exercise price of $0.08 and an aggregate intrinsic value of approximately $0 as of March 31, 2022. Stock-based compensation expense related to equity options was approximately $112,000 for the three months ended March 31, 2022.
The intrinsic value of options exercisable and outstanding at March 31, 2021 was The aggregate intrinsic value for all options outstanding as of March 31, 2021 was There were no issuances of options to purchase Common Stock during the three months ended March 31, 2021. Stock-based compensation expense related to equity options was approximately $32,000 for the three months ended March 31, 2021.
The Company periodically issues Restricted Stock Units (“RSUs”) to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.
A summary of the activity related to RSUs is as follows:
There were RSUs granted during the three months ended March 31, 2022.
During the three months ended March 31, 2022, the Company recorded compensation expense of approximately $465,000 related to RSUs. During the three months ended March 31, 2021, the Company recorded compensation expense of approximately $15,000 related to RSUs. During the three months ended March 31, 2022 and 2021, the Company issued 41,901 and 161,168 shares of its Common Stock pursuant to the vesting of RSUs.
Stock-Based Compensation
Stock-based compensation related to equity options, RSUs and warrants has been classified as follows in the accompanying consolidated statements of income (loss) (in thousands):
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| Fair Value Disclosures [Text Block] |
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), 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:
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.
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 the 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, 2022 and December 31, 2021, the Company had embedded features contained in the Series D Preferred host instrument (issued in November 2020) that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $6,024,000 and $5,292,000 at March 31, 2022 and December 31, 2021, respectively, which are classified as a current liability in the consolidated balance sheet as of March 31, 2022 and December 31, 2021. The fair value of the Company’s derivative liabilities are classified within Level 3 of the fair value hierarchy because they are valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The Company uses Monte-Carlo simulations and other fair value methodologies in the determination of the fair value of derivative liabilities. Considering the various path dependencies for the Series D Preferred Stock, Monte-Carlo simulations were deemed the most appropriate methodology.
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, 2022 are a risk-free rate of 2.38%, equity volatility of 127.8%, effective life of 2.76 years and a Preferred Stock dividend rate of 4.0%. These assumptions incorporate management’s estimate of the probability of future financings (Series D Financing) and the timing of potential change of control events. The primary assumptions impacted by Series D Financing were the effective life of 2.76 years and equity volatility.
The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.
The reconciliations of Level 3 pension assets measured at fair value during the three months ended March 31, 2022 and 2021 are presented below:
The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three months ended March 31, 2022 is presented below:
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Note 12 - Related Party Transactions |
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| Notes to Financial Statements | |
| Related Party Transactions Disclosure [Text Block] |
NOTE 12. RELATED PARTY TRANSACTIONS
December 2021 Credit Facility with Nantahala Capital Management
On December 29, 2021 (the “Closing Date”), the Company entered into a Term Loan and Security Agreement (the “Agreement”) with certain funds and separate accounts managed by Nantahala Capital Management, LLC (collectively, “Nantahala”), as lenders, and other lenders set forth on the signature pages thereto (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $2,500,000 (the “Credit Facility”). Nantahala collectively owns, or otherwise controls, approximately 37.5% of our issued and outstanding voting securities.
All loans (each a “Loan”, and collectively, the “Loans”) under the Credit Facility will bear interest at a rate of 12% for the initial six months after the Closing Date, and at 17% thereafter until the maturity date of 12 months from the Closing Date (the “Maturity Date”). All amounts borrowed by the Company under the Credit Facility are secured by a first-priority lien on all the assets of the Company. On the Closing Date, the Company received in initial draw-down on the Credit Facility of $600,000. As of May 4, 2022, the Company received additional proceeds from draw-downs on the Credit Facility aggregating $1,450,000. The Company expects to use the proceeds from the Credit Facility for working capital requirements and corporate purposes. As of May 20, 2022, there is approximately $342,000 outstanding under the Credit Facility in such Lender’s discretion, and no assurances can be given that the Lenders will consent to the release of the additional $342,000 under the Credit Facility. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.
