UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
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For the
fiscal year ended December 31, 2007.
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
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For the transition
period to .
Commission File Number
IMAGEWARE SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
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33-0224167
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(State or Other
Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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10883
Thornmint Road, San Diego, California
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92127
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(Address of
Principal Executive Offices)
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(Zip Code)
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(Registrants telephone number, including area code):
(858) 673-8600
Securities registered pursuant to Section 12(b) of the
Exchange Act:
Title of Each Class
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Name of Each Exchange
on Which Registered
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Common Stock, $0.01 par value
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American Stock Exchange
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Warrants to Purchase Common Stock
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American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act
. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act.
Yes
o
No
x
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.
Yes
x
No
o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer,
and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated
filer
x
(Do not check if a
smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the
registrant, based on the closing sales price of the issuers Common Stock on June 30,
2007, as reported on the American Stock Exchange was approximately
$27,985,450. Excluded from this
computation were 557,118 shares of Common Stock held by all current executive officers
and directors and 1,539,901 shares held by each person who is known by the
registrant to own 5% or more of the outstanding Common Stock. Share ownership information of certain
persons known by the issuer to own greater than 5% of the outstanding Common
Stock for purposes of the preceding calculation is based solely on information
on Schedule 13G filed with the Commission and is as of June 30, 2006.
Exclusion of shares held by any person or entity should not be construed to
indicate that such person or entity possesses the power, directly or
indirectly, to direct or cause the direction of the management or the policies
of the Registrant.
The number of shares of
the registrants common stock outstanding as of April 4, 2008 was
18,075,639.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the Registrants definitive proxy statement for the 2008 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A are incorporated by reference into Part III of this Form 10-K
to the extent stated herein.
IMAGEWARE SYSTEMS, INC.
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
2
Forward-Looking Statements
The
statements contained in this Annual Report of Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act),
including statements regarding our expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements include, without
limitation, statements regarding the extent and timing of future revenues and
expenses and customer demand, statements regarding deployment of our products,
and statements regarding reliance on third parties. All forward-looking
statements included in this report are based on information available to us as
of the date hereof and we assume no obligation to update any forward-looking
statements. Forward-looking statements involve known or unknown risks,
uncertainties and other factors, which may cause our actual results,
performance or achievements, or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Factors that could cause or contribute to such
differences include but are not limited to: our need for additional capital,
fluctuations in our operating results, continued new product introductions,
market acceptance of our new product introductions, new product introductions
by competitors, technological changes in the digital imaging industry,
uncertainties regarding intellectual property rights and the other factors
referred to herein including, but not limited to, those items discussed under Risk
Factors below.
Trademarks
Capture
the Image that Captures the Crook, C.R.I.M.E.S., FACE ID, ImageWare, Suspect
ID, and Vehicle ID, EPIBuilder, and EPISuite are registered trademarks of
the Company. Biometric Engine, WinBadge Aviation, and IWS Biometric Engine are
trademarks of the Company.
All
other trademarks, service marks and/or trade names appearing in this document
are the property of their respective holders.
PART I
Item 1. Business.
OVERVIEW
ImageWare Systems, Inc.
is a leader in the emerging market for software-based identity management
solutions, providing biometric, secure credential, law enforcement and
enterprise authorization. Our flagship product is the IWS Biometric
Engine. Scalable for small city business or worldwide deployment, our
biometric engine is a multi-biometric platform that is hardware and algorithm
independent, enabling the enrollment and management of unlimited population
sizes. Our identification products are used to manage and issue secure
credentials, including national IDs, passports, driver licenses, smart cards
and access control credentials. Our law enforcement products provide law enforcement
with integrated mug shot, fingerprint LiveScan and investigative capabilities.
We also provide comprehensive authentication security software, as well as
real-time voice recognition, multilingual speech translation and voice
analytics technologies. Biometric technology is now an integral part of
all markets we address, and all of our products are integrated into the
Biometric Engine Platform. Elements of the IWS Biometric Engine can be
used as investigative tools for law enforcement utilizing multiple biometrics
and forensic data elements, and to enhance security and authenticity of public
and private sector credentials.
Our biometric technology
is a core software component of an organizations security infrastructure and
includes a multi-biometric identity management solution for enrolling,
managing, identifying and verifying the identities of people by the physical
characteristics of the human body. We develop, sell and support various
identity management capabilities within government (federal, state and local),
law enforcement, commercial enterprises, and transportation and aviation
markets for identification and verification purposes. Our IWS Biometric Engine
is a biometric identity management platform for multi-biometric enrollment,
management and authentication, managing population databases of virtually
unlimited sizes. It is also offered as a Software Development Kit (SDK) based
search engine, enabling developers and system integrators to implement a
biometric solution or integrate biometric capabilities into existing
applications without having to derive biometric functionality from pre-existing
applications. The IWS Biometric Engine combined with our secure
credential platform, IWS EPI Builder, provides a comprehensive, integrated
biometric and secure credential solution that can be leveraged for high-end
applications such as passports, driver licenses, national IDs, and other secure
documents. It can also be utilized within our law enforcement systems to
incorporate any number of various multiple biometrics into one system.
3
We recently added next
generation voice recognition, multilingual speech translation and voice
analytics capabilities to our suite of biometric identity management solutions,
enabling users to facilitate and improve communication across major language
groups globally. The ImageWare Mediator products are offered standalone or
integrated with our Biometric Engine platform providing an advanced
multilingual communications capability. Government, intelligence, defense,
public safety and border control customers are able to realize language
translation and voice recognition capabilities whereby an English-speaking user
can understand and be understood in numerous languages including Spanish,
German, French, Korean, Arabic and Polish, among others. ImageWare Mediator
products support speech to speech translation, multilingual collaboration,
conversational environments, which are represented for both voice and text and
include biometric functionality for speaker identification and voice analytics.
Our law enforcement
solutions enable agencies to quickly capture, archive, search, retrieve, and
share digital images, fingerprints and criminal history records on a
stand-alone, networked, wireless or Web-based platform. We develop, sell and
support a suite of modular software products used by law enforcement and public
safety agencies to create and manage criminal history records and to
investigate crime. Our IWS Law Enforcement solution consists of six software
modules: a Capture and Investigative module, which provides a criminal booking
system and related database; a Facial Recognition module, which uses biometric
facial recognition to identify suspects; a Suspect ID module, which facilitates
the creation of full-color, photo-realistic suspect composites; a wireless
module, which provides access to centrally stored records over the Internet in
a connected or wireless fashion; a PDA add-on module, which enables access to
centrally stored records while in the field on a handheld Pocket PC compatible
device combined with central repository services which allows for inter-agency
data sharing on a local, regional, and/or national level; and a LiveScan
module, which incorporates LiveScan capabilities into IWS Law Enforcement
providing integrated fingerprint and palm print biometric management for civil
and law enforcement use.
Our Secure Credential ID
solutions empower customers to create secure and smart digital identification
documents with complete ID systems. We develop, sell and support software and
design systems which utilize digital imaging in the production of photo
identification cards and credentials and identification systems. Our products
in this market consist of IWS EPI Suite, IWS EPI Builder (SDK), Identifier for
Windows and ID Card Maker. These products allow for the production of
digital identification cards and related databases and records and can be used
by, among others, schools, airports, hospitals, corporations or governments.
We have recently added the ability to incorporate multiple biometrics into the
ID systems we offer with the addition of our new IWS Biometric Engine to our
product line.
Our enterprise
authentication software includes the IWS Desktop Security product which is a
comprehensive authentication management infrastructure solution providing added
layers of security to workstations, networks and systems through advanced
encryption and authentication technologies. IWS Desktop Security is optimized
to enhance network security and usability, and uses multi-factor authentication
methods to protect access, verify identity and help secure the computing
environment without sacrificing ease-of-use features such as quick login.
Additionally, IWS Desktop Security provides an easy integration with various
smart card-based credentials including the Common Access Card (CAC), Homeland
Security Presidential Directive 12 (HSPD-12) Personal Identity Verification
(PIV) credential, and Transportation Worker Identification Credential (TWIC)
with an organizations access control process. IWS Desktop Security provides
the crucial end-point component of a Logical Access Control System (LACS), and
when combined with a Physical Access Control System (PACS), organizations
benefit from a complete door to desktop access control and security model.
CORPORATE
HISTORY
ImageWare
Systems, Inc., formerly known as ImageWare Software, Inc., was
incorporated in the State of California on February 6, 1987. From the inception until 1995, we designed and
sold software products for the photo entertainment industry. In late 1994, we sold our photo entertainment
line of products, and utilized our core technologies to develop and sell
products to law enforcement agencies. In
1994 our company was sold to a new ownership and we embarked upon the design
and creation of digital imaging based software products for law
enforcement. From 1995 to early 2000 our
business consisted only of our law enforcement products. We completed our initial public offering in April 2000. At that time we recognized that our core
imaging technology and industry expertise positioned us to enter other and
larger markets, and we targeted the digital identification market for
diversification. It was a fragmented
market which offered us the opportunity to establish market share through an
acquisition program. On August 22,
2000, we acquired Imaging Technology Corporation (ITC), a privately held
developer of software and software systems for digital identification
documents. On September 29, 2000,
we purchased Goddard Technology Corporation (Goddard), a privately held
developer of software identification badging systems. On March 30, 2001,
we purchased substantially all the assets of G & A Imaging Ltd.
(G & A), a privately
4
held developer of
software and software systems for digital identification documents. These three acquisitions, along with the
internal development of digital ID solutions for some of our law enforcement
customers, firmly placed us in the market for digital ID software. In 2001, ID software and systems became our
largest product segment. On December 19,
2007, we added next generation voice recognition, multilingual speech
translation and voice analytics capabilities to our suite of biometric identity
management solutions, enabling users to facilitate and improve communication
across major language groups globally through our acquisition of Sol Logic, Inc.,
a privately held developer of voice recognition technologies.
RECENT
EVENTS
Significant developments
around national and homeland security, specifically identity management, are
direct results of the terrorist attacks of September 11, 2001,
demonstrating the risks with insufficient credentialing and access control
systems. Although the U.S. Government has taken strong initiatives to help
combat terrorism and other identity related challenges, the industry is still
in flux with inadequate equipment and appropriate funding causing a delay in
deployments. The growing rate of identity theft is also pervasive and becoming
of great concern. These developments have impacted business.
The law enforcement and
secure credential markets, although seen as markets which would ultimately
benefit from increased spending on security, were negatively impacted within
the last five years by the tendency for the delay in purchasing decisions,
awaiting guidance and funding from the government, and the use of available
funding for payment of overtime expenditures incurred due to heightened
security alerts. As we recognized these impacts, we continued to reduce cost
and consolidate our businesses while expanding our products to meet market
demands. We have restructured our company to be more cost effective and
efficient by consolidating resources and moving various operations.
As a result of our
strategy to address international markets for large identity management
projects, we sold our Singapore subsidiary in 2005 and closed our German sales
office in 2006. We now address this market through local and U.S. based
strategic partners and systems integrators with local sales and service
presence, and manage international channel partners for our boxed ID Software
from our U.S. offices.
These international
offices had historically emphasized the resale of third party merchandise
(hardware and media) which generated lower gross margins than software and
required significant fixed costs for sales, service and support. Although these
measures have resulted in lower top line revenue in the short term, management
believes that we will be able to replace the lost revenue with higher margin
software sales while continuing to enjoy the lower fixed costs.
In furtherance of our
strategy to more efficiently address both domestic and international markets
for large-scale identity management projects, we completed the sale of our
entire Professional Digital Photography (PDI) product line in the fourth
quarter of 2006. We sold this component because it had incurred
significant operating losses and had lost significant market share. The
assets sold consisted primarily of a suite of software and related inventory
including source, copyrights, trademarks, documentation and client base.
In the fourth quarter of
2007, we acquired the assets of Sol Logic, Inc., a leading provider of
voice recognition and multilingual translation technology. This acquisition was
in line with our strategic plan to expand our biometric product portfolio and
enable us to enter new markets including military and defense.
INDUSTRY
BACKGROUND
Biometrics and Secure Credential Markets
We
believe the biometric identity management market will continue to grow as the
role of biometrics becomes more widely adopted for enhancing security and
complying with new government regulations such as HSPD-12. Our biometric and
secure credentialing solutions are meeting the demands for true multi-modal
biometric identity management systems, as well as providing scalability to
support evolving functionality.
As a result of HSPD-12,
government organizations are required to adopt new processes for verifying the
identity of employees and contractors as well as controlling access to secure
facilities and information systems. In response to the strict requirements set
forth by the Federal government, ImageWare enhanced its IWS Biometric Engine
and secure credentialing product suite by adding card management and card
printing modules which enable the offering of end-to-end support for PIV-I and
PIV-II business processes, technical requirements, as well as the ability to
partner with leading physical and logical access control vendors for logistics
and deployment considerations.
5
Our
technology also has applications in markets related to secure credentials,
identification and access control (physical and logical) in the public and
private sectors. Organizations concerned
with security can use our technology to create secure smart identification
cards that can be instantly checked against a database of facial images or
other biometrics to prevent unauthorized access to secure areas. We believe
potential customers in these markets include, among others, large corporations,
border crossings (land, air and sea), airports, hospitals, universities and government
agencies.
Identification
systems have historically been sold based upon the cost-savings digital systems
offer over traditional photo-based systems. We believe that the ability to
easily capture images and data in a digital database and to enable immediate
and widespread access to that database for remote identification/verification
will be a functionality that customers will require in the future and that such
functionality will be one of the primary drivers for future growth within this
market. We are able to provide field-proven identification products with high
quality reference accounts across the board in terms of size and complexity of
systems and user requirements. When combined with our proven biometric and Web
capabilities, we believe we can provide a leading product offering into the
biometrically-enabled secure credential market.
Law Enforcement and Public Safety Markets
The
United States law enforcement and public safety markets are composed of
federal, state and local law enforcement agencies. Our target customers include local police
departments, sheriffs departments and offices, primary state law enforcement
agencies, prisons, special police agencies, county constable offices, and
federal agencies such as the FBI and the DEA.
We are also targeting agencies in foreign countries for our biometric
and law enforcement solutions.
We
believe the September 11, 2001, terrorist attacks and subsequent creation
of the Department of Homeland Security has accelerated the adoption of digital
identification systems. Law enforcement customers are demanding end-to-end
solutions that incorporate robust features and functionalities such as
biometric and secure credentialing capabilities, as well as instant access to
centrally maintained records for real time verification of identity and
privileges.
The
U.S. federal government has promoted the development and use of nationwide
criminal history record databases called the Interstate Identification Index (III)
and the National Crime Information Center (NCIC), each consisting of on-line
national and regional databases dedicated to serving criminal justice agencies.
The Interstate Identification Index is maintained by the FBI and includes
persons arrested for felonies or serious misdemeanors. The FBI has indicated
that this index will accept photographs in the future. We anticipate that the
inclusion of digital images in these databases will increase the value of
digital booking systems and the demand for facial recognition applications.
