UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [____] to [____]
Commission file number
IMAGEWARE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
| | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | ||
( (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | OTCQB Marketplace |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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 a 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 | ☐ |
| ☒ | Small 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the OTCQB marketplace was $
As of April 12, 2022, there were
EXPLANATORY NOTE
Imageware Systems, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment No. 1”) to its Annual Report on Form 10-K for the year ended December 31, 2021, originally filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2022 (the “Original Form 10-K”), solely to correct an error in the content of Baker Tilly US, LLP’s Report of Independent Registered Public Accounting Firm.
In accordance with Rule 12b-15 under the Exchange Act, the Company is including in this Amendment No. 1 an amended Part IV, Item 15 to include currently dated certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the Company’s principal executive officer and principal financial officer.
Except as described above, this Amendment does not amend, modify or update the information in, or exhibits to, the Original 10-K. Furthermore, this Amendment does not change any previously reported financial results nor does it reflect events occurring after the filing of the Original 10-K. This Amendment should be read in conjunction with the Original 10-K and with the Company’s other filings made with the SEC subsequent to the filing of the Original 10-K.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements as of and for the years ended December 31, 2021 and 2020 and the report of our independent registered public accounting firm are included in Item 15 of this Annual Report.
ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) |
The following documents are filed as part of this Annual Report: |
Exhibit No. |
Description |
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Agreement and Plan of Merger, dated October 27, 2005 (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A, filed November 15, 2005). |
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Certificate of Incorporation (incorporated by reference to Annex B to the Company’s Definitive Proxy Statement on Schedule 14A, filed November 15, 2005). |
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Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed October 14, 2011). |
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Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed February 16, 2017). |
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Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 2, 2015). |
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Certificate of Designations, Preferences and Rights of the Series F Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed September 9, 2016). |
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Certificate of Designations, Preferences and Rights of the Series G Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed December 30, 2016). |
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Amendment No. 1 to the Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed December 30, 2016). |
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Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed September 19, 2017). |
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Certificate of Elimination of the Series E Convertible Preferred Stock, Series F Convertible Preferred Stock and Series G Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed October 19, 2017). |
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Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 13, 2018). |
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Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Amendment No. 1 to the Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Amended and Restated Certificate of Incorporation of Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Amended and Restated Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Amended and Restated Certificate of Designations, Preferences, and Rights of Series A-1 Convertible Preferred Stock of Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Amended and Restated Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock of Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Certificate of Designations, Preferences, and Rights of Series D Convertible Preferred Stock of Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.5 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Amended and Restated Certificate of Designations, Preferences, and Rights of Series D Convertible Preferred Stock of Imageware Systems, Inc (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated December 30, 2020). |
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Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Imageware Systems, Inc., dated April 21, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated April 26, 2021). |
Form of Amendment to Warrant, dated March 21, 2012, (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K, filed April 4, 2012). |
Form of Warrant, dated September 10, 2018 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Employment Agreement, dated September 27, 2005, between the Company and S. James Miller (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 30, 2005). |
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Form of Indemnification Agreement entered into by the Company with its directors and executive officers (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form SB-2 (No. 333-93131), filed December 20, 1999, as amended). |
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Amended and Restated 1999 Stock Plan Award (incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement on Schedule 14A, filed November 21, 2007). |
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Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed July 14, 2005). |
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2001 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-QSB, filed November 14, 2001). |
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Securities Purchase Agreement, dated September 25, 2007, by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 26, 2007). |
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Office Space Lease between I.W. Systems Canada Company and GE Canada Real Estate Equity, dated July 25, 2008 (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Form of Securities Purchase Agreement, dated August 29, 2008 by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Change of Control and Severance Benefits Agreement, dated September 27, 2008, between Company and Charles Aubuchon (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Change of Control and Severance Benefits Agreement, dated September 27, 2008, between Company and David Harding (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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First Amendment to Employment Agreement, dated September 27, 2008, between the Company and S. James Miller (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Form of Convertible Note dated November 14, 2008 (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Second Amendment to Employment Agreement, dated April 6, 2009, between the Company and S. James Miller (incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Office Space Lease between the Company and Allen W. Wooddell, dated July 25, 2008 (incorporated by reference to Exhibit 10.54 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Third Amendment to Employment Agreement, dated December 10, 2009, between the Company and S. James Miller (incorporated by reference to Exhibit 10.60 to the Company’s Annual Report on Form 10-K, filed February 24, 2010). |
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Securities Purchase Agreement, dated December 12, 2011, by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 21, 2011). |
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Note Exchange Agreement, dated December 12, 2011, by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed December 21, 2011). |
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Fourth Amendment to Employment Agreement, dated March 10, 2011, between the Company and S. James Miller, (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K, filed January 17, 2012). |
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Fifth Amendment to Employment Agreement, dated January 31, 2012, between the Company and S. James Miller, Jr., (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K, filed April 4, 2012. |
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Employment Agreement, dated January 1, 2013, between the Company and Wayne Wetherell (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 7, 2013). |
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Employment Agreement, dated January 1, 2013, between the Company and David Harding (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 7, 2013). |
Convertible Promissory Note dated March 27, 2013 issued by the Company to Neal Goldman (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K, filed April 1, 2013). |
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Amendment to Convertible Promissory Note, dated March 12, 2014 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 13, 2014). |
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Note Exchange Agreement, dated January 29, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 2, 2015). |
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Sixth Amendment to Employment Agreement, by and between S. James Miller and the Company, dated November 1, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed November 7, 2013). |
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Seventh Amendment to Employment Agreement, by and between S. James Miller, Jr. and the Company, dated January 9, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2015). |
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Second Amendment to Employment Agreement, by and between Wayne Wetherell and the Company, dated January 9, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2015). |
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Second Amendment to Employment Agreement, by and between David E. Harding and the Company, dated January 9, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2015). |
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Amendment No. 3 to Convertible Promissory Note, dated December 8, 2014 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 10, 2014). |
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Third Amendment to Employment Agreement, by and between Wayne Wetherell and the Company, dated December 14, 2015 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed December 21, 2015). |
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Third Amendment to Employment Agreement, by and between David E. Harding and the Company, dated December 14, 2015 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed December 21, 2015). |
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Eighth Amendment to Employment Agreement, by and between S. James Miller and the Company, dated December 14, 2015 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed December 21, 2015). |
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Amendment No. 4 to Convertible Promissory Note, dated March 8, 2016 (incorporated by reference to the Company's Current Report on Form 8-K, filed March 10, 2017). |
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Convertible Promissory Note, dated March 9, 2016 (incorporated by reference to the Company's Current Report on Form 8-K, filed March 10, 2017). |
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Form of Securities Purchase Agreement, dated September 7, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 9, 2016). |
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Amendment No. 5 to Convertible Promissory Note, dated January 23, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K, filed January 26, 2017). |