The Company may prepay amounts borrowed under the Credit Facility in whole or in part, at a price equal to 105% of the principal amount borrowed under the Credit Facility (including any interest capitalized thereon), subject to additional prepayment terms pursuant to the Agreement, a copy of which is filed as an Exhibit to the Company’s Current Report on Form 8-K, filed with the SEC on January 4, 2022. In addition, pursuant to the Agreement, at any time after the Closing Date, each Lender shall have the right, but not the obligation, on mutually agreed upon terms, to exchange each such Lender’s pro rata portion of shares of the Company’s Series D Convertible Preferred Stock, par value $0.01 (“Series D Preferred”) held by such Lender for a mutually agreed upon portion of any subsequent Delayed Draw Loan (as defined in the Agreement) (an “Exchange”). Upon the Company’s receipt by a Lender of a notice stating a Lender’s intent to participate in an Exchange, the Company is required to offer to all holders of Series D Preferred the opportunity, but not the obligation, to exchange each such holder’s pro rata portion of shares of the Company’s Series D Preferred held by such holder for participation in any subsequent Delayed Draw Loan, upon substantially similar terms as those provided in the applicable notice of Exchange by a Lender.
Consulting Agreement
On March 1, 2022, the Company entered into a consulting agreement with a member of the Company’s Board of Directors (the “Consulting Agreement”). The Consulting Agreement provides for the provision of certain strategic financing and corporate development activities . The term of the agreement is for a period of three months and expires June 1, 2022. The maximum consulting fee is $8,000 per month to be accrued throughout the term but with payment deferral until the closing of certain contractually defined milestones. The Company has made any payments pursuant to the Consulting Agreement during the three months ended March 31, 2022. |
Note 13 - Contingent Liabilities |
3 Months Ended |
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Mar. 31, 2022 | |
| Notes to Financial Statements | |
| Commitments and Contingencies Disclosure [Text Block] |
NOTE 13. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024 (the “Employment Agreement”). The Company may terminate the Employment Agreement with or without cause. Subject to the conditions and other limitations set forth in the Employment Agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the Employment Agreement) by the Company or by the executive:
Under the terms of the Employment Agreement, if employment is terminated by the Company without cause or there is a change of control, then the executive shall be entitled to severance payments equal to the executive’s annual salary and shall remain enrolled in the Company’s health, dental, and life insurance plans for the lesser of twelve (12) months or the remaining period prior to expiration of the Employment Period (as defined in the Employment Agreement) plus the executive shall be entitled to any bonus due as of the effective date of such termination.
Litigation
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. |
Note 14 - Subsequent Events |
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Mar. 31, 2022 | |
| Notes to Financial Statements | |
| Subsequent Events [Text Block] |
NOTE 14. SUBSEQUENT EVENTS
During the period from April 1, 2022 through May 23, 2022, the Company issued 687,500 shares of its Common Stock pursuant to the vesting of RSUs.
During the period from April 1, 2022 through May 23, 2022, the Company borrowed an additional $400,000 from the Lenders under the Credit Facility. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable. |
Significant Accounting Policies (Policies) |
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| Consolidation, Policy [Policy Text Block] | 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. |
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| Use of Estimates, Policy [Policy Text Block] | Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates. |
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| Receivable [Policy Text Block] | 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 receivables 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 receivables are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful. |
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| Inventory, Policy [Policy Text Block] | Inventories
Finished goods inventories are stated at the lower of cost, determined using the average cost method, or net realizable value. See Note 4. |
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| Fair Value of Financial Instruments, Policy [Policy Text Block] | 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. |
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| Lessee, Leases [Policy Text Block] | Lease Liabilities and Operating Lease Right-of-Use Assets
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% using a capital asset pricing model. The Company has utilized the practical expedient regarding lease and non-lease 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 evaluates its operating lease right-of-use assets for impairment. Impairment is based on the excess of the carrying amount over the fair value, based on market value when available, or expected future economic benefits to the company from the operating lease right-of-use asset and is recorded in the period in which the determination is made. The Company recorded no impairment during the three months ended March 31, 2022. |
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| Revenue [Policy Text Block] | Revenue Recognition
In accordance with ASC Topic 606 – Revenue from Contracts with Customers (“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 ASC 606 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:
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
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
Post-contract customer support (“PCS”) consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and PCS 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, 2022 and December 31, 2021, we had capitalized incremental costs of obtaining a contract with a customer of $0 and recorded additional contract costs during the three months ended March 31, 2022.