Since the September 11, 2001, terrorist attack on the U.S. there has been
significant discussion at the federal and state levels of government regarding
the need for federal, state and local agencies to share information. We
anticipate that the movement toward sharing of information will accelerate the
adoption of systems such as ImageWares by law enforcement agencies at all
levels.
PRODUCTS
AND SERVICES
Our identity management
solutions are primarily focused around biometrics, secure credentials and
multilingual translation providing complete, cross-functional and interoperable
systems. Our biometric and secure credentialing products provide complete and
interoperable solutions with features and functions required throughout the
entire identity management life-cycle, enabling users the flexibility to make
use of any desired options, such as identity proofing and enrollment, card
issuance, maintenance and access control. Our solutions offer a significant
benefit that one vendors solution is used throughout the various stages, from
establishing an applicants verified identity, to issuance of smart card based
credentials, to the usage and integration to physical and logical access
control systems. Our multilingual translation products fulfills the need of
translators, interpretation experts and linguists. These solutions address
global collaboration through the use if next generation multilingual
communications that provide integrated multilingual and biometric content
services and integrated capabilities.
These solutions improve
global communication, the integrity and authenticity of access control to
facilities and information systems, as well as enhances security, increase
efficiency, reduce identity fraud, and protect personal privacy.
6
We
categorize our identity management products and services into three basic
markets: (1) Biometrics, (2) Secure Credential, and (3) Law
Enforcement and Public Safety. Our biometric product line consists of the
following:
Biometrics
IWS BIOMETRIC
ENGINE
This is a biometric
identity management platform for multi-biometric enrollment, management and
authentication, managing population databases of unlimited sizes without regard
to hardware or algorithm. Searches can be
1:1 (verification), 1:N (identification), X:N (investigative) and N:N (database
integrity). IWS Biometric Engine is technology and biometric agnostic, enabling
the use of biometric devices and algorithms from any vendor, and the support of
the following biometric types: finger, face, iris, hand geometry, palm,
signature, DNA, voice, 3D face and retina. IWS Biometric Engine is a
second-generation solution from ImageWare Systems that is based on field-proven
ImageWare technology solutions that have been used to manage millions of
biometric records since 1997 and is ideal for a variety of applications
including: criminal booking, background checks (civil and criminal), watch
list, visa/passport and border control (air, land and sea), physical and
logical access control, and other highly-secure identity management
environments.
IWS
Biometric Engine is scalable, and biometric images and templates can be
enrolled either live or offline.
Because it stores the enrolled images, a new algorithm can be quickly
converted to support new or alternate algorithms and capture devices. The
Biometric Engine is built to be hardware agnostic, and currently supports
over 107 hardware capture devices and over 93 biometric algorithms.
In 2006, ImageWare launched an expanded suite of
application solutions based on the award-winning IWS Biometric Engine. The IWS
Biometric Engine has previously been available as a Software Development Kit
(SDK), as well as a platform for custom configurations to meet specific
customer requirements. The added suite of products provide government, law
enforcement, border management and enterprise businesses, a wide variety of
application-specific solutions that address specific government mandates and
technology standards. It also provides the ability to integrate into existing
legacy systems and expand based upon specific customer requirements. This
enables users to integrate a complete solution or components as needed. The new
application suite of products include complete packaged solutions for:
·
HSPD-12
Personal Identity Verification (PIV)
·
Border Management
·
ePassport & eVisa
·
Applicant Identity Vetting
·
Mobile Acquisition
·
Disaster Management
·
Physical Access Control
·
Single-Sign-On and Logical Access
Control
IWS PIV MANAGEMENT APPLICATION
ImageWare provides a set
of Enterprise Server products within our complete PIV solution, and these
software products supply server-based features and functions, while the use
case for PIV requires client-based presentation of PIV data and workflow. The IWS PIV Management Application supplies
the web-based graphical user interface that presents the user or client
interface to the various server functions.
Furthermore, since the server-based applications perform specific functions
for specific phases of the PIV life-cycle, these server-based applications need
to be bound together with additional workflow processes. Again, the IWS PIV Management Application
meets this need with software modules that interface and interconnect the
server-based applications.
7
IWS PIV MIDDLEWARE
The IWS PIV Middleware
product, which is NIST certified and listed on the GSA approved product list,
is a library of functions that connect a card reader & PIV card on the
hardware side with a software application. The library implements the specified
PIV Middleware API functions that support interoperability of PIV Cards. This ImageWare software has been developed in
conformance with the FIPS-201 specification, and the software has been certified
by the NIST Personal Identification Verification Program (NPIVP) Validation
Authority as being compliant.
IWS BACKGROUND SERVER
The IWS Background Server is a software application
designed specifically for government and law enforcement organizations to
support the first stage of biometric identity management functions such as
identity proofing and vetting. IWS Background Check Server automatically
processes the submission of an applicants demographic and biographic data to
investigative bureaus for background checks prior to issuing a credential.
IWS DESKTOP SECURITY
IWS Desktop Security is a
highly flexible, scalable and modular authentication management platform that
is optimized to enhance network security and usability. This architecture
provides an additional layer of security to workstations, networks and systems
through advanced encryption and authentication technologies. Biometric
technologies (face, fingerprint, iris, voice or signature), can be seamlessly
coupled with TPM chips to further enhance corporate security. USB tokens, smart
cards and RFID technologies can also be readily integrated.
Additional
features include:
·
Support for
multiple authentication tools including Public Key Infrastructure (PK1) within
a uniformed platform and privilege
Management Infrastructure (PMI) technology to provide more advanced access
control services and assure authentication and data integrity.
·
Integration with
IWS Biometric Engine for searching and match capabilities (1:1, 1:N and X:N)
·
Integration with
IWS EPI Builder for the production and management of secure Credentials
·
Support for both
BioAPI and BAPI standards
·
Supports a
single sign-on feature that securely manages Internet Explorer and Windows
application ID and password information.
·
Supports file
and folder encryption features.
·
Supports various
operating systems, including Microsoft Windows 2000, Windows XP, and And
Windows Server 2003.
IWS
BIOMETRIC QUALITY ASSESSMENT & ENHANCEMENT
(IWS
Biometric IQA&E)
The IWS Biometric
IQA&E is a biometric image enhancement and assessment solution that assists
government organizations with the ability to evaluate and enrich millions of
biometric images automatically, saving time and costs associated with biometric
enrollment while maintaining image and database integrity.
The IWS Biometric IQA&E improves the accuracy and
effectiveness of biometric template enrollments. The software may be used
standalone or in conjunction with the IWS Biometric Engine. IWS Biometric
IQA&E provides automated image quality assessment with respect to relevant
image quality standards from organizations such as International Civil Aviation
Organization (ICAO) National Institute of Standards and Technology (NIST),
International Organization for Standards (ISO) and American Association of
Motor Vehicle Association (AAMVA). IWS Biometric IQA&E also enables
organizations to conduct multi-dimensional facial recognition which further
enhances accuracy for numerous applications including driver licenses,
passports and watch lists.
8
IWS Biometric IQA&E automatically provides
real-time biometric image quality analysis and feedback to improve the overall
effectiveness of biometric images thus increasing the biometric verification
performance, and maintaining database and image data integrity. IWS Biometric
IQA&E provides a complete platform that includes an image enhancement
library for biometric types including face, finger and iris.
IWS
MEDIATOR
The IWS Mediator solution
is a suite of products that provide next generation integrated voice
recognition, multilingual speech translation, voice analysis and biometric
capabilities for government, defense, public safety, border control, and
corporate enterprises. These products enable users to facilitate and improve
communication across major language groups globally, while accurately interpret
ting to and from a foreign language including special terminology and nuances.
In addition, the Mediator utilizes a core middleware component, Unity, to
provide users with the ease to collaborate and identify throughout diverse and
disparate mediums, as well as enable autonomous use through mobile
technologies. It supports
speech-to-speech translation, multilingual collaboration, conversational
environments (both voice and text) and include biometric functionality for
speaker identification and voice analysis
.
Because it is scalable, and
hardware and software agnostic, users
have the freedom to select from best-of-breed applications to ensure efficient
integration, and work with various environments to provide focused and
mission-critical capabilities.
IWS
COLLABID
The IWS CollabID product
is self-contained, multilingual translation, collaborative and multimodal
biometrics solution providing a means for users to communicate with subjects in
their own language while allowing for subject verification and identification
through the use of multimodal biometrics including face, iris, fingerprint, as
well as support for the Common Access Card (CAC) and Personal Identity
Verification (PIV) credentials. IWS CollabID performs in various environments
and addresses mission-critical operations such as two-speech, speech-to-speech
(rules and statistical), voice analysis, as well as multilingual chat,
distributed speech for MeshNet and document exploitation.
Furthermore, CollabID
combines ImageWares advanced technologies in the areas of integrated
multilingual translation, voice analysis and biometric content services and
capabilities. These integrated capabilities offer immediate increase in global
communication while strengthening tactical missions. It also addresses the
unique requirements for successful gisting, the art of conveying intent or
meaning, which requires sophistication of language databases and the efficiency
between the integrated technology and trainer. Additional features include:
·
Ability
to provide critical content indicators, alerts and warnings for users and
command distribution
·
Ability
to upload all collected content and download updates and additional information
to existing databases as required when connected
·
Support
for multiple formats for stored and reported content
·
Assurance
that all content is collected and stored locally
Secure Credential
Our
Identification and Secure Credential Products consist of the following
products:
IWS CARD
MANAGEMENT
The IWS Card Management
System (CMS) is a comprehensive solution to support and manage the issuance of
smart cards complete with the following capabilities:
·
Biometric
enrollment and identity proofing with Smart Card encoding of biometrics
·
Flexible
models of central or distributed issuance of credentials
·
Customizable card
life-cycle workflow managed by the CMS
Integration
of the CMS data with other enterprise solutions, such as physical access
control and logical access control (i.e. Single-Sign-On SSO)
9
IWS EPI
SUITE
This
is an ID software solution for producing, issuing, and managing secure
credentials and personal identification cards. Users can efficiently manage
large amounts of data, images and card designs, as well as track and issue
multiple cards per person; automatically populate multiple cards, eliminating
redundant data entry, IWS EPI Suite was designed to integrate with our
customers existing security and computing infrastructure. We believe that this
compatibility may be an appealing feature to corporations, government agencies,
transportation departments, school boards, and other public institutions.
IWS EPI BUILDER
This is a software
developers kit and a leading secure credential component of identity
management and security solutions, providing all aspects of ID functionality
from image and biometric capture to the enrollment, issuance and management of
secure documents. It contains components which developers or systems
integrators can use to support and produce secure credentials including
national IDs, passports, International Civil Aviation Office (ICAO)-compliant
travel documents, smart cards and driver licenses. IWS EPI Builder enables
organizations to develop custom identification solutions or incorporate
sophisticated identification capabilities into existing applications including
the ability to capture images, biometric and demographic data; enable biometric
identification and verification (1:1 and 1:X) as well as support numerous biometric
hardware and software venders. It also enables users to add electronic
identification functionality for other applications, including access control,
tracking of time and attendance, point of sale transactions, human resource
systems, school photography systems, asset management, inventory control,
warehouse management, facilities management and card production systems.
IDENTIFIER
FOR WINDOWS
This
family of products combines the ability to capture photographic images
digitally with the ability to create a database and to print identification
cards. Identifier for Windows offers a powerful, versatile, and user-friendly
application which can be used by schools, hospitals, corporations and
governments.
IWS PRINTFARM
While
it is the last stage of PIV Card Issuance, the PIV smart card printing process
is by no means the least important stage.
Production printing of tens of thousands of PIV cards requires a
significant investment and a well-engineered system. The IWS EPI PrintFarm software offers a cost-effective
yet high-performance method for high-volume card printing.
IWS PIV ENCODER
PIV
smart cards must be programmed with specific mandatory data, digital signatures
and programs in order to maintain the interoperability as well as the security
features specified for the cards. The IWS PIV Encoder could be considered to be
complex device driver that properly programs the PIV smart cards. The Encoder interacts with the Card
Management System for data payload elements. It interacts with the Certificate
Authority to encrypt or sign the PIV smart card data with trusted certificates.
Finally, it acts as the application-level device driver to make the specific
PIV smart card encoding system properly program the smart card, regardless if
the system is a standalone encoding system or one integrated into a card
printer.
Law Enforcement and Public Safety
We
believe our integrated suite of software products significantly reduces the
inefficiencies and expands the capabilities of traditional booking and mugshot
systems. Using our products, an agency can create a digital database of
thousands of criminal history records, each including one or more full-color
facial images, finger and palm prints, text information and images of other
distinctive physical features such as scars, marks and tattoos. This database
can be quickly searched using text queries or by using our biometric facial
recognition or AFIS technology which can compare biometric characteristics of
an unknown suspect with those in the database.
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Our investigative
software products can also be used to create, edit and enhance digital images
and to search databases of other agencies to which our customers have access.
Our
IWS Law Enforcement solution consists of software modules, which may also be
purchased individually. The IWS Law Enforcement Capture and Investigative
module make up our booking system and database. Our add-on modules include
Livescan, Facial Recognition, Suspect ID, a Wireless module, and a PDA add-on
module.
IWS LAW ENFORCEMENT
IWS Law Enforcement is a
digital booking, identification and investigative solution that enables users
to digitally capture, search, store and retrieve images and demographic data
including mug shots, scars, marks and tattoos (SMTs) and fingerprints. Law
enforcement can submit fingerprint data directly to the State AFIS, FBI
criminal repository, or other agencies as required. Additional features and
functionality include real-time access to images and data, creation of digital
composite sketches, photo lineups, and production of identification cards and
credentials. IWS Law Enforcement also
uses off-the-shelf hardware and is designed to comply with open industry standards
so that it can operate on an array of systems ranging from a stand-alone
personal computer to a wide area network. To avoid duplication of entries, the
system can be integrated easily with several other information storage and
retrieval systems, such as a records management system or an automated
fingerprint identification system.
CAPTURE
This
software module allows users to capture and store facial images as well as
images of distinguishing features such as scars, tattoos and other marks. Each
entry contains both images and text information in an easy-to-view format made
up of distinct fields. Current customers of this module range from agencies
that capture a few thousand mugshots per year to those that capture hundreds of
thousands of mugshots each year.
LIVESCAN
This
software module is FBI certified which complies with the FBI Integrated
Automated Fingerprint Identification System (IAFIS) Image Quality
Specifications (IQS) while utilizing the latest FBI certified Livescan device
from most major vendors. Livescan allows users to capture single to ten prints
and palm data, providing an integrated biometric management for civil and law
enforcement use. By adding Livescan capabilities, law enforcement organizations
further enhance the investigative process by providing additional identifiers
to identify suspects involved in a crime.
In addition, officers no longer need to travel to multiple booking
stations to capture fingerprints and mug shots.
All booking information including images will be located at a central
designation and can be routed to the State AFIS or the FBI criminal history
record repository.