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Form of Subscription Agreement for Series G Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 30, 2016). |
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Form of Exchange Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed December 30, 2016). |
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Ninth Amendment to Employment Agreement, by and between James Miller, Jr. and the Company, dated October 20, 2016 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed December 30, 2016). |
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Fourth Amendment to Employment Agreement, by and between Wayne Wetherell and the Company, dated October 20, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed December 30, 2016). |
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Fourth Amendment to Employment Agreement, by and between David E. Harding and the Company, dated October 20, 2016 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, dated December 30, 2016). |
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Amendment No. 2 to Convertible Promissory Note, dated May 10, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed May 12, 2017). |
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Amendment No. 6 to Convertible Promissory Note, dated May 10, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed May 12, 2017). |
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Form of Subscription Agreement for Series A Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 19, 2017). |
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Form of Exchange Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed September 19, 2017). |
Fifth Amendment to Employment Agreement, by and between David E. Harding and the Company, dated February 7, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 13, 2018). |
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Tenth Amendment to Employment Agreement, by and between James Miller, Jr. and the Company, dated February 8, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated February 13, 2018). |
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Form of Securities Purchase Agreement for Series C Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Placement Agency Agreement, by and between the Company and Northland Capital Markets (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Form of Exchange Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed September 13, 2018). |
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Eleventh Amendment to Employment Agreement, by and between James Miller, Jr. and the Company, dated January 31, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 1, 2019). |
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Sixth Amendment to Employment Agreement, by and between David Harding and the Company, dated January 31, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated February 1, 2019). |
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Securities Purchase Agreement by and between the Company and Triton, dated February 20, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 27, 2020. |
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Employment Agreement between the Company and Kristin Taylor, dated April 10, 2020 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed April 15, 2020). |
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Purchase Agreement, by and between Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated April 28, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated April 30, 2020). |
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Registration Rights Agreement, by and between Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated April 28, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated April 30, 2020). |
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Note Payable Agreement by and between Imageware Systems, Inc. and COMERICA BANK, dated April 30, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 11, 2020). |
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Consulting Agreement by and between Imageware Systems, Inc. and S. James Miller, dated November 13, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Debt Exchange Agreement and Satisfaction and Release by and between Imageware Systems, Inc. and S. James Miller, dated November 12, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Debt Exchange Agreement and Satisfaction and Release by and between Imageware Systems, Inc. and Neal Goldman, dated November 12, 2020 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated November 18, 2020). |
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Letter Agreement, dated January 7, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated January 8, 2021). |
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Purchase Agreement, by and between Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated May 17, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 21, 2021). |
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Registration Rights Agreement, by and between Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated May 17, 2021 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated May 21, 2021). |
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Amended and Restated Employment Agreement, by and between Kristin Taylor and the Company, dated June 4, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated June 8, 2021). |
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Amendment to the Imageware Systems, Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.62 to the Company’s Annual Report on Form 10-K, filed with the SEC on April 5, 2021). |
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Loan and Security Agreement, dated December 29, 2021, among Imageware Systems, Inc., and certain funds and separate accounts managed by Nantahala Capital Management, LLC, and the other lenders set forth on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated January 4, 2022). |
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List of Subsidiaries (incorporated by referenced to Exhibit 21.1 to the Company’s Annual Report on Form 10-K filed February 24, 2010). |
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Consent of Independent Registered Public Accounting Firm. |
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23.2 | Consent of Independent Registered Public Accounting Firm. | |
Certification of CEO as Required by Rule 13a-14(a)/15d-14, filed herewith. |
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Certification of CFO as Required by Rule 13a-14(a)/15d-14, filed herewith. |
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Certification of CEO and CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. |
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Inline XBRL Instance Document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101) |
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Registrant
Date: July 19, 2022 |
Imageware Systems, Inc.
/s/ Kristin Taylor |
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Kristin Taylor |
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Chief Executive Officer (Principal Executive Officer) and President |
Date: July 19, 2022 |
/s/ Jeffrey Hotze |
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Corporate Controller (Principal Financial and Accounting Officer) |
In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Date: July 19, 2022 |
/s/ James Demitrieus |
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James Demitrieus |
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Director |
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Date: July 19, 2022 |
/s/ Douglas Morgan |
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Douglas Morgan |
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Director |
Date: July 19, 2022 |
/s/ Lauren C. Anderson |
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Lauren C. Anderson |
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Director |
IMAGEWARE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Imageware Systems, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Imageware Systems, Inc. (the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, changes in shareholders' deficit and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Convertible Preferred Shares
Critical Audit Matter Description:
As described in Note 13 to the consolidated financial statements, the Company has previously issued Series D Convertible Preferred Stock which required the identification and assessment of the embedded features to be recognized separately and recorded at fair value. The Company determined that the embedded conversion option, redemption option and participating dividend feature contained in the Series D Convertible Preferred Stock were required to be recognized separately as derivative liabilities at fair value. The determination of fair value involved using complex valuation methodologies and significant assumptions including the expected volatility of the Company’s common stock and the probability of certain conditions or events occurring.
We identified auditing the Company’s evaluation of the accounting for the embedded features included in the Series D Convertible Preferred Stock, specifically the methods and assumptions used to estimate the fair value of the derivative liability as a critical audit matter.
How We Addressed the Matter in Our Audit:
The primary procedures we performed to address this critical audit matter included:
● | Obtaining and reviewing the underlying Series D Convertible Preferred Stock agreements to understand the terms and conditions, economic substance, and identify embedded features requiring evaluation. | |
● | Obtaining an understanding of management’s process for developing the estimated fair value of the embedded features, including evaluation of the appropriateness of the method selected by the Company, identifying the significant assumptions used to determine the fair value estimate, and the application of those assumptions in the related method. | |
● | Testing the data and significant assumptions used in developing the fair value estimate, including procedures to determine whether the data was complete and accurate and sufficiently precise and whether management’s estimation of the probability of whether certain conditions or events were reasonable as of each valuation date. | |
● | Utilizing a valuation specialist assisting in evaluating the reasonableness of the valuation methodology used, and the underlying assumptions including the forecasted volatility of the Company’s common stock price to its historical volatility. |
/s/
We have served as the Company's auditor since 2021.
April 14, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
Imageware Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Imageware Systems, Inc. (“Company”) as of December 31, 2020, and the related consolidated statements of operations, comprehensive loss, shareholders’ deficit and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not generate sufficient cash flows from operations to maintain operations and, therefore, is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Convertible Preferred Shares
As described further in Note 13 to the financial statements, the Company issued 22,863 shares of Series D Convertible Preferred Stock during the year ended December 31, 2020. The accounting for the transaction was complex, as it required the identification and assessment as to whether embedded features were required to be recognized separately and therefore, also were required to be recorded at fair value. The Company determined that the embedded conversion option, redemption option and participating dividend feature contained in the Series D Convertible Preferred Stock host instrument were required to be recognized separately as derivative liabilities at fair value. The determination of fair value involved using complex valuation methodologies that incorporate significant assumptions which include the expected volatility of the Company’s common stock and the probability of certain conditions or events occurring.