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, 2022 and 2021:
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| Concentration Risk, Credit Risk, Policy [Policy Text Block] | Customer Concentration
For the three months ended March 31, 2022, two customers accounted for approximately 37% or $314,000 of our total revenue and had trade receivables at March 31, 2022 of $35,000.
For the three months ended March 31, 2021, two customers accounted for approximately 45% or $333,000 of our total revenue and had trade receivables of $249,000 at March 31, 2021. |
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| New Accounting Pronouncements, Policy [Policy Text Block] | Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06"). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas. ASU 2020-06 is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements. |
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| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis [Table Text Block] |
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| Schedule of Changes in Fair Value of Plan Assets [Table Text Block] |
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| Schedule of Derivative Liabilities at Fair Value [Table Text Block] |
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Note 1 - Description of Business and Operations (Details Textual) - USD ($) |
May 20, 2022 |
Mar. 31, 2022 |
Dec. 31, 2021 |
Dec. 29, 2021 |
|---|---|---|---|---|
| Common Stock, Par or Stated Value Per Share (in dollars per share) | $ 0.01 | $ 0.01 | ||
| Working Capital (Deficit) | $ (10,289,000) | $ (8,046,000) | ||
| Derivative Liability, Total | 6,024,000 | |||
| Temporary Equity, Liquidation Preference | 23,469,000 | |||
| Term Loan and Security Agreement [Member] | Secured Term Loan Credit Facility [Member] | ||||
| Line of Credit Facility, Maximum Borrowing Capacity | $ 2,500,000 | $ 2,500,000 | ||
| Term Loan and Security Agreement [Member] | Secured Term Loan Credit Facility [Member] | Forecast [Member] | ||||
| Line of Credit Facility, Remaining Borrowing Capacity | $ 342,000 | |||
| Series D Preferred Stock [Member] | ||||
| Preferred Stock, Par or Stated Value Per Share (in dollars per share) | $ 0.01 | $ 0.01 |
Note 2 - Significant Accounting Policies and Basis of Presentation (Details Textual) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Operating Lease, Weighted Average Discount Rate, Percent | 14.50% | |
| Operating Lease, Impairment Loss | $ 0 | |
| Capitalized Contract Cost, Net, Total | 0 | |
| Capitalized Contract Cost, Additions | 0 | |
| Revenues, Total | $ 845,000 | $ 733,000 |
| Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Two Customers [Member] | ||
| Concentration Risk, Percentage | 37.00% | 45.00% |
| Revenues, Total | $ 314,000 | $ 333,000 |
| Customer Concentration Risk [Member] | Accounts Receivable [Member] | Two Customers [Member] | ||
| Accounts Receivable, after Allowance for Credit Loss, Total | $ 35,000 | $ 249,000 |
Note 2 - Significant Accounting Policies and Basis of Presentation - Disaggregation of Revenue (Details) - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Revenue | $ 845 | $ 733 |
| Software and Royalties [Member] | ||
| Revenue | 141 | 39 |
| Hardware and Consumables [Member] | ||
| Revenue | 43 | 13 |
| Service [Member] | ||
| Revenue | 26 | 4 |
| Maintenance [Member] | ||
| Revenue | $ 635 | $ 677 |
Note 3 - Net Income (Loss) Per Common Share - Basic and Diluted Income (Loss) Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Net loss | $ (2,698) | $ (1,885) |
| Preferred dividends and preferred stock discount accretion | (1,797) | (2,255) |
| Net loss available to common shareholders | $ (4,495) | $ (4,140) |