INVESTIGATIVE
This
software module allows users to search the database created with IWS Law
Enforcement. Officers can conduct text searches in many fields, including file
number, name, alias, distinctive features, and other information such as gang
membership and criminal history. The Investigative module creates a catalogue
of possible matches, allowing officers or witnesses to save time by looking
only at mugshots that closely resemble the description of the suspect. This
module can also be used to create a line-up of similar facial images from which
a witness may identify the suspect.
FACIAL
RECOGNITION
This
software module uses biometric facial recognition and retrieval technology to
help authorities identify possible suspects. Images taken from surveillance
videos, digital sketches or photographs can be searched against a digital
database of facial images to retrieve any desired number of faces with similar
characteristics. This module can also be used at the time of booking to
identify persons using multiple aliases. Using biometrics-based technology, the
application can search through thousands of facial images in a matter of
seconds, reducing the time it would otherwise take a witness to flip through a
paper book of facial images that may or may not be similar to the description
of the suspect. The Facial Recognition module then creates a selection of
possible matches ranked in order of similarity to the suspect, and a percentage
confidence level is attributed to each possible match. The application
incorporates search engine technology which we license from various facial
recognition algorithm providers.
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SUSPECT
ID
This
software module allows officers and witnesses to quickly create full-color,
photo-realistic suspect composites. The digital composites are constructed from
libraries of facial features based upon actual color photographs of such
features. Suspect ID allows officers with minimal computer training and
artistic talent to create a suspect composite by pointing and clicking with a
mouse. This module can be installed on a laptop computer and taken into the
field, allowing officers to conduct interviews and create composites before
witnesses memories fade. For rapid identification, officers can distribute
completed composites within minutes via fax or e-mail.
WIRELESS
The
Wireless module enables authorized personnel to access and search a countys
booking records stored in IWS Law Enforcement through a standard Web browser
from within the countys intranet. This module allows remote access to the IWS
Law Enforcement database without requiring the user to be physically connected
to the customers network. This application requires only that the user have
access to the Internet and authorization to access the countys intranet.
PDA
The
PDA module is a powerful investigative tool that allows officers to access IWS
Law Enforcement booking photos and related data in the field on a handheld
Pocket PC compatible device.
Maintenance and Customer Support
As
part of our installation of a system, we offer to train our customers
employees as to the effective use of our products. We offer training both
on-site and at our facilities. We offer on-site hardware support to our
customers, generally within 24 hours of the customer request. Customers
can contract with us for technical support that enables them to use a toll-free
number to speak with our technical support center for software support and
general assistance 24 hours a day, seven days a week. As many of our
government customers operate around the clock and perceive our systems as
critical to their day-to-day operations, a very high percentage contract for
technical support. Customer support services typically provide us with annual
revenue of 12% to 18% of the initial sales price of the hardware and software
purchased by our customers. Maintenance
revenues typically account for approximately 21% to 25% of our total revenues.
Software Customization and Fulfillment
We
directly employ computer programmers and also retain independent programmers to
develop our software and perform quality control. We provide customers with
software that we specifically customize to operate on their existing computer
system. We work directly with purchasers of our system to ensure that the
system they purchase will meet their unique needs. We configure and test the
system either at our facilities or on-site and conduct any customized
programming necessary to connect the system with any legacy systems already in
place. We can also provide customers
with a complete computer hardware system with our software already installed
and configured. In either case, the customer is provided with a complete turnkey
solution which can be used immediately. When we provide our customers with a
complete solution including hardware, we use off-the-shelf computers, cameras
and other components purchased from other companies such as IBM or Hewlett
Packard. Systems are assembled and configured either at our facilities or at
the customers location.
OUR
STRATEGY
Our
strategy is to provide open-architected identity management solutions including
multi-biometric, multilingual translation, secure credential and law enforcement
technologies that are stand alone, integrated and/or bundled with key partners
including channel relationships and large systems integrators such as
Honeywell, Boeing, GE Security, CSC, Unisys, HP, IBM, Oracle, Motorola, among
others. Key elements of our strategy for growth include the following:
Fully Exploit the Biometrics, Access
Control and Identification Markets
The
establishment of the Department of Homeland Security coupled with the movement
by governments around the world to authenticate the identity of their citizens,
employees and contractors has accelerated the adoption of biometric
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identification systems
that can provide secure credentials and instant access to centrally maintained
records for real-time verification of identity and access (physical and
logical) privileges. Using our products, an organization can create secure
credentials that correspond to records including images and biographic data in
a digital database. A border guard or customs agent can stop an individual to
quickly and accurately verify his identity against a database of authorized
persons, and either allow or deny access as required. Our technology is also
standards based and applied to facilitate activities such as federal
identification mandates while complying with personal identification
verification standards (HSPD-12), International Civil Aviation Organization
(ICAO) standards, American Association of Motor Vehicle Administrators (AAMVA)
driver licenses, voter registration, immigration control and welfare fraud
identification.
With
the identity management market growing at a rapid pace, biometric identifiers
are becoming recognized and accepted as integral components to the
identification process in the public and private sectors. As biometric technologies (facial
recognition, fingerprint, iris, etc) are adopted, identification systems must
be updated to enable their use in the field.
We have built our solutions to enable the incorporation of one or
multiple biometrics, which can be associated with a record and stored both in a
database and on a card for later retrieval and verification without regard to
the specific hardware employed. We
believe the increasing demand for biometric technology will drive demand for
our solutions which enable their use by end users. Our identity management products are built to
accommodate the use of biometrics and meet the demanding requirements across
the entire identity life cycle.
Expand into the Multilingual Translation Market
The
need for multilingual translation, interpretation, global collaboration,
identification and conversation-based systems are more urgent that ever before.
The world community, including international organizations such as the United
Nations and the European Union, are spread around the globe, requiring not only
a large number of linguists in general, but also a large number of linguists
for each given language. Similarily, law enforcement agencies, while in support
of homeland security operations and information analysis, lack the necessary
manpower to support continuous language translation and monitoring of broadcast
information sources which may provide insight, and other potentially critical
data to support their tasks.
Given
the unique environment in which these professionals work, accurate
interpretation to and from a foreign language, including special terminology
and nuances are critically important. Our Mediator suite of multilingual
translation products provide users with the ease to collaborate and identify
throughout diverse and disparate mediums, as well as enable autonomous use
through mobile technologies. We are utlizing our expertise in biometric and
identity management, and integrating these capabilities, providing a means for
users to communicate with subjects in their own language while allowing for
subject verification and identification through multimodal biometrics such as
voice, face, iris, fingerprint, as well as support for the Common Access Card
(CAC) and Personal Identity Verification (PIV) credential.
Fully Expand Law Enforcement and Public
Safety Markets
We
intend to use our successful installations with customers such as the Arizona
Department of Public Safety, New South Wales Police, and the Los Angeles County
Sheriffs Department as reference accounts and to aggressively market IWS Law
Enforcement as a superior technological solution. Our recent addition of the
Livescan module and support for local AFIS to our IWS Law Enforcement will
enhance its functionality and value to the law enforcement customer as well as
increase the potential revenue the Company can generate from a system
sale. We primarily sell direct to the
law enforcement community. Our sales strategy is to increase sales to new and
existing customers including renewing supporting maintenance agreements. We
have also established relationships with large systems integrators such as
Motorola to OEM our law enforcement solution utilizing their worldwide sales
force. We will focus our sales efforts in the near term to establish IWS Law
Enforcement as the integrated mug shot and Livescan system adopted in as many
countries, states, large counties and municipalities as possible. Once we have
a system installed in a region, we intend to then sell additional systems or
retrieval seats to other agencies within the primary customers region and in
neighboring regions. In addition, we plan to market our integrated
investigative modules to the customer, including the Facial Recognition and
Wireless modules, Suspect ID, WitnessView, Wireless module, and PDA module. As
customer databases of digital mug shots grow, we expect that the perceived
value of our investigative modules, and corresponding revenues from sales of
those modules, will also grow.
Acquire Businesses That Enhance Our
Strategic Position
We may
acquire additional businesses that will complement our growth strategy and
enhance our competitive position in our current markets and other markets that
utilize our core biometric identity management and multiligual translation
technologies.
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Expand into Related Applications within the
Law Enforcement and Public Safety Markets
Our
products can provide solutions to law enforcement and public safety agencies
beyond our core application of police booking systems and related investigative
products with minimal adaptation. The technology behind our IWS Law Enforcement
product line can be used to create databases of missing children and to compare
the facial image of a lost child to the images in the database. Our system can
be used to help correctional facilities track and control inmates as well as
facilitate inmate release. Gun sellers could use our products to access
available criminal databases and help prevent the sale of guns to ineligible
persons. Our technology can be used to monitor persons on parole or probation
without requiring them to travel to their parole or probation officer. We
anticipate that a parolee or probationer will be able to have his photograph
taken in a specially-designed kiosk which uses biometrics-based technology to
identify the person and inform his parole or probation officer of his location.
SALES
AND MARKETING
We
market and sell our products through our direct sales force and through indirect
distribution channels, including systems integrators. We have sales and account
representatives based domestically in Virginia, Maryland, Texas, Arizona, and California. Geographically, as of March 1,
2008, our sales and marketing force consists of 14 persons in the United
States.
We
sell through a direct sales organization which is supported by the marketing
organization. Our sales professionals
are supported by our technical experts who are available by telephone and
conduct on-site customer presentations.
The
typical sales cycle for IWS Biometric Engine and IWS Law Enforcement includes a
pre-sale process to define the potential customers needs and budget, an
on-site demonstration and conversations between the potential customer and
existing customers. Government agencies are typically required to purchase
large systems by including a list of requirements in a Request For Proposal,
known as an RFP, and by allowing several companies to openly bid for the
project by responding to the RFP. If our response is selected, we enter into
negotiations for the contract and, if successful, ultimately receive a purchase
order from the customer. This process can take anywhere from a few months to
over a year.
Our
Biometric and ID products are also sold to large integrators, direct via our
sales force and to end users through distributors. Depending on the customers
requirements, there may be instances that require an RFP. The sales cycle can
vary from a few weeks to a year.
In
addition to our direct sales force, we have developed relationships with a
number of systems integrators who contract with government agencies for the
installation and integration of large computer and communication systems. By
acting as a subcontractor to these systems integrators, we are able to avoid
the time consuming and often-expensive task of submitting proposals to
government agencies, and we also gain access to large clients.
We
also work with companies that offer complementary products, where value is
created through product integration. Through teaming arrangements we are able
to enhance our products and to expand our customer base through the
relationships and contracts of our strategic partners.
We
promote our products through trade journal advertisements, direct mail and attendance
at industry trade shows, including those sponsored by the Biometric
Consortium, International Association for Biometrics, American Association of
Motor Vehicle Administrators, International Association for
Identification, American Society of Industrial Security and the
International Association of Chiefs of Police. We also target other media
through public relations efforts, including non-industry publications, daily
newspapers, local and national news programs, and television programs related
to law enforcement. Articles regarding our products have appeared in Business
Week, Los Angeles Times, Chicago Tribune, The Wall Street Journal and a number
of other publications.
We
plan to continue to market and sell our products internationally. Some of the
challenges and risks associated with international sales include the difficulty
in protecting our intellectual property rights, difficulty in enforcing
agreements through foreign legal systems and volatility and unpredictability in
the political and economic conditions of foreign countries. We believe we can
work to successfully overcome these challenges.
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CUSTOMERS
We
have a wide variety of domestic and international customers. Most of our IWS
Law Enforcement customers are government agencies at the federal, state and
local levels in the United States. Our products are also being used in
Australia, Canada, the United Arab Emirates, Kuwait, Mexico, Colombia, Costa
Rica, Venezuela, Singapore, Indonesia and the Philippines. The customer base
for our digital identification systems includes domestic and foreign government
agencies, universities, airports, and private sector companies, many of which
are Fortune 500 or Fortune 1000 companies. In 2007, Unisys Corporation
accounted for approximately 18% of our revenues. In 2006, Raytheon Company accounted for
approximately 21% of our revenues. In
2005 there was no single customer who accounted for more than 10% of our
revenues.
COMPETITION
The Law Enforcement and Public Safety
Markets
Due to
the fragmented nature of the law enforcement and public safety market and the
modular nature of our product suite, we face different degrees of competition
with respect to each IWS Law Enforcement module. We believe the principal basis
on which we compete with respect to all of our products are:
·
the
unique ability to integrate our modular products into a complete biometric,
Livescan, imaging and investigative system;
·
our
reputation as a reliable systems supplier;
·
the
usability and functionality of our products; and
·
the
responsiveness, availability and reliability of our customer support.
Our
law enforcement product line faces competition from other companies such as
DataWorks Plus and Cogent Systems, Inc.
Internationally, there are often a number of local companies offering
solutions in most countries. Many of our competitors products in this niche
offer basic image capture and storage, but lack the functionality of integrated
investigative products, including facial recognition and image editing and
enhancement.
Identification Markets
Due to
the breadth of our software offering in the secure ID market space, we face
differing degrees of competition in certain market segments. The strength of
our competitive position is based upon:
·
our
strong brand reputation with a customer base which includes small and
medium-sized businesses, Fortune 500 corporations and large government
agencies;
·
the
ease of integrating our technology into other complex applications; and
·
the
leveraged strength that comes from offering customers software tools, packaged
solutions and Web-based service applications that support a wide range of
hardware peripherals.
Our
software faces competition from Datacard Corporation, a privately held
manufacturer of hardware, software and consumables for the ID market. There are
also a considerable number of smaller software competitors such as Number Five
Software Ltd., Loronix Information Systems, Inc. and Fox Technology
Pty Ltd. who compete in differing geographies, primarily in the packaged
product segment.
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Biometric
Market
The
market to provide biometric systems to the identity management market is
evolving and we face competition from a number of sources. We believe that the
strength of our competitive position is based on:
·
our unique ability to provide a system
which enables the enrollment, management and authentication of multiple
biometrics managing population databases of unlimited sizes;
·
searches can
be 1:1 (verification), 1:N (identification) and X:N (investigative); and N:N
(database integrity)
·
the system is
technology and biometric agnostic, enabling the use of biometric devices and
algorithms from any vendor, and the support of the following biometric types:
finger, face, iris, hand geometry, palm, DNA, signature, voice, and 3D face and
retina;
Our
multi-biometric product faces competition from L-1 Identity Solutions, Inc.,
Ireland-based Daon, and French-based Sagem neither of which have offerings with
the scope and flexibility of our IWS Biometric Engine.
INTELLECTUAL
PROPERTY
We
rely on trademark, patent, trade secret and copyright laws and confidentiality
and license agreements to protect our intellectual property. We have several
unregistered and federally registered trademarks including the trademark
ImageWare, as well as trademarks for which there are pending trademark
registrations with the United States, Canadian and other International Patent &
Trademark Offices. We hold several
issued patents and have several other patent applications pending for elements
of our products. We license and depend
on intellectual property from third parties for our biometric products and
modules which utilizes third party biometric encoding and matching
technologies.