We identified auditing the Company’s evaluation of the accounting for the embedded features included in the Series D Convertible Preferred Stock and the methods and assumptions used to estimate the fair value of the resulting derivative liability as a critical audit matter. The principal consideration for this determination was the degree of judgment involved by management in determining if the host contract was more akin to debt or equity and the development of the assumptions necessary to estimate the fair value of the derivative liability which in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence for the accounting and estimated fair value.
The primary procedures we performed to address this critical audit matter included:
● | Reading the underlying Series D Convertible Preferred Stock agreements to understand the terms and conditions, economic substance, and identify embedded features requiring evaluation. |
● | Testing management’s application of the relevant accounting guidance to assess if the embedded features require accounting as derivative financial instruments and applying our understanding of each. |
● | Obtaining an understanding of management’s process for developing the estimated fair value, including understanding the reasons the method was selected by the Company, identifying the significant assumptions used to determine the fair value estimate, and the application of those assumptions in the related method, and evaluating the appropriateness of each. |
● | Testing the data used in developing the fair value estimate, including procedures to determine whether the data was complete and accurate and sufficiently precise. |
● | Evaluating the significant assumptions used in developing the fair value estimate, including: |
o | Evaluating whether management’s estimation of the probability of whether certain conditions or events were reasonable as of each valuation date. |
o | Comparing the forecasted volatility of the Company’s common stock price to its historical volatility. |
● | Involving the use of valuation professionals with specialized skill and knowledge to assist in the evaluation of management’s process, selected method, and inputs and assumptions used in the method. |
Modification of Preferred Shares
As described in Note 2 and Note 14 to the financial statements, during the year ended December 31, 2020 the Company amended the terms of its Series A and Series A-1 Preferred Stock. In addition, the Company converted the Series C Preferred Stock into shares of Series D Preferred Stock. The accounting for the transactions was complex due to a lack of authoritative guidance on the accounting for preferred stock modifications and extinguishments within US GAAP. Additionally, the transactions required an estimation of the fair value of Series A, Series A-1, and Series D Preferred Stock.
We identified auditing the Company’s accounting for the modification of the Series A and A-1 preferred shares, the conversion of the Series C Preferred Stock into Series D Preferred Stock, and the corresponding fair value estimates of the Series A, Series A-1, and Series D Preferred Stock as a critical audit matter. The principal consideration for this determination was a combination of the lack of authoritative guidance on accounting for the modification or extinguishment of preferred shares and the judgment involved by management in developing the model and assumptions necessary to estimate of the fair value of the Series A, Series A-1, and Series D Preferred Stock. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s accounting conclusions and the reasonableness of the significant assumptions used by the Company to estimate each fair value and the application of those assumptions within the valuation methods.
The primary procedures we performed to address this critical audit matter included:
● | Reading the underlying preferred share agreements to understand the terms, conditions and economic substance of the transactions. |
● | Evaluating whether management’s selection and application of the relevant accounting guidance was reasonable and supportable, applying our understanding of the agreements. |
● | Obtaining an understanding of management’s process for developing the estimated fair value of the Series A, Series A-1, and Series D Preferred Stock, including understanding the reasons the methods were selected by the Company, identifying the significant assumptions used to determine the fair value estimates and the application of those assumptions in the related models, and evaluating the appropriateness of each. |
● | Testing the data used in developing the fair value estimates, including procedures to determine whether the data was complete and accurate and sufficiently precise. |
● | Involving the use of valuation professionals with specialized skill and knowledge to assist in the evaluation of management’s process, selected methods, and inputs and assumptions used in the methods. |
/s/
We served as the Company's auditor from 2011 to 2021.
April 2, 2021
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, | December 31, | |||||
2021 | 2020 | |||||
ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | $ | ||||
Accounts receivable, net of allowance for doubtful accounts of and at December 31, 2021 and 2020, respectively. | ||||||
Inventory, net | ||||||
Other current assets | ||||||
Total Current Assets | ||||||
Property and equipment, net | ||||||
Other assets | ||||||
Operating lease right-of-use assets | ||||||
Intangible assets, net of accumulated amortization | ||||||
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 | ||||||
Note payable, net of current portion | ||||||
Operating lease liabilities, net of current portion | ||||||
Pension obligation | ||||||
Total Liabilities | ||||||
Mezzanine Equity: | ||||||
Series D Convertible Redeemable Preferred Stock, par value, designated shares, shares issued and and shares outstanding at December 31, 2021 and December 31, 2020, respectively; liquidation preference $ and $ at December 31, 2021 and 2020, respectively. | ||||||
Shareholders’ Deficit: | ||||||
Preferred stock, authorized shares: | ||||||
Series A Convertible Redeemable Preferred Stock, par value; designated shares, shares issued and and shares outstanding at December 31, 2021 and 2020, respectively; liquidation preference $ and $ at December 31, 2021 and 2020, respectively. | ||||||
Series A-1 Convertible Redeemable Preferred Stock, par value; designated shares, shares issued and and shares outstanding at December 31, 2021 and 2020, respectively; liquidation preference $ and $ at December 31, 2021 and 2020, respectively. | ||||||
Series B Convertible Redeemable Preferred Stock, $ par value; designated shares, shares issued and shares outstanding at December 31, 2021 and 2020, respectively; liquidation preference $ at December 31, 2021 and 2020, respectively. | ||||||
Common Stock, $ par value, shares authorized; and shares issued at December 31, 2021 and 2020, respectively, and shares and shares outstanding at December 31, 2021 and 2020, 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 consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
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) on change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
(Gain) on extinguishment of debt | ( | ) | — | |||||
Loss on extinguishment of derivative liabilities, net | ||||||||
Other components of net periodic pension expense | ||||||||
Other (income) expense, net | ( | ) | ||||||
Income (loss) before income taxes | ( | ) | ||||||
Income tax expense | ||||||||
Net income (loss) | $ | $ | ( | ) | ||||
Preferred dividends, deemed dividends and accretion | ( | ) | ( | ) | ||||
Net income (loss) available to common shareholders | $ | $ | ( | ) | ||||
Basic income (loss) per common share — see Note 2: | ||||||||
Basic income (loss) per share available to common shareholders | $ | $ | ( | ) | ||||
Basic weighted-average shares outstanding | ||||||||
Diluted income (loss) per common share — see Note 2: | ||||||||
Diluted income (loss) per share available to common shareholders | $ | $ | ( | ) | ||||
Diluted weighted-average shares outstanding |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Net income (loss) | $ | $ | ( | ) | ||||
Other comprehensive income (loss): | ||||||||
Decrease (increase) in additional minimum pension liability | ( | ) | ||||||
Foreign currency translation adjustment | ( | ) | ||||||
Comprehensive income (loss) | $ | $ | ( | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In thousands, except share amounts)
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, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||
Accretion of Preferred Stock discount | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense - options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense - RSUs | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense - warrants | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock for cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock as issuance costs for equity line of credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recission of common shares | - | - | - | ( | ) | (0 | ) | - | 0 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series A preferred stock, /share | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series A-1 preferred stock, /share | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series B preferred stock | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series D Preferred stock, /share | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