| Denominator for basic loss per share – weighted-average shares outstanding (in shares) | 347,275,242 | 245,829,914 |
| Basic and diluted loss per share available to common shareholders (in dollars per share) | $ (0.01) | $ (0.02) |
Note 3 - Net Income (Loss) Per Common Share - Antidilutive Securities (Details) - shares |
3 Months Ended | 12 Months Ended |
|---|---|---|
Mar. 31, 2022 |
Dec. 31, 2021 |
|
| Total Potential Dilutive Securities (in shares) | 491,597,864 | 454,334,941 |
| Series A Preferred Stock [Member] | ||
| Total Potential Dilutive Securities (in shares) | 0 | 30,743,500 |
| Series A-1 Preferred Stock [Member] | ||
| Total Potential Dilutive Securities (in shares) | 0 | 29,610,000 |
| Series B Preferred Stock [Member] | ||
| Total Potential Dilutive Securities (in shares) | 46,980 | 46,980 |
| Series D Preferred Stock [Member] | ||
| Total Potential Dilutive Securities (in shares) | 402,562,607 | 390,348,199 |
| Share-Based Payment Arrangement, Option [Member] | ||
| Total Potential Dilutive Securities (in shares) | 4,818,876 | 2,574,669 |
| Restricted Stock Units (RSUs) [Member] | ||
| Total Potential Dilutive Securities (in shares) | 81,019,401 | 618,004 |
| Warrant [Member] | ||
| Total Potential Dilutive Securities (in shares) | 3,150,000 | 393,589 |
Note 4 - Select Balance Sheet Details (Details Textual) |
1 Months Ended | 3 Months Ended | 12 Months Ended |
|---|---|---|---|
|
May 31, 2021
USD ($)
shares
|
Mar. 31, 2022
USD ($)
|
Dec. 31, 2021
USD ($)
|
|
| Inventory, Gross, Total | $ 24,000 | $ 25,000 | |
| Inventory, Work in Process, Gross | 7,000 | 7,000 | |
| Inventory, Finished Goods, Gross | 17,000 | 18,000 | |
| Inventory, LIFO Reserve | $ 3,000 | 3,000 | |
| Number of Reporting Units | 1 | ||
| Goodwill, Ending Balance | $ 3,416,000 | 3,416,000 | |
| Goodwill, Impairment Loss | 0 | $ 0 | |
| Other Assets [Member] | |||
| Deferred Offering Costs | 70,000 | ||
| Lincoln Park [Member] | |||
| Sale of Stock, Number of Shares Issued in Transaction (in shares) | shares | 1,000,000 | ||
| Deferred Offering Costs | $ 70,000 | ||
| Identity Management [Member] | |||
| Goodwill, Ending Balance | $ (18,961,000) |
Note 5 - Leases (Details Textual) |
1 Months Ended | 3 Months Ended | |||
|---|---|---|---|---|---|
|
Apr. 01, 2021
USD ($)
|
Jan. 31, 2021
USD ($)
a
|
Mar. 31, 2022
USD ($)
ft²
|
Mar. 31, 2021
USD ($)
|
Dec. 31, 2021
USD ($)
|
|
| Operating Lease, Weighted Average Discount Rate, Percent | 14.50% | ||||
| Operating Lease, Right-of-Use Asset | $ 808,000 | $ 847,000 | |||
| Operating Lease, Liability, Total | 1,181,000 | $ 1,298,000 | |||
| Lease, Cost, Total | $ 154,000 | $ 154,000 | |||
| Operating Lease, Weighted Average Remaining Lease Term (Year) | 1 year 3 months 29 days | ||||
| Operating Lease, Payments | $ 162,000 | $ 166,000 | |||
| Headquarters in San Diego, California [Member] | |||||
| Area of Real Estate Property (Square Foot) | 8,511 | 500 | |||
| Monthly Lease Expense | $ 28,000 | $ 2,000 | |||
| Monthly Sublease Payments | $ 26,000 | ||||
Note 5 - Leases - Future Minimum Lease Payments (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| 2022 (nine months) | $ 490,000 | |
| 2023 | 424,000 | |
| 2024 | 387,000 | |
| 2025 | 132,000 | |
| Total | 1,433,000 | |
| Present Value effect on future minimum undiscounted lease payments at March 31, 2022 | (252,000) | |
| Lease liability at March 31, 2022 | 1,181,000 | $ 1,298,000 |
| Less current portion | (495,000) | (496,000) |
| Non-current lease liability at March 31, 2022 | $ 686,000 | $ 802,000 |
Note 6 - Mezzanine Equity - Share Activity (Details) - Series D Preferred Stock [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2022
shares
| |
| shares of Series D Preferred Stock (in shares) | 23,216 |
| Shares converted (in shares) | 0 |
| Shares issued (in shares) | 253 |