We
regard our software as proprietary and retain title to and ownership of the software
we develop. We attempt to protect our
rights in the software primarily through trade secrets. We have not published the source code of most
of our software products and require employees and other third-parties who have
access to the source code, other trade secret information, to sign
confidentiality agreements acknowledging our ownership and the nature of these
materials as our trade secrets.
Despite
these precautions, it may be possible for unauthorized parties to copy or
reverse-engineer portions of our products.
While our competitive position could be threatened by disclosure or
reverse engineering of this proprietary information, we believe that copyright
and trademark protection are less important than other factors such as the
knowledge, ability, and experience of our personnel, name recognition and
ongoing product development and support.
Our
software products are licensed to end users under a perpetual, nontransferable,
nonexclusive license that stipulates which modules can be used and how many
concurrent users may use them. These
forms of licenses are typically not signed by the licensee and may be more
difficult to enforce than signed agreements in some jurisdictions.
Although
our products have never been the subject of an infringement claim, we cannot
assure that third parties will not assert infringement claims against us in the
future or that any such assertion will not require us to enter into royalty
arrangements or result in costly litigation.
RESEARCH
AND DEVELOPMENT
Our
research and development team is made up of 26 programmers, engineers and other
employees. We also contract with outside programmers for specific projects as
needed. We spent approximately $3.7 million, $3.7 million and $2.9 million
on research and development in 2007, 2006 and 2005, respectively. We
continually work to increase the speed, accuracy, and functionality of our
existing products. We anticipate that our research and development efforts will
continue to focus on new technology and products for the identity management
markets.
EMPLOYEES
As of March 1, 2008,
we had a total of 72 full-time employees. Our employees are not covered by any
collective bargaining agreement, and we have never experienced a work stoppage.
We believe that our relations with our employees are good.
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Item 1A. Risk Factors
An
investment in our common stock involves a high degree of risk. before investing
in our common stock, you should consider carefully the specific risks detailed
in this Risk Factors section and any applicable prospectus supplement,
together with all of the other information contained in this prospectus and any
prospectus supplement. If any of these risks occur, our business, results of
operations and financial condition could be harmed, the price of our common
stock could decline, and you may lose all or part of your investment.
RISKS
RELATED TO OUR BUSINESS
Risks
Related to Our Business
We have incurred net losses in
our six most recent fiscal years and AMEX has issued us a letter that it
intends to remove our common stock from listing and registration on the
exchange
.
The AMEX Company Guide
(the Company Guide) provides that AMEX will normally consider suspending
dealings in, or removing from the list, securities of a company which sustains
net losses in its five most recent fiscal years and has shareholders equity of
less than $6,000,000, unless the company has total market capitalization of at
least $50,000,000, or total assets and revenue of $50,000,000. We have
sustained net losses during our six most recent fiscal years, and as of December 31,
2007, our shareholders equity was approximately $3,527,000. In addition, we do
not meet the alternative minimum market capitalization or total asset and revenue
requirements.
On December 14,
2007, we received a letter from AMEX indicating that we do not comply with AMEXs
continued listing standards due to our inability to maintain compliance with
Sections 1003(a)(ii), 1003(a)(iii) and 1003(a)(iv) of the Company
Guide and that AMEX intends to remove our common stock from listing and
registration on AMEX by filing a delisting application with the Securities and
Exchange Commission (SEC). The letter
from AMEX states that we were not in compliance with (i) Section 1003(a)(ii) of
the Company Guide because our shareholders equity was less than $4,000,000 and
we sustained losses from continuing operations and/or net losses in three out
of our four most recent fiscal years, and (ii) Section 1003(a)(iii) of
the Company Guide because our shareholders equity was less than $6,000,000 and
we sustained losses from continuing operations and/or net losses in our five
most recent fiscal years. We had also
been notified by AMEX that we were not in compliance with Section 1003(a)(iv) of
the Company Guide in that we had sustained losses which are so substantial in
relation to our overall operations or our existing financial resources, or our
financial condition had become so impaired that it appeared questionable, in
the opinion of AMEX, as to whether we would be able to continue operations
and/or meet our obligations as they matured.
We filed an appeal of
AMEXs determination and requested an oral hearing before an AMEX Listing
Qualifications Panel (a Qualifications Panel). On March 10, 2008, we received a letter
from AMEX granting our request. Our
hearing with a Qualifications Panel is scheduled for April 16, 2008. If the Qualifications Panel does not grant
the relief sought, our common stock will be delisted from AMEX following which
it is expected that our common stock would be quoted on the Over-the-Counter
Bulletin Board. As a consequence of any
such delisting, the public price of our common stock could be adversely affected
and a stockholder would likely find it more difficult to dispose of, or to
obtain accurate quotations as to the prices of, our common stock.
We have a history of significant recurring losses totaling
approximately $75.9 million, and these losses may continue in the future
.
As of December 31,
2007, we had an accumulated deficit of $75.9 million, and these losses may
continue in the future. We will need to raise capital to fund our continuing
operations, and financing may not be available to us on favorable terms or at
all. In the event financing is not available in the time frame required, we
will be forced to sell certain of our assets or license our technologies to
others. We expect to continue to incur significant sales and marketing,
research and development, and general and administrative expenses. As a result,
we will need to generate significant revenues to achieve profitability and we
may never achieve profitability.
Our operating results
have fluctuated in the past and are likely to fluctuate significantly in the
future. We may experience fluctuations in our quarterly results of operations
as a result of:
·
varying demand for and market acceptance of our
technology and products;
17
·
changes in our product or customer mix;
·
the gain or loss of one or more key
customers or their key customers, or significant changes in the financial
condition of one or more of our key customers or their key customers;
·
our ability to introduce, certify and deliver new
products and technologies on a timely basis;
·
the announcement or introduction of products and technologies
by our competitors;
·
competitive pressures on selling prices;
·
costs associated with acquisitions and the integration
of acquired companies, products and technologies;
·
our ability to successfully integrate acquired
companies, products and technologies, including the assets acquired from Sol
Logic;
·
our accounting and legal expenses; and
·
general economic conditions.
These factors, some of
which are not within our control, may cause the price of our stock to fluctuate
substantially. To respond to these and other factors, we may need to make
business decisions that could result in failure to meet financial expectations.
If our quarterly operating results fail to meet or exceed the expectations of
securities analysts or investors, our stock price could drop suddenly and
significantly. Most of our expenses, such as employee compensation, inventory
and debt repayment obligations, are relatively fixed in the short term.
Moreover, our expense levels are based, in part, on our expectations regarding
future revenue levels. As a result, if our revenue for a particular period were
below our expectations, we would not be able to proportionately reduce our
operating expenses for that period. Any revenue shortfall would have a
disproportionately negative effect on our operating results for the period.
We received a going concern opinion from our independent
registered public accounting firm for the fiscal years ended December 31,
2006 and 2007, which may negatively
impact our business.
We received a report from
Stonefield Josephson, Inc., our independent registered public accounting
firm (Stonefield Josephson), regarding our consolidated financial statements
for the fiscal year ended December 31, 2006 and 2007, which included an
explanatory paragraph stating that the consolidated financial statements were
prepared assuming we will continue as a going concern. The report also stated
that our substantial net losses and monetary liabilities have raised
substantial doubt about our ability to continue as a going concern. The going
concern opinion for the fiscal year ended December 31, 2007, may fail to
dispel any continuing doubts about our ability to continue as a going concern and
could adversely affect our ability to enter into collaborative relationships
with business partners, to raise additional capital and to sell our products,
and could have a material adverse effect on our business, financial condition
and results of operations.
We currently have limited cash resources and we will require
additional funding to finance our working capital requirements for at least the
next twelve months
.
We currently have limited
cash resources and we will require financing to fund our anticipated working
capital requirements for at least the next twelve months. If we are not able to
generate positive cash flows from operations in the near future, we will be
required to seek additional funding through public or private equity or debt
financing. There can be no assurance that additional financing will be available
on acceptable terms, or at all. If we are required to sell equity to raise
additional funds, our existing stockholders may incur substantial dilution and
any shares so issued may have rights, preferences and privileges superior to
the rights, preferences and privileges of our outstanding common stock. If we
seek debt financing, the terms of the financing may require us to agree to
restrictive covenants or impose other obligations that limit our ability to
grow our business, acquire necessary assets or take other actions that we
consider necessary or desirable. Also, we may be required to obtain funds
through arrangements with third parties that require us to relinquish rights to
certain of our technologies or products that we would seek to develop or
commercialize ourselves. In addition, our ability to raise additional capital
may be dependent upon our common stock being listed on AMEX. We have not
satisfied the criteria for continued listing on AMEX in the past and we cannot
guarantee that we will be able to satisfy the criteria for continued listing on
AMEX in the future.
18
Our current ineligibility to use the Registration Statement
on Form S-3 may affect our ability to finance our working capital requirements
for the next twelve months
.
As a result of the fact
that our Current Report on Form 8-K, filed with the SEC on December 21,
2007, was filed after the deadline for its filing, we became ineligible through
December 2008 to register shares of our common stock on a Form S-3
Registration Statement. Certain investors, for whom the ability to resell their
shares relatively soon after they acquire them is important, may only be
willing to participate in private financings by us if we can register their shares
using a Form S-3 Registration Statement. Therefore, our
ineligibility to use Form S-3 could limit our ability to raise additional
capital for at least the next 12 months or such longer period that we are
ineligible to use the Form S-3 Registration Statement.
We depend upon a small number of large system sales ranging
from $500,000 to in excess of $2,000,000, and we may fail to achieve one or
more large system sales in the future
.
Historically, we have
derived a substantial portion of our revenues from a small number of sales of
large, relatively expensive systems, typically ranging in price from $500,000
to $2,000,000. If we fail to receive orders for these large systems in a given
sales cycle on a consistent basis, our business could be significantly harmed.
Further, our quarterly results are difficult to predict because we cannot
predict in which quarter, if any, large system sales will occur in a given
year. As a result, we believe that quarter-to-quarter comparisons of our
results of operations are not a good indication of our future performance. In
some future quarters, our operating results may be below the expectations of
securities analysts and investors, in which case the market price of our common
stock may decrease significantly.
Our lengthy sales cycle may cause us to expend significant
resources for as long as one year in anticipation of a sale to certain
customers, yet we still may fail to complete the sale
.
When considering the
purchase of a large computerized identity management system, potential
customers of ours may take as long as one year to evaluate different systems
and obtain approval for the purchase. Under these circumstances, if we fail to
complete a sale, we will have expended significant resources and received no
revenue in return. Generally, customers consider a wide range of issues before
committing to purchase our products, including product benefits, ability to
operate with their current systems, product reliability and their own budgetary
constraints. While potential customers are evaluating our products, we may
incur substantial selling costs and expend significant management resources in
an effort to accomplish potential sales that may never occur.
A significant number of our customers and potential
customers are government agencies that are subject to unique political and
budgetary constraints and have special contracting requirements which may
affect our ability to obtain new and retain current government customers
.
A significant number of
our customers are government agencies. These agencies often do not set their
own budgets and therefore have little control over the amount of money they can
spend from quarter-to-quarter or year-to-year. In addition, these agencies
experience political pressure that may dictate the manner in which they spend
money. Due to political and budgetary processes and other scheduling delays
that may frequently occur relating to the contract or bidding process, some
government agency orders may be canceled or substantially delayed, and the receipt
of revenues or payments from these agencies may be substantially delayed. In
addition, future sales to government agencies will depend on our ability to
meet government contracting requirements, certain of which may be onerous or
impossible to meet, resulting in our inability to obtain a particular contract.
Common requirements in government contracts include bonding requirements,
provisions permitting the purchasing agency to modify or terminate at will the
contract without penalty, and provisions permitting the agency to perform
investigations or audits of our business practices, any of which may limit our
ability to enter into new contracts or maintain our current contracts.
We may fail to create new applications for our products and
enter new markets, which may have an adverse effect on our operations,
financial condition and prospects
.
We believe our future
success depends in part on our ability to develop and market our technology for
applications other than booking systems for the law enforcement market. If we
fail in these goals, our business strategy and ability to generate revenues and
cash flow would be significantly impaired. We intend to expend significant
resources to develop new technology, but the successful development of new
technology cannot be predicted and we cannot guarantee we will succeed in these
goals.
19
We occasionally rely on systems integrators to manage our
large projects, and if these companies do not perform adequately, we may lose
business
.
We occasionally act as a
subcontractor to systems integrators who manage large projects that incorporate
our systems, particularly in foreign countries. We cannot control these
companies, and they may decide not to promote our products or may price their
services in such a way as to make it unprofitable for us to continue our
relationship with them. Further, they may fail to perform under agreements with
their customers, in which case we might lose sales to these customers. If we lose
our relationships with these companies, our business, financial condition and
results of operations may suffer.
If the patents we own or license, or our other intellectual
property rights, do not adequately protect our products and technologies, we
may lose market share to our competitors and our business, financial condition
and results of operations would be adversely affected
.
Our success depends
significantly on our ability to protect our rights to the technologies used in
our products. We rely on patent protection, trade secrets, as well as a
combination of copyright and trademark laws and nondisclosure, confidentiality
and other contractual arrangements to protect our technology. However, these
legal means afford only limited protection and may not adequately protect our
rights or permit us to gain or keep any competitive advantage. In addition, we
cannot be assured that any of our current and future pending patent
applications will result in the issuance of a patent to us. The U.S. Patent and
Trademark Office (PTO) may deny or require significant narrowing of claims in
our pending patent applications, and patents issued as a result of the pending
patent applications, if any, may not provide us with significant commercial
protection or be issued in a form that is advantageous to us. We could also
incur substantial costs in proceedings before the PTO. These proceedings could
result in adverse decisions as to the claims included in our patents.
Our issued and licensed
patents and those that may be issued or licensed in the future may be
challenged, invalidated or circumvented, which could limit our ability to stop
competitors from marketing related products. Additionally, upon expiration of
our issued or licensed patents, we may lose some of our rights to exclude
others from making, using, selling or importing products using the technology
based on the expired patents. We also must rely on contractual rights with the
third parties that license technology to us to protect our rights in the
technology licensed to us. Although we have taken steps to protect our
intellectual property and technology, there is no assurance that competitors
will not be able to design around our patents. We also rely on unpatented
proprietary technology. We cannot assure you that we can meaningfully protect
all our rights in our unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products or
processes or otherwise gain access to our unpatented proprietary technology. We
seek to protect our know-how and other unpatented proprietary technology with
confidentiality agreements and intellectual property assignment agreements with
our employees. However, such agreements may not provide meaningful protection
for our proprietary information in the event of unauthorized use or disclosure
or other breaches of the agreements or in the event that our competitors
discover or independently develop similar or identical designs or other
proprietary information. In addition, we rely on the use of registered and
common law trademarks with respect to the brand names of some of our products.
Our common law trademarks provide less protection than our registered
trademarks. Loss of rights in our trademarks could adversely affect our business,
financial condition and results of operations.