Additional minimum pension liability | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) |
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, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||
Accretion of Preferred Stock discount | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock net of financing costs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for financing facility | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Modification of Series A Preferred Stock from issuance of Series A-1 Preferred Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series A Preferred to Common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series A-1 Preferred to Common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series B preferred stock, /share | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Additional minimum pension liability | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series A preferred stock, /share | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series A-1 preferred stock, /share | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series C preferred stock, /share | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on Series D preferred stock, /share | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Deemed dividend from issuance of Series D preferred stock | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||
Cash flows from operating activities | 2021 | 2020 | ||||||
Net income (loss) | $ | $ | ( | ) | ||||
Adjustments to reconcile net income (loss) to net cash used by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Loss on disposal of fixed assets | ||||||||
Loss on abandonment of patents | ||||||||
Loss on extinguishment of derivative liabilities | ||||||||
Deferred stock issuance costs | ||||||||
Stock-based compensation | ||||||||
Stock issued in lieu of cash as compensation for services | ||||||||
Application of rent deposit in lieu of cash payments | ||||||||
Gain on extinguishment of debt | ( | ) | ||||||
Gain from change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
Impairment loss on lease abandonment | ||||||||
Change in assets and liabilities | ||||||||
Accounts receivable | ||||||||
Inventory | ||||||||
Other assets | ( | ) | ||||||
Operating lease right-of-use assets | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ||||||
Accrued expense | ( | ) | ||||||
Deferred revenue | ( | ) | ||||||
Pension obligation | ( | ) | ||||||
Total adjustments | ( | ) | ( | ) | ||||
Net cash used by operating activities | ( | ) | ( | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | ( | ) | ||||||
Net cash used by investing activities | ( | ) | ||||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of common stock, net | ||||||||
Proceeds from issuance of notes payable, net | ||||||||
Repayment of notes payable | ( | ) | ||||||
Proceeds from issuance of preferred stock, net of issuance costs | ||||||||
Dividends paid to preferred stockholders | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
Cash and cash equivalents at beginning of year | ||||||||
Cash and cash equivalents at end of year | $ | $ | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | $ | ||||||
Cash paid for income taxes | $ | $ | ||||||
Summary of non-cash investing and financing activities: | ||||||||
Issuance of common stock for financing facility | $ | $ | ||||||
Stock dividends on Series A Convertible Redeemable Preferred Stock | $ | $ | ||||||
Stock dividends on Series A-1 Convertible Redeemable Preferred Stock | $ | $ | ||||||
Stock dividends on Series C Convertible Redeemable Preferred Stock | $ | $ | ||||||
Stock dividends 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 | $ | $ | ||||||
Conversion of bridge loan into Series D Convertible Redeemable Preferred Stock | $ | $ | ||||||
Conversion of related party notes payable and accrued interest into Series D Convertible Redeemable Preferred Stock | $ | $ | ||||||
Recognition of derivative liabilities on preferred stock issuance | $ | $ | ||||||
Deemed dividend from holder on preferred stock extinguishment and modification | $ | $ | ||||||
Exchange of Series C Convertible Redeemable Preferred Stock for Series D Convertible Redeemable Preferred Stock | $ | $ | ||||||
Accretion of discount on Series C Convertible Redeemable Preferred Stock | $ | $ | ||||||
Accretion of discount on Series D Convertible Redeemable Preferred Stock | $ | $ | ||||||
Reduction in additional minimum pension liability | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
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.
Liquidity, Going Concern and Management’s Plans
At December 31, 2021 and 2020, 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 has instituted several cost cutting measures and has utilized cash proceeds available under the credit facility 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 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 LOC, 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 consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital and generate positive cash flows from operations. However, the Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will be able to obtain additional capital, operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements are prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 105-10, Generally Accepted Accounting Principles, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s wholly-owned subsidiaries are: XImage Corporation, a California Corporation; Imageware Systems ID Group, Inc., a Delaware corporation (formerly Imaging Technology Corporation); I.W. Systems Canada Company, a Nova Scotia unlimited liability company; Imageware Digital Photography Systems, LLC, a Nevada limited liability company (formerly Castleworks LLC); Digital Imaging International GmbH, a company formed under German laws; and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated.
Operating Cycle
Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying consolidated balance sheets, although they will be liquidated in the normal course of contract completion which may take more than one operating cycle.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share-based payments, fair value of Series D Preferred and financial instruments issued with and affected by the Series D Preferred Financing (defined below), fair value of financial instruments with and affected by the Series C Preferred (defined below), fair value of Series A Preferred (defined below), fair value of Series A-1 Preferred (defined below), assumptions used in the application of revenue recognition policies, assumptions used in the derivation of the Company’s incremental borrowing rate used in the computation of the Company’s operating lease liabilities, the determination of impairment of long-lived assets and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
Accounts Receivable
In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.
Inventories
Finished goods inventories are stated at the lower of cost, determined using the average cost method, or net realizable value. See Note 6.
Property, Equipment and Leasehold Improvements
Property and equipment, consisting of furniture and equipment, are stated at cost and are being depreciated on a straight-line basis over the estimated useful lives of the assets, which generally range from
to years. Maintenance and repairs are charged to expense as incurred. Major renewals or improvements are capitalized. When assets are sold or abandoned, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Expenditures for leasehold improvements are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Revenue Recognition
In accordance with ASC 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:
1. | Identify the contract with the customer; |
2. | Identify the performance obligation in the contract; |
3. | Determine the transaction price; |
4. | Allocate the transaction price to the performance obligations in the contract; and |
5. | Recognize revenue when (or as) each performance obligation is satisfied. |
At contract inception, we assess the goods and services promised in a contract with a customer and identify as a performance obligation each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) that is distinct or (ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. We recognize revenue only when we satisfy a performance obligation by transferring a promised good or service to a customer.
Determining the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations requires judgement.
We disclose disaggregation of our customer revenue by classes of similar products and services as follows:
● | Software licensing and royalties; |
● | Computer hardware and identification media; |
● | 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 (“PCS”)
Post contract customer support consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with multiple performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and post-contract customer support on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service and (ii) the percent discount off of list price approach.
Contract costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. At December 31, 2021 and 2020, we had recorded approximately $
Other items
We do not offer rights of return for our products and services in the normal course of business.
Sales tax collected from customers is excluded from revenue.