Note 7 - Derivative Liabilities (Details Textual) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
| Derivative Liability, Current | $ 6,024,000 | $ 5,292,000 | |
| Derivative, Gain (Loss) on Derivative, Net, Total | (667,000) | $ 1,172,000 | |
| Series D Preferred Stock Instrument [Member] | |||
| Derivative Liability, Current | 6,024,000 | 5,292,000 | $ 5,292,000 |
| Derivative, Gain (Loss) on Derivative, Net, Total | $ 667,000 | $ 1,172,000 | |
Note 8 - Line of Credit (Details Textual) - USD ($) |
1 Months Ended | 2 Months Ended | |||
|---|---|---|---|---|---|
May 04, 2022 |
Dec. 29, 2021 |
May 20, 2022 |
May 23, 2022 |
Mar. 31, 2022 |
|
| Nantahala Capital Management, LLC [Member] | |||||
| Ownership Interest | 37.30% | ||||
| Term Loan and Security Agreement [Member] | Secured Term Loan Credit Facility [Member] | |||||
| Line of Credit Facility, Maximum Borrowing Capacity | $ 2,500,000 | $ 2,500,000 | |||
| Proceeds from Issuance of Long-Term Debt, Total | $ 600,000 | ||||
| Term Loan and Security Agreement [Member] | Secured Term Loan Credit Facility [Member] | Subsequent Event [Member] | |||||
| Proceeds from Issuance of Long-Term Debt, Total | $ 1,450,000 | $ 1,450,000 | $ 400,000 | ||
| Long-Term Line of Credit, Total | 342,000 | ||||
| Line of Credit Facility, Remaining Borrowing Capacity | $ 342,000 |
Note 9 - Equity - Common Stock Activity (Details) - shares |
2 Months Ended | 3 Months Ended |
|---|---|---|
May 23, 2022 |
Mar. 31, 2022 |
|
| Shares outstanding (in shares) | 347,275,242 | 347,233,341 |
| Shares issued pursuant to option exchange and RSU vesting (in shares) | 41,901 |
Note 10 - Stock-based Compensation - Stock Option Activity (Details) - $ / shares |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
| Balance (in shares) | 4,818,876 | ||
| Balance, weighted average exercise price (in dollars per share) | $ 0.08 | ||
| Weighted-average remaining contractual term (Year) | 3 years 2 months 12 days | 3 years 6 months | |
| Granted (in shares) | 0 | 0 | |
| Granted, weighted average exercise price (in dollars per share) | $ 0 | ||
| Expired/Cancelled (in shares) | 0 | ||
| Expired/Cancelled, weighted average exercise price (in dollars per share) | $ 0 | ||
| Exercised (in shares) | 0 | ||
| Exercised, weighted average exercise price (in dollars per share) | $ 0 | ||
| Balance (in shares) | 4,818,876 | 4,818,876 | |
| Balance, weighted average exercise price (in dollars per share) | $ 0.08 | $ 0.08 | |
Note 10 - Stock-based Compensation - RSU Activity (Details) - Restricted Stock Units (RSUs) [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2022
$ / shares
shares
| |
| Balance (in shares) | shares | 81,019,401 |
| Balance, weighted average issuance price (in dollars per share) | $ / shares | $ 0.13 |
| Granted (in shares) | shares | 0 |
| Granted, weighted average issuance price (in dollars per share) | $ / shares | $ 0 |
| Expired/Cancelled (in shares) | shares | (1,025,000) |
| Expired/Cancelled, weighted average issuance price (in dollars per share) | $ / shares | $ 0.04 |
| Vested (in shares) | shares | (41,901) |
| Vested, weighted average issuance price (in dollars per share) | $ / shares | $ 0.17 |
| Balance (in shares) | shares | 79,952,500 |
| Balance, weighted average issuance price (in dollars per share) | $ / shares | $ 0.04 |
Note 10 - Stock-based Compensation - Stock-based Compensation (Details) - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Stock based compensation | $ 592 | $ 78 |
| Cost of Sales [Member] | ||
| Stock based compensation | 11 | 1 |
| General and Administrative Expense [Member] | ||
| Stock based compensation | 335 | 37 |
| Selling and Marketing Expense [Member] | ||
| Stock based compensation | 127 | 21 |
| Research and Development Expense [Member] | ||