Furthermore, the laws of
foreign countries may not protect our intellectual property rights to the same
extent as the laws of the United States. If we fail to apply for intellectual
property protection or if we cannot adequately protect our intellectual
property rights in these foreign countries, our competitors may be able to
compete more effectively against us, which could adversely affect our
competitive position, as well as our business, financial condition and results
of operations.
If third parties claim that we infringe their intellectual
property rights, we may incur liabilities and costs and may have to redesign or
discontinue selling certain products
.
Whether a product
infringes a patent involves complex legal and factual issues, the determination
of which is often uncertain. We face the risk of claims that we have infringed
on third parties intellectual property rights. Searching for existing
intellectual property rights may not reveal important intellectual property and
our competitors may also have filed for patent protection, which is not as yet
a matter of public knowledge, or claimed trademark rights that have not been
revealed through our availability searches. Our efforts to identify and avoid
infringing on third parties intellectual property rights may not always be
successful. Any claims of patent or other intellectual property infringement,
even those without merit, could:
·
increase the cost of our products;
20
·
be expensive and time consuming to
defend;
·
result in us being required to pay
significant damages to third parties;
·
force us to cease making or selling products
that incorporate the challenged intellectual property;
·
require us to redesign, reengineer or
rebrand our products;
·
require us to enter into royalty or
licensing agreements in order to obtain the right to use a third partys
intellectual property, the terms of which may not be acceptable to us;
·
require us to indemnify third parties
pursuant to contracts in which we have agreed to provide indemnification to
such parties for intellectual property infringement claims;
·
divert the attention of our management;
and
·
result in our customers or potential
customers deferring or limiting their purchase or use of the affected products
until the litigation is resolved.
In addition, new patents
obtained by our competitors could threaten a products continued life in the
market even after it has already been introduced.
The failure to successfully integrate any business or asset
acquisitions into our existing operations, or if we discover previously
undisclosed liabilities, could negatively affect our business, financial
condition and results of operations
.
We completed the
acquisition of certain assets of Sol Logic in December 2007, and we plan
to continue to review potential acquisition candidates. Our business and our
strategy include building our business through acquisitions. However,
acceptable acquisition candidates may not be available in the future or may not
be available on terms and conditions acceptable to us.
Successful acquisitions
depend upon our ability to identify, negotiate, complete and integrate suitable
acquisitions and to obtain any necessary financing. Even if we complete
acquisitions, we may experience:
·
difficulties in integrating any acquired
companies, personnel and products into our existing business;
·
delays in realizing the benefits of the
acquired company or products;
·
diversion of our managements time and
attention from other business concerns;
·
limited or no direct prior experience in
new markets or countries we may enter;
·
higher costs of integration than we
anticipated; and
·
difficulties in retaining key employees
of the acquired business who are necessary to manage these acquisitions.
In addition, an
acquisition could materially impair our operating results by causing us to
incur debt or requiring us to amortize acquisition expenses and acquired
assets. We may also discover deficiencies in internal controls, data adequacy
and integrity, product quality, regulatory compliance and product liabilities
that we did not uncover prior to our acquisition of such businesses, which
could result in us becoming subject to penalties or other liabilities. Any
difficulties in the integration of acquired businesses or unexpected penalties
or liabilities in connection with such businesses could have a material adverse
effect on our business, financial condition and results of operations.
We operate in foreign countries and are exposed to risks associated
with foreign political, economic and legal environments and with foreign
currency exchange rates
.
With our acquisition of
G&A Imaging Ltd. in 2001, we have significant foreign operations. As a
result, we are exposed to risks, including among others, risks associated with
foreign political, economic and legal environments and with foreign
21
currency exchange rates.
Our results may be adversely affected by, among other things, changes in
government policies with respect to laws and regulations, anti-inflation
measures, currency conversions, remittance abroad and rates and methods of
taxation.
We depend on key personnel, the loss of any of whom could
materially adversely affect future operations
.
Our success will depend
to a significant extent upon the efforts and abilities of our executive
officers and other key personnel. The loss of the services of one or more of
these key employees and any negative market or industry perception arising from
the loss of such services could have a material adverse effect on us and the
trading price of our common stock. Our business will also be dependent
upon our ability to attract and retain qualified personnel. Acquiring and
keeping these personnel could prove more difficult or cost substantially more
than estimated and we cannot be certain that we will be able to retain such
personnel or attract a high caliber of personnel in the future.
Compliance with Section 404 of the Sarbanes-Oxley Act
of 2002 may result in substantial costs to us and a diversion of management
attention and resources, and failure to maintain adequate internal controls
over financial reporting could result in our business being harmed and our
stock price declining
.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to document and test the effectiveness
of our internal controls over financial reporting in accordance with an
established control framework and to report on our managements conclusion as
to the effectiveness of these internal controls over financial reporting
beginning with the fiscal year ending December 31, 2007. This
section also requires that our independent registered public accounting firm
provide an attestation report on our internal control over financial reporting
beginning with the fiscal year ending December 31, 2008. Our management
completed its evaluation of the effectiveness of our disclosure controls and
procedures as of December 31, 2007 and concluded that our internal controls
over financial reporting were effective as of that date.
The standards that must
be met for management to continue to assess the internal control over financial
reporting are complex and will require significant documentation, testing and
possible remediation to meet the detailed standards. In addition, the
attestation process that must be performed by our independent registered public
accounting firm is new and complex. We may encounter problems or delays in
completing the activities necessary to continue to make assessments of our
internal control over financial reporting, completing the implementation of any
requested improvements, or receiving an unqualified attestation of our
assessment by our independent registered public accountants. Ensuring
that we have adequate internal financial and accounting controls and procedures
in place is a costly and time-consuming effort that needs to be evaluated
frequently, so compliance with these new rules could require us to incur
substantial costs and may require a significant amount of time and attention of
management, which could seriously harm our business, financial condition and
results of operations. If we are unable to continue to our internal control
over financial reporting as effective, or if our independent registered public
accounting firm is unable to provide an unqualified attestation report on our
assessment, investors may lose confidence in us and our stock price may be
negatively impacted.
We face competition from companies with greater financial,
technical, sales, marketing and other resources, and, if we are unable to
compete effectively with these competitors, our market share may decline and
our business could be harmed
.
We face competition from
other established companies. A number of our competitors have longer operating
histories, larger customer bases, significantly greater financial,
technological, sales, marketing and other resources than we do. As a
result, our competitors may be able to respond more quickly than we can to new
or changing opportunities, technologies, standards or client requirements, more
quickly develop new products or devote greater resources to the promotion and
sale of their products and services than we can. Likewise, their greater
capabilities in these areas may enable them to better withstand periodic
downturns in the identity management solutions industry and compete more
effectively on the basis of price and production. In addition, new
companies may enter the markets in which we compete, further increasing
competition in the identity management solutions industry.
We believe that our
ability to compete successfully depends on a number of factors, including the
type and quality of our products and the strength of our brand names, as well
as many factors beyond our control. We may not be able to compete successfully
against current or future competitors, and increased competition may result in
price reductions, reduced profit margins, loss of market share and an inability
to generate cash flows that are sufficient to maintain or expand the development
and marketing of new products, any of which would adversely impact our results
of operations and financial condition.
22
Risks
Related to Our Securities
The holders of our preferred stock have certain rights and
privileges that are senior to our common stock, and we may issue additional
shares of preferred stock without stockholder approval that could have a
material adverse effect on the market value of the common stock
.
Our Board of Directors (Board)
has the authority to issue a total of up to 4,000,000 shares of preferred stock
and to fix the rights, preferences, privileges, and restrictions, including
voting rights, of the preferred stock, which typically are senior to the rights
of the common stockholders, without any further vote or action by the common
stockholders. The rights of our common stockholders will be subject to, and may
be adversely affected by, the rights of the holders of the preferred stock that
have been issued, or might be issued in the future. Preferred stock also could
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. This could delay, defer, or prevent a
change in control. Furthermore, holders of preferred stock may have other
rights, including economic rights, senior to the common stock. As a result,
their existence and issuance could have a material adverse effect on the market
value of the common stock. We have in the past issued and may from time to time
in the future issue, preferred stock for financing or other purposes with
rights, preferences, or privileges senior to the common stock. As of December 31,
2007, we had three series of preferred stock outstanding, Series B
preferred stock, Series C 8% convertible preferred stock and Series D
8% convertible preferred stock.
The provisions of our Series B
Preferred Stock prohibit the payment of dividends on the common stock unless
the dividends on those preferred shares are first paid. In addition, upon a
liquidation, dissolution or sale of our business, the holders of the Series B
Preferred Stock will be entitled to receive, in preference to any distribution
to the holders of common stock, initial distributions of $2.50 per share, plus
all accrued but unpaid dividends. Pursuant to the terms of our Series B
Preferred Stock we are obligated to pay cumulative cash dividends on shares of Series B
Preferred Stock from legally available funds at the annual rate of $0.2125 per
share, payable in two semi-annual installments of $0.10625 each, which
cumulative dividends must be paid prior to payment of any dividend on our
common stock. As of December 31, 2007, we had cumulative undeclared
dividends on the Series B Preferred Stock of approximately $9,000.
The Series C
Preferred Stock has a liquidation preference equal to its stated value, plus
any accrued and unpaid dividends thereon and any other fees or liquidated
damages owing thereon. The Series C Preferred Stock accrues cumulative
dividends at the rate of 8.0% of the stated value per share per annum. At
the option of the Company, the dividend payment may be made in the form of
cash, after the payment of cash dividends to the holders of Series B
Preferred Stock, or common stock issuable upon conversion of the Series C
Preferred Stock. Each share of Series C Preferred Stock is
convertible at any time at the option of the holder into a number of shares of
common stock equal to the stated value (initially $1,000 per share, subject to
adjustment), plus any accrued and unpaid dividends, divided by the conversion
price (initially $1.50 per share, subject to adjustment). Subject to certain
limitations, the conversion price per share shall be adjusted in the event of
certain subsequent stock dividends, splits, reclassifications, dilutive
issuances, rights offerings, and reclassifications. Certain activities
may not be undertaken by the Company without the affirmative vote of a majority
of the holders of the outstanding shares of Series C Preferred Stock. As
of December 31, 2007, we had cumulative undeclared dividends on the Series C
Preferred Stock of approximately $234,000.
The Series D
Preferred Stock has a liquidation preference equal to its stated value, plus
any accrued and unpaid dividends thereon and any other fees or liquidated
damages owing thereon. The Series D Preferred Stock accrues cumulative
dividends at the rate of 8.0% of the stated value per share per annum. At
the option of the Company, the dividend payment may be made in the form of
cash, after the payment of cash dividends to the holders of Series B and Series C
Preferred Stock, or common stock issuable upon conversion of the Series D
Preferred Stock. Each share of Series D Preferred Stock is
convertible at any time at the option of the holder into a number of shares of
common stock equal to the stated value (initially $1,000 per share, subject to
adjustment), plus any accrued and unpaid dividends, divided by the conversion
price (initially $1.90 per share, subject to adjustment). Subject to certain limitations,
the conversion price per share shall be adjusted in the event of certain
subsequent stock dividends, splits, reclassifications, dilutive issuances,
rights offerings, and reclassifications. Certain activities may not be
undertaken by the Company without the affirmative vote of a majority of the
holders of the outstanding shares of Series D Preferred Stock. As of December 31,
2007, we had cumulative undeclared dividends on the Series D Preferred
Stock of approximately $98,000.
Our stock price has been volatile, and your investment in
our common stock could suffer a decline in value
.
There has been
significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies issuing
the securities. These broad market fluctuations may negatively affect the
23
market price of our
common stock. You may not be able to resell your shares at or above the price
you pay for those shares due to fluctuations in the market price of our common
stock caused by changes in our operating performance or prospects and other
factors.
Some specific factors
that may have a significant effect on our common stock market price include:
·
actual or anticipated fluctuations in our
operating results or future prospects;
·
our announcements or our competitors
announcements of new products;
·
the publics reaction to our press
releases, our other public announcements and our filings with the SEC;
·
strategic actions by us or our
competitors, such as acquisitions or restructurings;
·
new laws or regulations or new
interpretations of existing laws or regulations applicable to our business;
·
changes in accounting standards,
policies, guidance, interpretations or principles;
·
changes in our growth rates or our
competitors growth rates;
·
developments regarding our patents or
proprietary rights or those of our competitors;
·
our inability to raise additional capital
as needed;
·
substantial sales of common stock
underlying warrants and preferred stock;
·
concern as to the efficacy of our
products;
·
changes in financial markets or general
economic conditions;
·
sales of common stock by us or members of
our management team; and
·
changes in stock market analyst
recommendations or earnings estimates regarding our common stock, other
comparable companies or our industry generally.
Our future sales of our common stock could adversely affect
its price and our future capital-raising activities could involve the issuance
of equity securities, which would dilute your investment and could result in a
decline in the trading price of our common stock
.
We may sell securities in
the public or private equity markets if and when conditions are favorable, even
if we do not have an immediate need for additional capital at that time. Sales
of substantial amounts of our common stock, or the perception that such sales
could occur, could adversely affect the prevailing market price of our common
stock and our ability to raise capital. We may issue additional common stock in
future financing transactions or as incentive compensation for our executive
management and other key personnel, consultants and advisors. Issuing any
equity securities would be dilutive to the equity interests represented by our
then-outstanding shares of common stock. The market price for our common stock
could decrease as the market takes into account the dilutive effect of any of
these issuances. Furthermore, we may enter into financing transactions at
prices that represent a substantial discount to the market price of our common
stock. A negative reaction by investors and securities analysts to any
discounted sale of our equity securities could result in a decline in the
trading price of our common stock.
If registration rights that we have previously granted are
exercised, then the price of our common stock may be adversely affected
.
We have agreed to
register with the SEC certain shares of our common stock which we issued in
unregistered offerings. In the event these securities are registered with
the SEC, they may be freely sold in the open market provided the registration
statement relating to such shares becomes effective and subject to trading
restrictions to which our affiliates holding the shares may be subject from
time to time. We expect that we also will
24
be required to register
any securities sold in future private financings. Additionally, the number of
shares of our common stock underlying issued and outstanding warrants and
preferred stock registered under prior registration statements, many of which are
now available for resale under Rule 144 of the Securities Act, is
substantial and sales of such underlying stock could cause significant
dilution. The sale of a significant amount of shares in the open market,
or the perception that these sales may occur, could cause the trading price of
our common stock to decline or become highly volatile.
Our corporate documents and Delaware law contain provisions
that could discourage, delay or prevent a change in control of our company
.
Provisions in our
certificate of incorporation and bylaws may discourage, delay or prevent a
merger or acquisition involving us that our stockholders may consider
favorable. For example, our certificate of incorporation authorizes preferred
stock, which carries special rights, including voting and dividend rights. With
these rights, preferred stockholders could make it more difficult for a third
party to acquire us.
We are also subject to
the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law. Under these provisions, if anyone becomes an interested
stockholder, we may not enter into a business combination with that person
for three years without special approval, which could discourage a third party
from making a takeover offer and could delay or prevent a change of control.