The following table sets forth our disaggregated revenue for the years ended December 31, 2021 and 2020:
Year Ended December 31, | ||||||||
Net Revenue | 2021 | 2020 | ||||||
(dollars in thousands) | ||||||||
Software and royalties | $ | $ | ||||||
Hardware and consumables | ||||||||
Services | ||||||||
Maintenance | ||||||||
Total net revenue | $ | $ |
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 ASC 842. In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately
A package of practical expedient to not reassess:
● | Whether a contract is or contains a lease |
● | Lease classification |
● | Initial direct costs |
The Company evaluates its operating lease right-of-use assets for impairment. As of December 31, 2021, and through the date of this report, management’s review indicated that there was an impairment of an operating lease right-of-use asset and the Company recorded an impairment loss of approximately $
Goodwill
The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual simplified impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of Accounting Standards Update (“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
Intangible and Long-Lived Assets
Intangible assets are carried at their cost less any accumulated amortization. Any costs incurred to renew or extend the life of an intangible or long-lived asset are reviewed for capitalization. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. As of December 31, 2021, and through the date of this Annual Report, the Company’s management believes there is
Derivative Liabilities
The Company accounts for its derivative instruments under the provisions of ASC Topic 815, Derivatives and Hedging (“ASC 815”). Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contract that qualify as derivative instruments and require bifurcation.
On November 20, 2020, the Company consummated the Series D Financing, resulting in the sale of
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high quality financial institutions and at times during the years ended December 31, 2021 and 2020, exceeded the FDIC insurance limits of $250,000. Sales are typically made on credit and the Company generally does not require collateral. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for doubtful accounts. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are presented net of an allowance for doubtful accounts of approximately $
For the year ended December 31, 2021, three customers accounted for approximately
Stock-Based Compensation
At December 31, 2021, the Company had one stock-based compensation plan for employees and nonemployee directors, which authorizes the granting of various equity-based incentives including stock options, warrants and restricted stock.
The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 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 of the associated employees report and credited to additional paid-in-capital.
ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. Historical volatility factors utilized in the Company’s Black-Scholes computations for options granted during the years ended December 31, 2021 and 2020 ranged from
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 utilized an estimated annualized forfeiture rate ranging from approximately
The Company estimates the fair value of its warrants using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation – Stock Compensation”. The fair value of warrants 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 related to warrants is reported in operating expense based upon the departments to which substantially all of the associated employees report and credited to additional paid-in-capital.
Restricted stock units (“RSUs”) are recorded at the grant date fair value with corresponding compensation expense recorded ratably over the requisite service period.
Stock-based compensation expense related to equity options, warrants and RSUs was approximately $
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes, (“ASC 740”). Current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credits and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC 740 requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. The amount accrued for uncertain tax positions was $
The Company’s uncertain tax position relative to unrecognized tax benefits and any potential increase in these liabilities relates primarily to the allocations of revenue and costs among the Company’s global operations and the impact of tax rulings made during the period affecting its tax positions. The Company’s existing tax positions could result in liabilities for unrecognized tax benefits. The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of December 31, 2021 and 2020 was $
Significant judgment is required in evaluating the Company’s uncertain tax positions and determining the Company’s provision for income taxes. No assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. Revenue and expense of such subsidiaries have been translated into U.S. dollars at weighted-average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments. The Company translates foreign currencies of its German, Canadian and Mexican subsidiaries. The cumulative translation adjustment, which is recorded in accumulated other comprehensive loss, increased approximately $
Comprehensive Income (Loss)
Comprehensive loss consists of net gains and losses affecting shareholders’ deficit that, under generally accepted accounting principles, are excluded from net loss. For the Company, the only items are the cumulative translation adjustment and the additional minimum liability related to the Company’s defined benefit pension plan, recognized pursuant to ASC 715-30, “Compensation - Retirement Benefits - Defined Benefit Plans – Pension”.
Advertising Costs
The Company expenses advertising costs as incurred. The Company incurred approximately $
Income (Loss) Per Share
Basic income (loss) per common share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted income (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 income (loss) per share calculation purposes, the net income (loss) available to common shareholders is adjusted to add back any preferred stock dividends and any interest on convertible debt reflected in the consolidated statement of income (loss) for the respective periods.
The table below presents the computation of basic and diluted income (loss) per share:
(Amounts in thousands except share and per share amounts) | Twelve Months Ended December 31, | |||||||
2021 | 2020 | |||||||
Numerator for basic and diluted income (loss) per share: | ||||||||
Net income (loss) | $ | $ | ( | ) | ||||
Preferred dividends, deemed dividends and accretion | ( | ) | ( | ) | ||||
Net income (loss) available to common shareholders | $ | $ | ( | ) | ||||
Effective of dilutive securities: | ||||||||
Preferred dividends, deemed dividends and accretion | ||||||||
Net income (loss) available to common shareholders after assumed conversions | ( | ) | ||||||
Denominator for basic income (loss) per share – weighted-average shares outstanding | ||||||||
Effect of dilutive securities: | ||||||||
Options | ||||||||
Warrants | ||||||||
Convertible preferred stock | ||||||||
Denominator for diluted income (loss) – adjusted weighted average shares and assumed conversions | ||||||||
Basic income (loss) per share available to common shareholders | $ | $ | ( | ) | ||||
Diluted income (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 December 31, 2021 | Common Share Equivalents at December 31, 2020 | ||||||
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 |
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB ASU No. 2019-12. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Early adoption of the amendments is permitted. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
FASB ASU No. 2020-01. In January 2020, the FASB issued ASU 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”, to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
FASB ASU No. 2020-06. In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
3. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements in accordance with ASC Topic 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 December 31, 2021 | ||||||||||||||||
($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Pension assets | $ | $ | $ | $ | ||||||||||||
Totals | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities | $ | $ | $ | $ | ||||||||||||
Totals | $ | $ | $ | $ |
Fair Value at December 31, 2020 | ||||||||||||||||
($ 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 Company submits and does not hold individual assets per participating employer. The German Federal Financial Supervisory oversees and supervises the insurance contracts.
As of December 31, 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 $
As of December 31, 2020, the Company had embedded features contained in the Series D Preferred host instrument (issued in November 2020) that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $
Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events. Significant assumptions used in the application of fair value methodologies for the Series D Preferred are a risk-free rate of
The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.
The reconciliations of Level 3 pension assets measured at fair value in 2021 and 2020 are presented below:
($ in thousands) | December 31, 2021 | December 31, 2020 | ||||||
Pension assets: | ||||||||
Fair value at beginning of year | $ | $ | ||||||
Return on plan assets | ||||||||
Company contributions and benefits paid, net | ( | ) | ( | ) | ||||
Effect of rate changes | ( | ) | ||||||
Fair value at end of year | $ | $ |
The reconciliations of Level 3 derivative liabilities measured at fair value in 2021 and 2020 are presented below:
($ in thousands) | December 31, 2021 | December 31, 2020 | ||||||
Derivative liabilities | ||||||||
Fair value at beginning of year | $ | $ | ||||||
Derivative liability from issuance of Preferred Series D | ||||||||
Decrease in derivative liability from conversion of Preferred Series D | ( | ) | ||||||
Change in fair value included in earnings | ( | ) | ( | ) | ||||
Fair value at end of year | $ | $ |
4. INTANGIBLE ASSETS AND GOODWILL
The carrying amounts of the Company’s patent intangible assets were $
The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual simplified impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The provisions of ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts, will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only
5. RELATED PARTIES
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
Notes Payable
Factoring Agreement
On February 12, 2020, the Company entered into a factoring agreement (the “Factoring Agreement”) with a former member of the Company’s Board of Directors (the “Factoring Lender”). Under the Factoring Agreement, the Company received $
Convertible Promissory Notes
During the year ended December 31, 2020, the Company received advances from a second former member of the Board of Directors (the “Board Lender”) in the aggregate amount of $
Also during the year ended December 31, 2020, the Company received advances from a third former member of the Board of Directors (the “Second Board Lender”) in the aggregate amount of $
On November 12, 2020, in connection with the Closing of the Series D Financing, the Board Lenders entered into (i) Debt Exchange Agreements (collectively, the “Debt Exchange Agreements”), and (ii) Satisfaction and Release Agreements (collectively, the “Release Agreements”), for the purpose of satisfying certain obligations of the Company arising under (i) the Board Note, and (ii) the Second Board Note. Pursuant to the Debt Exchange Agreements and Release Agreements: (a) one-half of the Board Note Principal plus accrued interest, totaling approximately $
Professional Services Agreement
During the year ended December 31, 2020, the Company entered into professional services agreement with a firm affiliated with a member of the Company’s Board at the time the parties entered into the agreement. The Company made
6. 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.