| Stock based compensation | $ 119 | $ 19 |
Note 11 - Fair Value Accounting (Details Textual) |
Mar. 31, 2022
USD ($)
|
Dec. 31, 2021
USD ($)
|
Mar. 31, 2021
USD ($)
|
|---|---|---|---|
| Derivative Liability, Current | $ 6,024,000 | $ 5,292,000 | |
| Measurement Input, Risk Free Interest Rate [Member] | |||
| Derivative Liability, Measurement Input | 2.38 | ||
| Measurement Input, Price Volatility [Member] | |||
| Derivative Liability, Measurement Input | 127.8 | ||
| Measurement Input, Expected Term [Member] | |||
| Derivative Liability, Measurement Input | 2.76 | ||
| Measurement Input, Expected Dividend Rate [Member] | |||
| Derivative Liability, Measurement Input | 0.040 | ||
| Series D Preferred Stock Instrument [Member] | |||
| Derivative Liability, Current | $ 6,024,000 | $ 5,292,000 | $ 5,292,000 |
| Series D Preferred Stock Instrument [Member] | Measurement Input, Expected Term [Member] | |||
| Derivative Liability, Measurement Input | 2.76 |
Note 11 - Fair Value Accounting - Financial Assets and Liabilities at Fair Value (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Pension assets | $ 1,643 | $ 1,689 |
| Totals | 1,643 | 1,689 |
| Derivative liabilities | 6,024 | 5,292 |
| Totals | 6,024 | 5,292 |
| Fair Value, Inputs, Level 1 [Member] | ||
| Pension assets | 0 | 0 |
| Totals | 0 | 0 |
| Derivative liabilities | 0 | 0 |
| Totals | 0 | 0 |
| Fair Value, Inputs, Level 2 [Member] | ||
| Pension assets | 0 | 0 |
| Totals | 0 | 0 |
| Derivative liabilities | 0 | 0 |
| Totals | 0 | 0 |
| Fair Value, Inputs, Level 3 [Member] | ||
| Pension assets | 1,643 | 1,689 |
| Totals | 1,643 | 1,689 |
| Derivative liabilities | 6,024 | 5,292 |
| Totals | $ 6,024 | $ 5,292 |
Note 11 - Fair Value Accounting - Pension Assets (Details) - Fair Value, Inputs, Level 3 [Member] - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Fair value at beginning of period | $ 1,689 | $ 1,881 |
| Return on plan assets | 16 | 15 |
| Company contributions and benefits paid, net | (17) | 2 |
| Effect of exchange rate changes | (45) | (98) |
| Fair value at end of period | $ 1,643 | $ 1,800 |
Note 11 - Fair Value Accounting - Derivative Liabilities (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Change in fair value included in earnings | $ (667,000) | $ 1,172,000 |
| Fair value at end of period | 6,024,000 | |
| Fair Value, Inputs, Level 3 [Member] | ||
| Fair value at beginning of period | 5,292,000 | 24,128,000 |
| Change in fair value included in earnings | 667,000 | (1,172,000) |
| Fair value at end of period | 6,024,000 | 22,850,000 |
| Fair Value, Inputs, Level 3 [Member] | Series D Preferred Stock [Member] | ||
| Derivative liability from issuance of Preferred Series D | 65,000 | 248,000 |
| Decrease in derivative liability from conversions of Preferred Series D | $ 0 | $ (354,000) |
Note 14 - Subsequent Events (Details Textual) - USD ($) |
1 Months Ended | 2 Months Ended | 3 Months Ended | ||
|---|---|---|---|---|---|
May 04, 2022 |
Dec. 29, 2021 |
May 20, 2022 |
May 23, 2022 |
Mar. 31, 2022 |
|
| Shares Issued, Shares, Share-Based Payment Arrangement, after Forfeiture, Total (in shares) | 41,901 | ||||
| Term Loan and Security Agreement [Member] | Secured Term Loan Credit Facility [Member] | |||||
| Proceeds from Issuance of Long-Term Debt, Total | $ 600,000 | ||||
| Subsequent Event [Member] | Term Loan and Security Agreement [Member] | Secured Term Loan Credit Facility [Member] | |||||
| Proceeds from Issuance of Long-Term Debt, Total | $ 1,450,000 | $ 1,450,000 | $ 400,000 | ||
| Restricted Stock Units (RSUs) [Member] | Subsequent Event [Member] | |||||
| Shares Issued, Shares, Share-Based Payment Arrangement, after Forfeiture, Total (in shares) | 687,500 |
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