For purposes of Section 203, interested stockholder means, generally,
someone owning 15% or more of our outstanding voting stock or an affiliate of
ours that owned 15% or more of our outstanding voting stock during the past
three years, subject to certain exceptions as described in Section 203.
We do not expect to pay cash dividends on our common stock
for the foreseeable future
.
We have never paid cash
dividends on our common stock and do not anticipate that any cash dividends will
be paid on the common stock for the foreseeable future. The payment of any cash
dividend by us will be at the discretion of our board of directors and will
depend on, among other things, our earnings, capital, regulatory requirements
and financial condition. Furthermore, the terms of our Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock directly
limit our ability to pay cash dividends on our common stock.
Securities analysts may not continue to cover our common
stock or may issue negative reports, and this may have a negative impact on our
common stocks market price
.
There is no guarantee
that securities analysts will continue to cover our common stock. If securities
analysts do not cover our common stock, the lack of research coverage may
adversely affect our common stocks market price. The trading market for our
common stock relies in part on the research and reports that industry or
financial analysts publish about our business or us. If one or more of the
analysts who cover us downgrades our stock, our stock price may decline
rapidly. If one or more of these analysts ceases coverage of our common stock,
we could lose visibility in the market, which in turn could cause our stock
price to decline. In addition, rules mandated by the Sarbanes-Oxley Act of
2002, and a global settlement reached between the SEC, other regulatory
analysts and a number of investment banks in April 2003, may lead to a
number of fundamental changes in how analysts are reviewed and compensated. In
particular, many investment banking firms will now be required to contract with
independent financial analysts for their stock research. It may be difficult
for companies with smaller market capitalizations, such as our company, to
attract independent financial analysts that will cover our common stock, which
could have a negative effect on our market price.
The large number of holders and lack of concentration of
ownership of our common stock may make it difficult for us to reach a quorum or
obtain an affirmative vote of our stockholders at future stockholder meetings
.
Our stock is held in a
large number of individual accounts. As a result, it may be difficult for us to
reach a quorum or obtain an affirmative vote of a majority of our stockholders
where either of those thresholds are measured based on the total number of
shares of our common stock outstanding. Difficulty in obtaining a stockholder
vote could impact our ability to complete any financing or strategic
transaction requiring stockholder approval or effect basic corporate governance
changes, such as an increase in the authorized number of shares of our
preferred stock and our common stock.
25
Item
1B. Unresolved Staff Comments
Not
applicable.
Item 2. Properties.
Our
corporate headquarters are located in San Diego, California where we occupy
approximately 16,000 square feet of office space and approximately 1,000 square
feet of warehouse space. Our lease for this facility continues through September 2008
at a cost of approximately $20,500 per month.
We occupy 10,000 square feet in Gatineau, Province of Quebec. These
premises are leased until May 2009, at a cost of approximately $16,800 per
month. We occupy 3,470 square feet of office space in Portland, Oregon at a
cost of approximately $7,300 per month.
Our lease for this facility continues through October 2009.
Item 3. Legal Proceedings.
We are periodically engaged
in litigation in the ordinary course of business and do not believe that any of
such litigation is material to our ongoing operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5.
Market for Common Equity and Related Stockholder Matters.
Market
Information.
Our
Common Stock trades under the symbol IW on the American Stock Exchange.
The
following table sets forth the high and low sales prices per share for our
Common Stock as reported by the American Stock Exchange for each quarter in
2007 and 2006:
2007 Fiscal Quarters
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
2.810
|
|
$
|
1.450
|
|
Second Quarter
|
|
$
|
2.740
|
|
$
|
1.450
|
|
Third Quarter
|
|
$
|
2.180
|
|
$
|
1.400
|
|
Fourth Quarter
|
|
$
|
2.000
|
|
$
|
1.400
|
|
2006 Fiscal Quarters
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
2.540
|
|
$
|
1.350
|
|
Second Quarter
|
|
$
|
2.560
|
|
$
|
1.580
|
|
Third Quarter
|
|
$
|
2.300
|
|
$
|
1.110
|
|
Fourth Quarter
|
|
$
|
2.250
|
|
$
|
1.200
|
|
There
is no public trading market for our preferred stock.
Holders.
As of March 25,
2008, there were approximately 1,600 holders of record of our Common Stock.
Dividends.
We
have never declared or paid dividends on our Common Stock and do not anticipate
paying any cash dividends on our shares of Common Stock in the foreseeable
future. We are obligated to pay cumulative cash dividends on shares of Series B
Preferred Stock from legally available funds at the annual rate of $0.2125 per
share, payable in two semi-annual installments of $0.10625 each, which
cumulative dividends must be paid prior to payment of any dividend on our
Common
26
Stock. The holders of our Series C Preferred
Stock are entitled to receive cumulative dividends, at the option of the
Company, payable (i) in common stock upon conversion of the Series C
Preferred Stock, or (ii) in cash after the payment of cash dividends to
the holders of our Series B Preferred Stock at the rate of 8% per annum
(as a percentage of stated value per share).
The holders of our Series D Preferred Stock are entitled to receive
cumulative dividends, at the option of the Company, payable (i) in common
stock upon conversion of the Series D Preferred Stock, or (ii) in
cash after the payment of cash dividends to the holders of our Series B
Preferred Stock at the rate of 8% per annum (as a percentage of stated value
per share).
As of December 31,
2007, the Company had cumulative undeclared dividends of approximately $9,000
relating to our Series B Preferred Stock, approximately $234,000 relating
to our Series C Preferred Stock, and approximately 98,000 relating to our Series D
Preferred Stock.
Repurchases.
We did
not repurchase any shares of our common stock during fiscal 2007.
Item 6.
Selected Consolidated Financial Data
The
following selected financial data should be read in conjunction with our
Consolidated Financial Statements and the related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Form 10-K. The selected consolidated statement
of operations data presented below for each of the years ended December 31,
2007, 2006, and 2005, and the consolidated balance sheet data at December 31,
2007 and 2006 are derived from our Consolidated Financial Statements that have
been included elsewhere in this Form 10-K. The selected consolidated
statement of operations data for the years ended December 31, 2004 and
2003 and consolidated balance sheet data at December 31, 2005, 2004, and
2003 are derived from audited consolidated financial statements not included in
this Form 10-K. The historical results of operations are not necessarily
indicative of future results.
27
STATEMENT OF OPERATIONS DATA:
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005(1)
|
|
2004(1)
|
|
2003(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,488,577
|
|
$
|
10,189,566
|
|
$
|
9,174,173
|
|
$
|
9,176,865
|
|
$
|
14,147,971
|
|
Cost of revenues
|
|
$
|
2,546,432
|
|
$
|
3,329,039
|
|
$
|
4,041,862
|
|
$
|
3,106,256
|
|
$
|
6,745,616
|
|
Gross profit
|
|
$
|
5,942,145
|
|
$
|
6,860,527
|
|
$
|
5,132,311
|
|
$
|
6,070,609
|
|
$
|
7,402,355
|
|
Operating
expenses
|
|
$
|
10,439,538
|
|
$
|
11,933,609
|
|
$
|
12,048,767
|
|
$
|
9,824,470
|
|
$
|
11,114,469
|
|
Interest
(income) expense, net
|
|
$
|
215,155
|
|
$
|
564,524
|
|
$
|
(53,288
|
)
|
$
|
5,172,193
|
|
$
|
6,960,140
|
|
Other (income)
expense, net
|
|
$
|
22,221
|
|
$
|
(119,330
|
)
|
$
|
(166,390
|
)
|
$
|
(187,640
|
)
|
$
|
(207,046
|
)
|
Loss from
continuing operations before income taxes
|
|
$
|
(4,734,769
|
)
|
$
|
(5,518,276
|
)
|
$
|
(6,696,778
|
)
|
$
|
(8,738,414
|
)
|
$
|
(10,465,208
|
)
|
Income tax
expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
61,735
|
|
Loss from
continuing operations
|
|
$
|
(4,734,769
|
)
|
$
|
(5,518,276
|
)
|
$
|
(6,696,778
|
)
|
$
|
(8,738,414
|
)
|
$
|
(10,526,943
|
)
|
Discontinued
operations
|
|
$
|
50,000
|
|
$
|
(407,939
|
)
|
$
|
(1,658,926
|
)
|
$
|
(900,185
|
)
|
$
|
(208,850
|
)
|
Net loss
|
|
$
|
(4,684,769
|
)
|
$
|
(5,926,215
|
)
|
$
|
(8,355,704
|
)
|
$
|
(9,638,599
|
)
|
$
|
(10,735,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss -
continuing operations
|
|
$
|
(0.31
|
)
|
$
|
(0.41
|
)
|
$
|
(0.53
|
)
|
$
|
(0.75
|
)
|
$
|
(1.78
|
)
|
Net loss -
discontinued operations
|
|
$
|
|
|
$
|
(0.03
|
)
|
$
|
(0.13
|
)
|
$
|
(0.08
|
)
|
$
|
(0.04
|
)
|
Net loss
preferred dividends
|
|
$
|
(0.08
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Net loss
|
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.66
|
)
|
$
|
(0.83
|
)
|
$
|
(1.81
|
)
|
Weighted-average
shares (basic and diluted)
|
|
15,070,308
|
|
13,592,841
|
|
12,731,304
|
|
11,739,819
|
|
5,953,801
|
|
BALANCE SHEET DATA:
Cash
|
|
$
|
1,044,242
|
|
$
|
938,553
|
|
$
|
741,184
|
|
$
|
2,911,765
|
|
$
|
578,093
|
|
Accounts
receivable, net
|
|
$
|
424,739
|
|
$
|
1,721,892
|
|
$
|
1,340,154
|
|
$
|
1,797,120
|
|
$
|
1,449,968
|
|
Inventories, net
|
|
$
|
130,342
|
|
$
|
57,990
|
|
$
|
207,833
|
|
$
|
1,096,796
|
|
$
|
804,526
|
|
Other current
assets
|
|
$
|
440,459
|
|
$
|
137,609
|
|
$
|
218,549
|
|
$
|
247,548
|
|
$
|
204,065
|
|
Property and
equipment, net
|
|
$
|
287,989
|
|
$
|
351,700
|
|
$
|
423,887
|
|
$
|
510,270
|
|
$
|
634,966
|
|
Other and
pension assets
|
|
$
|
718,214
|
|
$
|
784,459
|
|
$
|
738,238
|
|
$
|
733,796
|
|
$
|
726,414
|
|
Intangibles, net
|
|
$
|
2,436,576
|
|
$
|
141,294
|
|
$
|
218,400
|
|
$
|
764,125
|
|
$
|
1,120,675
|
|
Goodwill
|
|
$
|
4,452,042
|
|
$
|
3,415,647
|
|
$
|
3,415,647
|
|
$
|
5,297,627
|
|
$
|
5,297,627
|
|
Total assets
|
|
$
|
9,934,603
|
|
$
|
7,549,144
|
|
$
|
7,303,892
|
|
$
|
13,359,047
|
|
$
|
10,816,334
|
|
Total current
liabilities
|
|
$
|
5,268,953
|
|
$
|
5,212,961
|
|
$
|
2,808,760
|
|
$
|
4,281,140
|
|
$
|
3,311,964
|
|
Long-term
liabilities
|
|
$
|
1,138,911
|
|
$
|
1,016,293
|
|
$
|
1,129,530
|
|
$
|
811,688
|
|
$
|
4,192,605
|
|
Total
liabilities
|
|
$
|
6,407,864
|
|
$
|
6,229,254
|
|
$
|
3,938,290
|
|
$
|
5,092,828
|
|
$
|
7,504,569
|
|
Total
shareholders equity
|
|
$
|
3,526,739
|
|
$
|
1,319,890
|
|
$
|
3,365,602
|
|
$
|
8,266,219
|
|
$
|
3,311,765
|
|
(1) Results of
operations as presented have been restated to exclude the results of operations
of our Digital Photography and Digital Imaging Asia Pacific components due to
these components being classified as discontinued operations due to their sale
in November 2006 and March 2005, respectively.
Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING
STATEMENTS
The following discussion should be read in conjunction with our
consolidated financial statements included elsewhere in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors including those set forth under Risk Factors in Item 1A
above.
Due to such fluctuations, historical results and
percentage relationships are not necessarily indicative of the operating
results for any future period.
28
OVERVIEW
ImageWare Systems, Inc.
is a leader in the emerging market for software-based identity management
solutions, providing biometric, secure credential and law enforcement
technologies. Our flagship product is
the IWS Biometric Engine. Scalable for
small city business or worldwide deployment, our biometric engine is a
multi-biometric platform that is hardware and algorithm independent, enabling
the enrollment and management of unlimited population sizes. Our identification products are used to
manage and issue secure credentials including national IDs, passports, driver
licenses, smart cards and access control credentials. Our law enforcement
products provide law enforcement with integrated mug shot, fingerprint Livescan
and investigative capabilities. The
biometric technology is now an integral part of all markets we address, and all
of our products are integrated into the Biometric Engine Platform.
Elements of the biometric engine can be used as investigative tools to law
enforcement potentially utilizing multiple biometrics and forensic data
elements, and to enhance security and authenticity of public and private sector
credentials.
CRITICAL
ACCOUNTING ESTIMATES
The
discussion and analysis of our consolidated financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principals generally accepted in the
United States of America, or U.S. GAAP. The preparation of these consolidated financial
statements in accordance with U.S. GAAP requires us to utilize accounting
policies and make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingencies as of the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during a fiscal period. The SEC considers an accounting
policy to be critical if it is important to a companys financial condition and
results of operations, and if it requires significant judgment and estimates on
the part of management in its application. Although we believe that our
judgments and estimates are appropriate and correct, actual results
may differ from those estimates.
The
following are our critical accounting policies because we believe they are both
important to the portrayal of our financial condition and results of operations
and require critical management judgments and estimates about matters that are
uncertain. If actual results or events differ materially from those
contemplated by us in making these estimates, our reported financial condition
and results of operations for future periods could be materially affected. For a detailed discussion on the application
of these and other accounting policies, see Note 1 in the Notes to the
Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K,
beginning on page F-7.
Revenue Recognition
Our
revenue recognition policy is significant because our revenue is a key
component of our consolidated results of operations. We recognize revenue from
the following major revenue sources:
·
Long-term fixed-price contracts involving significant
customization
·
Fixed-price contracts involving minimal customization
·
Software licensing
·
Sales of computer hardware and identification media
·
Postcontract customer support (PCS)
The
Companys revenue recognition policies are consistent with U. S. GAAP including
Statements of Position 97-2 Software Revenue Recognition and 98-9 Modification
of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions,
Securities and Exchange Commission Staff Accounting Bulletin 104 , Emerging
Issues Task Force Issue 00-21 Revenue Arrangements with Multiple Deliverables,
and Emerging Issues Task Force Issue 03-05 Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software. Accordingly, the Company recognizes revenue
when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
fee is fixed or determinable, and collectibility is reasonably assured.