7. PROPERTY AND EQUIPMENT
Property and equipment at consist of:
($ in thousands) |
December 31, 2021 |
December 31, 2020 |
||||||
Equipment |
$ | $ | ||||||
Leasehold improvements |
||||||||
Furniture |
||||||||
Less accumulated depreciation |
( |
) |
( |
) |
||||
$ | $ |
Total depreciation expense for the years ended December 31, 2021 and 2020 was approximately $
8. ACCRUED EXPENSE
Principal components of accrued expense consist of:
($ in thousands) |
December 31, 2021 |
December 31, 2020 |
||||||
Compensated absences |
$ | $ | ||||||
Wages, payroll taxes and sales commissions |
||||||||
Customer deposits |
||||||||
Interest |
||||||||
Royalties |
||||||||
Pension and employee benefit plans |
||||||||
Accrued financing fees |
||||||||
Professional services |
||||||||
Income and sales taxes |
||||||||
Dividends |
||||||||
Other |
||||||||
$ | $ |
9. NOTES PAYABLE AND LINE OF CREDIT
Bridge Loan
Concurrently with the execution of the Series D Purchase Agreement, the Company and certain Series D Preferred investors executed the Series D Bridge Loan Agreement (the “Bridge Loan”), pursuant to which each Investor signatory thereto agreed to the Bridge Loan, secured by all assets of the Company, in an amount equal to 20% of such Investor’s purchase commitment as set forth in the Purchase Agreement, which Bridge Loan, plus accrued interest, will roll into, and be used to purchase, Series D Preferred at Closing.
Pursuant to the Bridge Loan, the Company received proceeds of $
PPP Loan
On May 4, 2020, the Company entered into a loan agreement (the “PPP Loan”) with Comerica Bank (“Comerica”) under the Paycheck Protection Program (the “PPP”), which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under the PPP, the Company received proceeds of approximately $
At December 31, 2020, the Company has recorded the current portion of the PPP Loan of approximately $
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 $
10. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740. Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities. The Company has established a valuation allowance against its deferred tax asset due to the uncertainty surrounding the realization of such asset.
The significant components of the income tax provision are as follows:
($ in thousands) |
Year Ended December 31, |
|||||||
Current |
2021 |
2020 |
||||||
Federal |
$ | |||||||
State |
||||||||
Foreign |
||||||||
Deferred |
||||||||
Federal |
||||||||
State |
||||||||
Foreign |
||||||||
$ | $ |
The following is a schedule of the deferred tax assets and liabilities as of December 31, 2021 and 2020:
($ in thousands) |
2021 |
2020 |
||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | $ | ||||||
Stock based compensation |
||||||||
Reserves , loans and accrued expense |
||||||||
Gross deferred tax assets |
||||||||
Valuation allowance |
( |
) |
||||||
Gross deferred tax assets after valuation allowance |
||||||||
Deferred tax liability - Intangible and fixed assets |
( |
) |
( |
) |
||||
Net deferred tax liabilities |
$ |
A reconciliation of the provision for income taxes to the amount computed by applying the statutory income tax rates to loss before income taxes is as follows:
2021 |
2020 |
|||||||
Amounts computed at statutory rates |
$ | $ | ( |
) |
||||
State income tax, net of federal benefit |
( |
) |
( |
) |
||||
Expiration of net operating loss carryforwards |
( |
) |
||||||
Equity compensation |
||||||||
Non-deductible interest |
( |
) |
( |
) |
||||
Foreign tax rate differential |
||||||||
Deferred tax adjustments and other |
( |
) |
||||||
Net change in valuation allowance on deferred tax assets |
||||||||
$ | $ |
The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets.
At December 31, 2021, the Company had federal net operating loss carryforwards of approximately $
The Internal Revenue Code (the “Revenue Code”) limits the availability of certain tax credits and net operating losses that arose prior to certain cumulative changes in a corporation’s ownership resulting in a change of control of the Company. The Company’s use of its net operating loss carryforwards and tax credit carryforwards will be significantly limited because the Company believes it underwent “ownership changes”, as defined under Section 382 of the Revenue Code, in several years, though the Company has not performed a study to determine the limitation. The Company continues to disclose the tax effect of the net operating loss carryforwards at their original amount in the table above as the actual limitation has not yet been quantified. The Company has also established a full valuation allowance for substantially all deferred tax assets due to uncertainties surrounding its ability to generate future taxable income to realize these assets. Since substantially all deferred tax assets are fully reserved, future changes in tax benefits will not impact the effective tax rate. Management periodically evaluates the recoverability of the deferred tax assets. If it is determined at some time in the future that it is more likely than not that deferred tax assets will be realized, the valuation allowance would be reduced accordingly at that time.
Tax returns for the years 2017 through 2021 are subject to examination by taxing authorities. The Company and its subsidiaries are subject to U.S. federal and state income tax, and in the normal course of business, its income tax returns are subject to examination by the relevant taxing authorities. As of December 31, 2021, the 2017 –
11. LEASES
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 - Leases. In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, 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. As of December 31, 2021, and through the date of this report, management’s review indicated that there was an impairment of an operating lease right-of-use asset and the Company recorded an impairment loss 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 year ended December 31, 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 of January 1, 2019 as its term is less than 12 months.
At December 31, 2021, future minimum undiscounted lease payments are as follows for the years ending:
($ in thousands) | ||||
2022 | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
Thereafter | ||||
Total | $ | |||
Present Value effect on future minimum undiscounted lease payments at December 31, 2021 | ||||
Lease liability at December 31, 2021 | $ | |||
Less current portion | ||||
Non-current lease liability at December 31, 2021 | $ |
12. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024. The Company may terminate the agreement with or without cause. Subject to the conditions and other limitations set forth in the employment agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the employment agreement) by the Company or by the executive:
Under the terms of the agreement, 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 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.
13. MEZZANINE EQUITY
Series D Convertible Redeemable Preferred Stock
On November 12, 2020, the Company filed the Series D Certificate with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred, and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities, and are to be paid at the rate of
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, (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common Shares issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common Shares will be either (A) covered by an effective registration statement under the Securities Act, which is then available for the immediate resale of such Common Shares by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.
On the fourth anniversary of the Issuance Date, or in the event of the consummation of a Change of Control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.
On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of
On the Closing Date, the Company exchanged approximately $
During the year ended December 31, 2021, the Company issued an aggregate of
Guidance for accounting for freestanding financial instruments that contain characteristics of both liabilities and equity are contained in ASC 480, Distinguishing Liabilities From Equity and Accounting Series Release 268 (“ASR 268”) Redeemable Preferred Stocks. The Company evaluated the provisions of the Series C Preferred and determined that the provisions of the Series C Preferred grant the holders of the Series C Preferred a redemption right whereby the holders of the Series C Preferred may, at any time after the third anniversary of the Series C Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series C Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series C Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control, the holders of Series C Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series C Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.
The Company noted that the Series 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 options, 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 each of the fiscal quarters during the year ended December 31, 2021:
Series D Convertible Redeemable Preferred |
||||
Total shares of Series D Preferred Stock - December 31, 2020 |
||||
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, 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 - June 30, 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 - September 30, 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 – December 31, 2021 |
The carrying value of the Company’s Series D Preferred was approximately $
14. EQUITY
The Company’s Certificate of Incorporation, as amended, authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board of Directors may determine.
On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of
As of December 31, 2021, we had
Our Board of Directors has designated five series of Preferred Stock; (i) Series A Preferred, (ii) Series A-1 Preferred, (iii) Series B Preferred, (iv) Series C Preferred and (v) Series D Preferred. As of December 31, 2021, there were
Series A Convertible Preferred Stock
On September 15, 2017, the Company filed the Certificate of Designations of the Series A Preferred with the Delaware Secretary of State (the “Series A Certificate”), designating
During July 2020, the Company entered into the Series A Exchange Agreement with the Series A Holders, pursuant to which such Series A Holders exchanged
On September 28, 2020, the Company received executed written consents from (i) the requisite holders of the Company’s voting securities, voting on an as-converted basis, and (ii) the requisite holders of Series A Preferred, voting as a separate class, approving the Amended Series A Certificate, which, among other things, provides for (a) the automatic conversion of all Series A Preferred into Common Stock at a rate of
The Company had
During the year ended December 31, 2021 the Company issued
Series A-1 Convertible Preferred Stock
In July 2020, the Company filed the Series A-1 Certificate with the Secretary of State for the State of Delaware - Division of Corporations, designating
Shares of Series A-1 Preferred rank senior to the Company’s Common Stock, pari-passu to the Company's Series A Preferred, and are subordinate and rank junior to Series B Preferred and Series D Preferred.
Each share of Series A-1 Preferred has a liquidation preference equal to the greater of (i) $
Each share of Series A-1 Preferred was convertible into that number of shares of the Company’s Common Stock (“Series A-1 Conversion Shares”) equal to that number of shares of Series A-1 Preferred being converted multiplied by $1,000, divided by $0.65, or the conversion price as defined in the Series A-1 Certificate in effect as of the date the holder delivers to the Company their notice of election to convert. Holders of Series A-1 Preferred may elect to convert shares of Series A-1 Preferred into Common Stock at any time. In addition to the aforementioned holder conversion option, if the volume weighted average closing price (“VWAP”) of the Company’s Common Stock is at least $1.00 per share for 20 consecutive trading days, then the Company has the right to convert one-half of the issued and outstanding shares of Series A-1 Preferred into Common Stock. In the event of a Change of Control, the Company will have the option to redeem all issued and outstanding shares of Series A-1 Preferred for
During July 2020, the Company entered into an Exchange Agreement, Consent and Waiver (“Exchange Agreement”) with certain holders of its Series A Preferred (the “Series A Holders”), pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred.
On September 28, 2020, the Company's holders of Common Stock and Preferred Stock voted to revise the Series A-1 Certificate by amending and restating the Series A-1 Certificate to, without limitation, provide for (i) the voluntary conversion of all outstanding shares of the Company's Series A-1 Preferred into shares of the Company’s Common Stock at a reduced conversion price of $0.20 per share of Common Stock, and (ii) the automatic conversion of all issued and outstanding shares of Series A Preferred and Series A-1 Preferred into shares of Common Stock at a rate of 10% per month, beginning on November 1, 2020, and ending on August 1, 2021, at the reduced conversion price of $0.20 per share of Common Stock.
The Company had
During the year ended December 31, 2021, the Company issued
Series B Convertible Redeemable Preferred Stock
The Company had
Common Stock
The following table summarizes outstanding Common Stock activity for the following periods:
Common Stock | ||||
Shares outstanding at December 31, 2019 | ||||
Shares issued pursuant to payment of stock dividend on Series A Preferred | ||||
Shares issued pursuant to payment of stock dividend on Series A-1 Preferred | ||||
Shares issued as payment of stock dividend on Series C Preferred | ||||
Shares issued pursuant to Series A conversion to Common Stock | ||||
Shares issued pursuant to Series A-1 conversion to Common Stock | ||||
Shares issued to secure financing facility | ||||
Shares issued for cash | ||||
Shares issued pursuant to option exchange and RSU vesting | ||||
Shares outstanding at December 31, 2020 | ||||
Shares issued pursuant to payment of stock dividend on Series A Preferred | ||||
Shares issued pursuant to payment of stock dividend on Series A-1 Preferred | ||||
Shares issued pursuant to Series A conversion to Common Stock | ||||
Shares issued pursuant to Series A-1 conversion to Common Stock | ||||
Shares issued pursuant to Series D to Common Stock | ||||
Shares issued pursuant to warrant exercises | ||||
Recission of shares previously issued at holder request | ( | ) | ||
Shares issued to secure financing facility | ||||
Shares issued for cash | ||||
Shares issued as compensation in lieu of cash | ||||
Shares issued pursuant to option exchange and RSU vesting | ||||
Shares outstanding at December 31, 2021 |
Warrants
As of December 31, 2021, warrants to purchase
The following table summarizes warrant activity for the following periods:
Warrants | Weighted-Average Exercise Price | |||||||
Balance at December 31, 2019 | $ | |||||||
Granted | ||||||||
Expired / Canceled | ( | ) | $ | |||||
Exercised | ||||||||
Balance at December 31, 2020 | ||||||||
Granted | ||||||||
Expired / Canceled | ( | ) | ||||||
Exercised | ( | ) | ||||||
Balance at December 31, 2021 |
In April 2021, the Company created an advisory board to the Board of Directors comprised of 3 individuals. As compensation for advisory board services, the Company granted an aggregate of
During the year ended December 31, 2021,
15. STOCK-BASED COMPENSATION
Stock Options
As of December 31, 2020, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”). Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Plan and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan. As of December 31, 2021, there are approximately
The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of 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. Historical volatility factors utilized in the Company’s Black-Scholes computations for options granted during the years ended December 31, 2021 and 2020 ranged from
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 utilized an estimated annualized forfeiture rate ranging from approximately
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, 2019 | $ | |||||||||||
Granted | $ | |||||||||||
Expired/Cancelled | ( | ) | $ | |||||||||
Exercised | ||||||||||||
Balance at December 31, 2020 | $ | |||||||||||
Granted | ||||||||||||
Expired/Cancelled | ( | ) | ||||||||||
Exercised | ||||||||||||
Balance at December 31, 2021 |
During the year ended December 31, 2021, the Company issued an aggregate
During the year ended December 31, 2021, the Company entered into exchange agreements with certain employees, officers, Board of Director members and non-employee contractors pursuant to which such persons exchanged
In addition to the aggregate
During the years ended December 31, 2021 and 2020, there were
At December 31, 2021, a total of
The weighted-average grant-date fair value per share of options granted to employees during the years ended December 31, 2021 and 2020 was $
The intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was
The intrinsic value of options exercisable at December 31, 2021 and 2020 was The intrinsic value of options that vested during 2021 was The aggregate intrinsic value for all options outstanding as of December 31, 2021 and 2020 was
The Company periodically issues RSUs to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.