29
We
recognize revenue and profit as work progresses on long-term, fixed-price
contracts involving significant amount of hardware and software customization
using the percentage of completion method based on costs incurred to date
compared to total estimated costs at completion. Revenue from contracts for
which we cannot reliably estimate total costs or there are not significant
amounts of customization are recognized upon completion. Determining when a
contract should be accounted for using the percentage of completion method
involves judgment. Critical items that are considered in this process are the
degree of customization and related labor hours necessary to complete the
required work as well as ongoing estimates of the future labor hours needed to
complete the contract. We also generate non-recurring revenue from the
licensing of our software. Software license revenue is recognized upon the
execution of a license agreement, upon deliverance, fees are fixed and
determinable, collectibility is probable and when all other significant
obligations have been fulfilled. We also 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. Our revenue from
periodic maintenance agreements is generally recognized ratably over the
respective maintenance periods provided no significant obligations remain and
collectibility of the related receivable is probable.
For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements in Item 8
of this Annual Report on Form 10-K, beginning on page F-7.
Allowance for Doubtful Accounts
We
provide an allowance for our accounts receivable for estimated losses that may
result from our customers inability to pay.
We determine the amount of allowance by analyzing historical losses,
customer concentrations, customer creditworthiness, current economic trends,
the age of the accounts receivable balances, and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivables balance was $425,000, net of allowance for
doubtful accounts of $0 for the year ended December 31, 2007.
Valuation of Goodwill, Other Intangible and Long-Lived Assets
We
assess impairment of goodwill and identifiable intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
·
Significant underperformance relative to
historical or expected future operating results;
·
Significant changes in the manner of our
use of the acquired assets or the strategy of our overall business;
·
Significant negative industry or economic
trends;
When
we determine that the carrying value of goodwill and other intangible assets
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based upon fair value
methodologies. Goodwill and other net intangible assets amounted to
approximately $6,889,000 for the year ended December 31, 2007. During the twelve months ended December 31,
2007, we completed the acquisition of substantially all the assets of Sol Logic, Inc. We recorded goodwill from this acquisition of
approximately $1,036,000 after the allocation of purchase price as determined
by an unaffiliated, professional third-party valuation firm employing fair
value methodologies.
In
2002, Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets became effective, and as a result we ceased to
amortize goodwill. In lieu of amortization, we performed an initial impairment
review of our goodwill in June, 2002 and will perform an annual impairment
review thereafter in the fourth quarter of our fiscal year. Completion of our initial impairment test
indicated there was no goodwill impairment.
We also performed our annual impairment review as of December 31,
2005, based upon our 2006 operating plan
This annual impairment review indicated there was goodwill impairment in
our Digital Photography segment as of December 31, 2005, and accordingly,
we recorded an impairment loss in the 2005 Consolidated Statement of
Operations. Both of these tests were
conducted by determining and comparing the fair value of our reporting units,
as defined in SFAS 142, to the reporting units carrying value as of that date.
With
the sale of our Digital Photography component in 2006, we reassessed the
composition of our operating segments and determined that we no longer operate
in separate, distinct market segments but rather operate in one market segment,
such segment being identity management.
The Companys determination was based on fundamental changes in the Companys
business structure due to the consolidation of operations, restructuring of the
Companys operations and
30
management team, and the
integration of what where previously distinct, mutually exclusive technologies. This has resulted in changes in the manner by
which the Companys chief decision maker assesses performance and makes
decisions concerning resource allocation.
As a result of our operation in one market segment, such segment being
identity management, our 2006 and 2007 goodwill impairment review consisted of
the comparison of the fair value of our identity management segment as
determined by the quoted market prices of our common stock to the carrying
amount of the segment. As the fair value exceeded the carrying value by a
substantial margin, we determined that our goodwill was not impaired.
There
are many management assumptions and estimates underlying the determination of
an impairment loss, and estimates using different, but reasonable, assumptions
could produce significantly different results. Significant assumptions include
estimates of future levels of revenues and operating expenses. Therefore, the
timing and recognition of impairment losses by us in the future, if any, may be
highly dependent upon our estimates and assumptions. There can be no assurance that goodwill
impairment will not occur in the future.
We
account for long-lived assets in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived
assets and certain identifiable intangible assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount which the carrying amount of the assets exceeds the fair value of
the assets. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the asset. Assets to be disposed of are
reported at the lower of the carrying amount of fair value less costs to
sell. During the twelve months ended December 31,
2007 we completed the acquisition of substantially all the assets of Sol Logic, Inc. Pursuant to this acquisition, we recorded approximately
$2,311,000 in identifiable intangible assets.
The assets acquired were a covenant not to compete valued at
approximately $200,000, customer base valued at approximately $93,000 and
developed technology valued at approximately $2,018,000. The allocation of the purchase price was
based on fair value methodologies employed by an independent valuation firm.
We
recorded no impairment losses for long-lived or intangible assets during the
twelve months ended December 31, 2007 and 2006. In 2005, we recorded an
impairment charge of approximately $253,000 related to our intangible asset for
certain trademark and tradenames carried in our Identification segment. This loss reflects the amount by which the
carrying value of this asset exceeded its estimated fair value determined by
the assets future discounted cash flows.
The impairment loss is recorded as a component of Operating expenses
in the Statement of Operations for 2005.
There are many management assumptions and estimates underlying the determination
of an impairment loss, and estimates using different, but reasonable,
assumptions could produce significantly different results. Significant
assumptions include estimates of future levels of revenues and operating
expenses. Therefore, the timing and recognition of impairment losses by us in
the future, if any, may be highly dependent upon our estimates and
assumptions. There can be no assurance
that intangible asset impairment will not occur in the future.
Stock-Based Compensation
Upon
adoption of SFAS 123R on January 1, 2006, we began estimating the value of
employee stock options on the date of grant using the Black-Scholes model.
Prior to the adoption of SFAS 123R, the value of each employee stock option was
estimated on the date of grant using the Black-Scholes model for the purpose of
the pro forma financial disclosure in accordance with SFAS 123. The
determination of fair value of stock-based payment awards on the date of grant
using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the expected stock price
volatility over the term of the awards and the actual and projected employee
stock option exercise behaviors. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. We calculated our expected volatility assumption required
in the Black-Scholes model based on the historical volatility of our stock. As
of January 1, 2006 we have adopted the modified prospective transition
method and its effect is included in our consolidated financial statements for
the twelve months ended December 31, 2006.
We will update these assumptions on at least an annual basis and on an
interim basis if significant changes to the assumptions are warranted.
31
Year Ended December 31, 2007
Compared to Year Ended December 31, 2006 and Year Ended December 31,
2006 Compared to Year Ended December 31, 2005
The following managements
discussion and analysis or plan of operation is based primarily upon our
Identity Management segment. Results as
presented do not contain the results of our Digital Photography component nor
our wholly-owned subsidiary, Digital Imaging Asia Pacific, due to these
components being classified as discontinued operations due to the sale of Digital
Photography in November 2006 and Digital Imaging Asia Pacific in the first
fiscal quarter of 2005.
Revenues
Product
Revenues
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Software and
Royalties
|
|
$
|
4,966,860
|
|
-16
|
%
|
$
|
5,889,262
|
|
46
|
%
|
$
|
4,036,856
|
|
Percentage of
total net product revenue
|
|
88
|
%
|
11
|
%
|
77
|
%
|
20
|
%
|
57
|
%
|
Hardware and
consumables
|
|
$
|
349,741
|
|
-74
|
%
|
$
|
1,347,452
|
|
-36
|
%
|
$
|
2,108,411
|
|
Percentage of
total net product revenue
|
|
6
|
%
|
-12
|
%
|
18
|
%
|
-12
|
%
|
30
|
%
|
Services
|
|
$
|
335,573
|
|
-9
|
%
|
$
|
368,884
|
|
-25
|
%
|
$
|
488,852
|
|
Percentage of
total net product revenue
|
|
6
|
%
|
1
|
%
|
5
|
%
|
-2
|
%
|
7
|
%
|
Patent Licensing
|
|
$
|
|
|
0
|
%
|
$
|
|
|
-100
|
%
|
$
|
500,000
|
|
Percentage of
total net product revenue
|
|
0
|
%
|
0
|
%
|
0
|
%
|
-7
|
%
|
7
|
%
|
Total net
product revenues
|
|
$
|
5,652,174
|
|
-26
|
%
|
$
|
7,605,598
|
|
7
|
%
|
$
|
7,134,119
|
|
Identity management
software and royalty revenues decreased 16% or approximately $922,000 during
the twelve months ended December 31, 2007 as compared to the corresponding
period in 2006. Sales of our Biometric
Engine and EPI identity management products decreased 11% or approximately
$557,000 in 2007 from 2006. This decrease
is reflective of lower sales of these products into project oriented solutions. Also contributing to this decrease were lower
royalties generated from our IWS Desktop Security product. Sales of software and royalties related to
our law enforcement products decreased 42% or $365,000 in 2007 from 2006 due
primarily to decreased sales of our Crime Capture System to state and local law
enforcement agencies.
The increase in our
Identity management software and royalties of 46% in 2006 from 2005 is
reflective of increased sales of our
Biometric Engine and EPI identity management products into project oriented
solutions. Also contributing to this increase were royalties generated from our
IWS Desktop Security product. The
increase in project-oriented revenues was offset by a decrease in sales of
boxed product through our distribution channel.
Hardware and consumable
product sales decreased approximately 74% or $998,000 during twelve months
ended December 31, 2007 as compared to the corresponding period in
2006. Sales of hardware decreased
approximately 60% or $279,000 from 2006 levels and reflect both a decrease in
project oriented work and in the hardware composition of orders received and
completed by the Company. Sales of
consumables decreased approximately 82% or $719,000 and are reflective of lower
project sales and recurring orders from our Law Enforcement customers. Hardware and consumable sales for the twelve
months ended December 31, 2006 contain approximately $203,000 related to
our German sales office which was closed in order to reduce operating costs.
Hardware and consumable
product sales decreased approximately 36% or $761,000 during twelve months
ended December 31, 2006 as compared to the corresponding period in 2005
and reflects the repositioning of our international sales office in Germany in
order to lower fixed costs and pursue significant Identification projects
utilizing the Companys software technologies as our primary
differentiator. This office had
historically emphasized the resale of third-party merchandise (hardware and
consumables) which generated lower gross margins than software (as a percentage
of revenue) and required significant fixed costs for sales, service and
support. In furtherance of this
strategy, in December 2005, we decided to reorganize our German sales
office by closing our existing facility in order to reduce operating expenses.
The effect on hardware and consumables revenues from the closure of this office
was a reduction of such revenues of approximately $732,000 in 2006 as compared
to 2005.
32
Services revenues are
comprised primarily of software integration services, system installation
services and customer training. Such
revenues decreased 9% or approximately $33,000 during the twelve months ended December 31,
2007 as compared to the corresponding period of 2006 due primarily to a
decrease in project work.
Such revenues decreased
during the twelve months ended December 31, 2006 as compared to the
corresponding period of 2005 due primarily to the composition of our customers
orders and a decrease in our installation of hardware products.
We expect service
revenues to increase in 2008 through our implementation of large-scale high-end
installations.
We generated revenues of
$500,000 from sublicensing our Image Editing System patent within the computer
video, web conferencing and cellular phone fields of use during the twelve
months ended December 31, 2005.
There were no such revenues earned in the comparable periods of 2007 or
2006.
We believe that the period-to-period fluctuations of
identity management software revenue in project-oriented solutions is largely
due to the timing of government procurement with respect to the various
programs we are pursuing. Based on
managements current visibility into the timing of potential government
procurements, we believe that we will see a significant increase in government
procurement and implementations with respect to identity management initiatives
during 2008 and continuing into 2009.
We feel that we are well positioned for participation
in one or more large-scale domestic or international projects which will enable
our company to achieve significant product revenue growth. In the past eighteen months we have
continuously retooled our identity management suite of products to meet
changing government specifications and to enable customization for large
project applications. Additionally, we
reoriented our sales organization to direct our resources and efforts toward
establishing partnerships with large systems integrators as we believe these
integrators will be the ultimate choice for awards of large-scale secure
identification solutions.
Our backlog of product
orders as of December 31, 2007, was approximately $867,000. At December 31, 2007, we also had
maintenance and support backlog of approximately $883,000 under existing
maintenance agreements. Product revenue
is typically recognized within a three to six month period depending upon the
required degree of customization, if any.
Historically, we have experienced a very minimal risk of order
cancellation and do not anticipate order cancellations in excess of 5%. Our revenue from maintenance agreements is
generally recognized ratably over the respective maintenance periods provided
no significant obligations remain and collectibility of the related receivable
is probable.
Maintenance
Revenues
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
revenues
|
|
$
|
2,836,403
|
|
10
|
%
|
$
|
2,583,968
|
|
27
|
%
|
$
|
2,040,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenues
increased 10% for the twelve months ended December 31, 2007 as compared to
the corresponding period in 2006 and reflects the expansion of our installed
base resulting from the completion of significant project-oriented work during
the year ended December 31, 2007 in conjunction with our retention of
existing maintenance customers.
Likewise, our increase in maintenance revenues for the twelve months
ended December 31, 2006 as compared to the corresponding period in 2005
reflects the expansion of our installed base during 2006 combined with our
retention of existing maintenance customers.
We anticipate continued
growth of our installed base through the retention of existing customers
combined with the completion of project-oriented work; however we cannot
predict the timing of this anticipated growth.
33
Cost
of Product Revenues
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
Cost of
Product Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Software and
Royalties
|
|
$
|
1,007,754
|
|
-18
|
%
|
$
|
1,225,300
|
|
32
|
%
|
$
|
931,293
|
|
Percentage of
software and royalty net product revenue
|
|
20
|
%
|
-1
|
%
|
21
|
%
|
-2
|
%
|
23
|
%
|
Hardware and
consumables
|
|
$
|
295,435
|
|
-70
|
%
|
$
|
983,167
|
|
-50
|
%
|
$
|
1,965,269
|
|
Percentage of
hardware and consumables net product revenue
|
|
84
|
%
|
11
|
%
|
73
|
%
|
-20
|
%
|
93
|
%
|
Services
|
|
$
|
76,984
|
|
933
|
%
|
$
|
7,454
|
|
-63
|
%
|
$
|
20,197
|
|
Percentage of
services net product revenue
|
|
23
|
%
|
21
|
%
|
2
|
%
|
-2
|
%
|
4
|
%
|
Patent Licensing
|
|
$
|
|
|
0
|
%
|
$
|
|
|
0
|
%
|
$
|
|
|
Percentage of
patent licensing net product revenue
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Total net
product revenues
|
|
$
|
1,380,173
|
|
-38
|
%
|
$
|
2,215,921
|
|
-24
|
%
|
$
|
2,916,759
|
|
Percentage of
total net product revenues
|
|
24
|
%
|
-5
|
%
|
29
|
%
|
-12
|
%
|
41
|
%
|
The dollar decrease in
our costs of software and royalty product revenue of approximately 18% or
$218,000 for the twelve months ended December 31, 2007 as compared to the
corresponding period of 2006 is reflective of lower software and royalty
revenues being generated from project-oriented work in the 2007 year. Identity management software and royalty
revenues decreased 16% during the twelve months ended December 31, 2007 as
compared to the corresponding period in 2006.