A summary of the activity related to RSUs is as follows:
RSUs | Weighted-Average Issuance Price | |||||||
Balance at December 31, 2020 | $ | |||||||
Granted | ||||||||
Expired/Cancelled | ( | ) | ||||||
Vested | ( | ) | ||||||
Balance at December 31, 2021 |
During the year ended December 31, 2021, the Company granted an aggregate of
The Company determined that the exchange agreements are a modification of a share-based payment award under ASC 718. Accordingly, the Company computed any incremental compensation expense as a component of the total compensation cost to be measured at the modification date. Aggregate incremental compensation expense measured from the modifications of stock options was approximately $
At January 1, 2021 the Company had
Stock-based Compensation
Stock-based compensation related to warrants, equity options and RSUs has been classified as follows in the accompanying consolidated statements of operations (in thousands):
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cost of revenue | $ | $ | ||||||
General and administrative | ||||||||
Sales and marketing | ||||||||
Research and development | ||||||||
Total | $ | $ |
Common Stock Reserved for Future Issuance
The following table summarizes the Common Stock reserved for future issuance as of December 31, 2021:
Common Stock | ||||
Convertible preferred stock – Series B and Series D | ||||
Stock options outstanding | ||||
Restricted Stock Units | ||||
Warrants outstanding | ||||
Authorized for future grant under stock option plans |
16. EMPLOYEE BENEFIT PLAN
During 1995, the Company adopted a defined contribution 401(k) retirement plan (the “Plan”). All U.S. based employees aged 21 years and older are eligible to become participants after the completion of 60 day's employment. The Plan provides for annual contributions by the Company of
Employees are fully vested in their share of the Company’s contributions after the completion of five years of service. In 2019, the Company authorized contributions of approximately $
17. PENSION PLAN
One of the Company’s dormant foreign subsidiaries maintains a defined benefit pension plan that provides benefits based on length of service and final average earnings. The following table sets forth the benefit obligation, fair value of plan assets, and the funded status of the Company’s plan; amounts recognized in the Company’s consolidated financial statements; and the assumptions used in determining the actuarial present value of the benefit obligations as of December 31:
($ in thousands) |
2021 |
2020 |
||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | $ | ||||||
Service cost |
||||||||
Interest cost |
||||||||
Actuarial (gain) loss |
( |
) |
||||||
Effect of exchange rate changes |
( |
) |
||||||
Effect of curtailment |
||||||||
Benefits paid |
( |
) |
( |
) |
||||
Benefit obligation at end of year |
$ | $ | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | $ | ||||||
Actual return of plan assets |
||||||||
Company contributions |
||||||||
Benefits paid |
( |
) |
( |
) |
||||
Effect of exchange rate changes |
( |
) |
||||||
Fair value of plan assets at end of year |
$ | $ | ||||||
Funded status |
$ | ( |
) |
$ | ( |
) |
||
Unrecognized actuarial loss (gain) |
||||||||
Unrecognized prior service (benefit) cost |
||||||||
Additional minimum liability |
( |
) |
( |
) |
||||
Unrecognized transition (asset) liability |
||||||||
Net amount recognized |
$ | ( |
) |
$ | ( |
) |
||
Components of net periodic benefit cost are as follows: |
||||||||
Service cost |
$ | $ | ||||||
Interest cost on projected benefit obligations |
||||||||
Expected return on plan assets |
( |
) |
( |
) |
||||
Amortization of prior service costs |
||||||||
Amortization of actuarial loss |
||||||||
Net periodic benefit costs |
$ | $ |
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, were |
||||||||
Discount rate |
% |
% |
||||||
Expected return on plan assets |
% |
% |
||||||
Rate of pension increases |
% |
% |
||||||
Rate of compensation increase |
N/A | N/A |
The following discloses information about the Company’s defined benefit pension plan that had an accumulated benefit obligation in excess of plan assets as of December 31, |
||||||||
Projected benefit obligation |
$ | $ | ||||||
Accumulated benefit obligation |
$ | $ | ||||||
Fair value of plan assets |
$ | $ |
As of December 31, 2021, the following benefit payments are expected to be paid as follows (in thousands):
2022 |
$ | ||||||
2023 |
$ | ||||||
2024 |
$ | ||||||
2025 |
$ | ||||||
2026 |
$ | ||||||
2027 | — | 2031 | $ |
The Company made contributions to the plan of approximately $
In accordance with the Company’s adoption of ASU 2017-07, the components of net periodic pension expense is shown in the Company’s Consolidated Statement of Operations for the years ended December 31, 2021 and 2020 under “Other components of net periodic pension expense”.
The measurement date used to determine the benefit information of the plan was January 1, 2022.
18. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is the combination of the additional minimum liability related to the Company’s defined benefit pension plan, recognized pursuant to ASC 715-30, “Compensation - Retirement Benefits - Defined Benefit Plans – Pension” and the accumulated gains or losses from foreign currency translation adjustments. The Company translates foreign currencies of its German, Canadian and Mexican subsidiaries into U.S. dollars using the period end exchange rate. Revenue and expense were translated using the weighted-average exchange rates for the reporting period. All items are shown net of tax.
As of December 31, 2021 and 2020, the components of accumulated other comprehensive loss were as follows:
($ in thousands) |
2021 |
2020 |
||||||
Additional minimum pension liability |
$ | ( |
) |
$ | ( |
) |
||
Foreign currency translation adjustment |
( |
) |
( |
) |
||||
Ending balance |
$ | ( |
) |
$ | ( |
) |
19. SUBSEQUENT EVENTS
During the period from January 1, 2022 through April 14, 2022, the Company issued
During the period from January 1, 2022 through April 14, 2022, the Company borrowed an additional $