The dollar increase in
our costs of software and royalty product revenue of approximately 32% or
$294,000 for the twelve months ended December 31, 2006 as compared to the
corresponding period of 2005 is reflective of increased software and royalty
revenues being generated from project-oriented work which includes costs for
third-party software licenses and contract programming fees for software
customization. Such costs decreased as a
percentage of software and royalty product revenues by approximately 2% during
the twelve months ended December 31, 2006 as compared to the corresponding
period of 2005 due to higher software and royalty product revenues in the 2006
year.
Costs of product revenues
of our hardware and consumables revenues decreased approximately 70% or
$688,000 for the twelve months ended December 31, 2007 as compared to the
corresponding period of 2006 due to lower sales of hardware and
consumables. Sales of hardware decreased
approximately $279,000 and sales of consumables decreased approximately $719,000
for the twelve months ended December 31, 2007 as compared to the
corresponding period in 2006. These
revenue decreases resulted in lower cost of sales of approximately $157,000
related to hardware and lower cost of sales of approximately $531,000 related
consumables.
Costs of product revenues
of our hardware and consumables revenues decreased approximately 50% or
$982,000 for the twelve months ended December 31, 2006 as compared to the
corresponding period of 2005 due to lower sales of hardware and
consumables. This decrease in hardware
and consumables product revenues is reflective of our decision in late 2005 to
close our German sales office. This
office had historically emphasized the resale of third-party merchandise
(hardware and consumables) which generated lower gross margins than software
(as a percentage of revenue) and required significant fixed costs for sales,
service and support The 2005 year also
contains approximately $251,000 in inventory write-down costs associated with
the closure of our German sales office.
Costs of products also
can vary as a percentage of product revenue from period to period depending
upon product mix and the third party software license content, hardware
content, and print media consumable content included in systems installed
during a given period.
34
Maintenance
Cost of Revenues
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
maintenance cost of revenues
|
|
$
|
1,166,259
|
|
5
|
%
|
$
|
1,113,118
|
|
-1
|
%
|
$
|
1,125,103
|
|
Percentage of
total maintenance revenues
|
|
41
|
%
|
-2
|
%
|
43
|
%
|
-12
|
%
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance
revenues increased approximately 5%, or $53,000 during the twelve months ended December 31,
2007 as compared to the corresponding period of 2006 due primarily to higher
costs incurred to service our expanding installed base. Cost of maintenance revenues as a percentage
of maintenance revenues decreased 2% during the twelve months ended December 31,
2007 as compared to the corresponding period in 2006 due to higher maintenance
revenues available to absorb fixed costs.
Cost of maintenance
revenues as a percentage of maintenance revenues decreased approximately 12%
during the twelve months ended December 31, 2006 as compared to the
corresponding period of 2005 due primarily to higher maintenance revenues to
absorb fixed maintenance costs. The
dollar decrease during the twelve months ended December 31, 2006 as
compared to the corresponding period in 2005 is reflective of a higher
percentage of our maintenance revenues being generated from maintenance
coverage on software only solutions which typically have lower maintenance
costs than solutions comprised of both software and hardware components.
Product
Gross Profit
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
Product
gross profit
|
|
|
|
|
|
|
|
|
|
|
|
Software and
royalties
|
|
$
|
3,959,106
|
|
-15
|
%
|
$
|
4,663,962
|
|
50
|
%
|
$
|
3,105,563
|
|
Percentage of
software and royalty product revenue
|
|
80
|
%
|
1
|
%
|
79
|
%
|
2
|
%
|
77
|
%
|
Hardware and
consumables
|
|
$
|
54,306
|
|
-85
|
%
|
$
|
364,285
|
|
154
|
%
|
$
|
143,142
|
|
Percentage of
hardware and consumables product revenue
|
|
16
|
%
|
-11
|
%
|
27
|
%
|
20
|
%
|
7
|
%
|
Services
|
|
$
|
258,589
|
|
-28
|
%
|
$
|
361,430
|
|
-23
|
%
|
$
|
468,655
|
|
Percentage of
services product revenue
|
|
77
|
%
|
-21
|
%
|
98
|
%
|
2
|
%
|
96
|
%
|
Patent Licensing
|
|
$
|
|
|
0
|
%
|
$
|
|
|
-100
|
%
|
$
|
500,000
|
|
Percentage of
Patent Licensing product revenue
|
|
0
|
%
|
0
|
%
|
0
|
%
|
-100
|
%
|
100
|
%
|
Total product
gross profit
|
|
$
|
4,272,001
|
|
-21
|
%
|
$
|
5,389,677
|
|
28
|
%
|
$
|
4,217,360
|
|
Percentage of
total product revenues
|
|
76
|
%
|
5
|
%
|
71
|
%
|
12
|
%
|
59
|
%
|
Total product gross
profit as a percentage of product revenues increased approximately 5% despite a
dollar decrease of approximately $1,118,000 during the twelve months ended December 31,
2007 as compared to the corresponding period during 2005 due primarily to a
higher percentage of total revenues coming from the sales of software and
royalties which typically have lower costs than solutions containing
significant amounts of hardware and consumables.
Total product gross
profit as a percentage of product revenues increased approximately 12% or
$1,173,000 during the twelve months ended December 31, 2006 as compared to
the corresponding period during 2005 due primarily to higher product sales and
a higher percentage of total revenues coming from the sales of software and
royalties which typically have lower costs than solutions containing
significant amounts of hardware and consumables.
The dollar decrease in
gross profit of software and royalties of approximately 15% or $705,000 for the
twelve months ended December 31, 2007 as compared to the corresponding
period in 2006 is reflective of lower sales of software and royalties into
project-oriented work of approximately $922,000 in the twelve month period
ending December 31, 2007.
35
The dollar increase in
gross profit of software and royalties of approximately 50% or 1,558,000 for
the twelve months ended December 31, 2006 as compared to the corresponding
period in 2005 is reflective of higher sales of software and royalties into
project-oriented work of approximately $1,852,000 in the twelve month period
ending December 31, 2006.
Hardware and consumable
gross profit as a percentage of hardware and consumable product revenue
decreased approximately 11% or $310,000 for the twelve months ended December 31,
2007 as compared to the corresponding period in 2006 due to lower sales of
hardware and consumables of approximately $998,000 in the twelve month period
ending December 31, 2007.
Hardware and consumable
gross profit as a percentage of hardware and consumable product revenue
increased approximately 20% or $221,000 for the twelve months ended December 31,
2006 as compared to the corresponding period in 2005 despite lower sales due to
the 2005 year containing approximately $251,000 in inventory write-down costs
associated with the closure of our German sales office.
Maintenance
Gross Profit
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
Maintenance
gross profit
|
|
|
|
|
|
|
|
|
|
|
|
Total
maintenance gross profit
|
|
$
|
1,670,144
|
|
14
|
%
|
$
|
1,470,850
|
|
61
|
%
|
$
|
914,951
|
|
Percentage of
total maintenance revenues
|
|
59
|
%
|
2
|
%
|
57
|
%
|
12
|
%
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
dollars related to maintenance revenues increased approximately $199,000 during
the twelve months ended December 31, 2007 as compared to the corresponding
period in 2006 due to higher maintenance revenues of approximately $252,000
offset by higher maintenance costs of $53,000.
Our increase in maintenance revenues reflects our expanding installed
base combined with our retention of existing maintenance contracts. Our increase in maintenance costs of $53,000
during the twelve months ended December 31, 2007 reflects increased labor
costs.
Total gross profit
dollars related to maintenance revenues increased approximately $556,000 during
the twelve months ended December 31, 2006 as compared to the corresponding
period in 2005 due to higher maintenance revenues to absorb fixed maintenance
costs combined with the 2006 year containing a larger percentage of maintenance
revenues being generated from maintenance coverage on software only solutions
which typically have lower maintenance costs than solutions containing both
software and hardware.
Operating
Expenses
|
|
TWELVE MONTHS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
Change
|
|
2006
|
|
Change
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
General &
administrative
|
|
$
|
3,865,463
|
|
-12
|
%
|
$
|
4,411,864
|
|
-11
|
%
|
$
|
4,970,060
|
|
Percentage of
total net revenue
|
|
46
|
%
|
3
|
%
|
43
|
%
|
-11
|
%
|
54
|
%
|
Sales and
marketing
|
|
$
|
2,647,444
|
|
-26
|
%
|
$
|
3,565,341
|
|
7
|
%
|
$
|
3,335,139
|
|
Percentage of
total net revenue
|
|
31
|
%
|
-4
|
%
|
35
|
%
|
-1
|
%
|
36
|
%
|
Research &
development
|
|
$
|
3,669,099
|
|
0
|
%
|
$
|
3,652,081
|
|
25
|
%
|
$
|
2,922,049
|
|
Percentage of
total net revenue
|
|
43
|
%
|
7
|
%
|
36
|
%
|
4
|
%
|
32
|
%
|
Impairment
losses
|
|
|
|
0
|
%
|
|
|
-100
|
%
|
$
|
253,000
|
|
Percentage of
total net revenue
|
|
0
|
%
|
0
|
%
|
0
|
%
|
-3
|
%
|
3
|
%
|
Depreciation and
amortization
|
|
$
|
257,532
|
|
-15
|
%
|
$
|
304,323
|
|
-46
|
%
|
$
|
568,519
|
|
Percentage of
total net revenue
|
|
3
|
%
|
0
|
%
|
3
|
%
|
-3
|
%
|
6
|
%
|
General
and Administrative Expenses
General and administrative
expenses are comprised primarily of salaries and other employee-related costs
for executive, financial, and other infrastructure personnel. General legal,
accounting and consulting services, insurance, occupancy and communication
costs are also included with general and administrative expenses. Such expenses decreased
36
during the twelve months
ended December 31, 2007 as compared to the corresponding period in 2006 by
approximately $546,000. Major components
of this change are:
·
Decrease in stock-based compensation expense of
approximately $380,000 due the expiration of certain restricted stock grants
combined with lower expenses recorded pursuant to SFAS 123(R) due to the
expiration of vesting periods for certain prior year share-based payment
issuances.
·
Decrease in consulting and professional fees expense
of approximately $192,000 due to the termination of various consulting
agreements.
·
Decrease in insurance expense, dues and subscriptions,
and other miscellaneous expenses of approximately $127,000.
·
Increase in salaries and related personnel costs of
approximately $153,000 due to increases in headcount in program management
personnel.
The percentage increase
is reflective of lower total net revenues during the year ended December 31,
2007, as compared to the corresponding period in 2006.
General and
administrative expenses decreased during the twelve months ended December 31,
2006 as compared to the corresponding period in 2005 by approximately
$558,000. Major components of this
change are:
·
Decrease in general and administrative expenses of
approximately $735,000 due to the closure of our sales office in Germany.
·
Decreases in expenses recorded for bad debt expense of
approximately $400,000.
·
Increase in stock based compensation expenses recorded
pursuant to the implementation of SFAS 123(R) of approximately $347,000.
·
Increases in higher professional fees and other
general administrative expenses of approximately $230,000.
We are continuing to
focus our efforts on achieving additional future operating efficiencies by
reviewing and improving upon existing business processes and evaluating our
cost structure. We believe these efforts will allow us to continue to gradually
decrease our level of general and administrative expenses expressed as a
percentage of total revenues.
Sales
and Marketing Expenses
Sales and marketing
expenses consist primarily of the salaries, commissions, other incentive
compensation, employee benefits and travel expenses of our sales force. Such expenses decreased in 2007 by
approximately $918,000. Major components
of this change are:
·
Decrease in salaries and personnel costs of
approximately $737,000 due to reductions in headcount.
·
Decrease in advertising and trade show expenses of
approximately $146,000.
·
Decrease in stock-based compensation expense of
approximately $104,000 due lower expenses recorded pursuant to SFAS 123(R) due
to the expiration of vesting periods for certain prior year share-based payment
issuances.
·
Increase in sales consulting expense of approximately
$69,000.
We anticipate that the
level of expenses incurred for sales and marketing during the twelve months
ended December 31, 2008 will increase as we pursue large project solution
opportunities.
37
Research
and Development Expenses
Research and development
costs consist primarily of salaries, employee benefits and outside contractors
for new product development, product enhancements and custom integration work.
Such expenses were approximately $3.7 million
during the twelve months ended December 31, 2007 and 2006. In 2007, such costs were incurred primarily
for the accelerated development of an expanded suite of applications utilizing
our ImageWare Biometric Engine, the development of our Personal Identity
Verification (PIV) solution, and continued development of our IWS desktop
security program. We utilize contract
programming services in conjunction with internal research and development resources
to carry out our research and development.
Research and development
costs increased approximately 25% or $730,000 during the twelve months ended December 31,
2006 as compared to the corresponding period of 2005 due to the accelerated
development of our new Biometric Engine, the Web enablement of our CCS product
line, development of our new Desktop Security program (released in the fourth
quarter of 2005) utilizing internal research and development resources and
contract programming.
Our level of expenditures in research and
development reflects our belief that to maintain our competitive position in
markets characterized by rapid rates of technological advancement, we must
continue to invest significant resources in new systems and software as well as
continue to enhance existing products.
Impairment
Losses
Impairment losses
represent the amount by which the carrying amount of long-lived assets exceeds
their fair value. Fair value is
determined based on the best information available in the circumstances,
including present value techniques. The
Company did not record any impairment losses during the twelve months ended December 31,
2007 and 2006. During the twelve months
ended December 31, 2005, we recorded impairment losses of $1,245,000 for
goodwill carried in our former Digital Photography segment and $253,000 for our
trademark and tradename asset carried in our former Identification segment.
Depreciation
and Amortization
Depreciation and
amortization decreased during the twelve months ended December 31, 2007 as
compared to the corresponding period in 2006 due primarily to fully depreciated
office and computer equipment.
Depreciation and
amortization decreased during the twelve months ended December 31, 2006 as
compared to the corresponding period in 2005 due primarily to lower
amortization of certain definite long-lived intangible assets due to a
significant portion of such assets being fully amortized at the end of our
first fiscal quarter of 2006.
Interest
Expense, Net
For the year ended
December 31, 2007, we recognized interest income of $48,000 and interest
expense of $263,000. For the year ended December 31,
2006, we recognized interest income of $28,000 and interest expense of
$593,000. For the year ended December 31,
2005, we recognized interest income of $55,000 and interest expense of $2,000.
Interest expense
for the year ended December 31, 2007 contains 3 components approximating
$248,000 related to our secured notes payable issued in March 2006 and
paid in full in March 2007: $19,000 of coupon interest, $213,000 in note
discount amortization, and $16,000 in deferred financing fee amortization
classified as interest expense.
Interest expense
for the year ended December 31, 2006, contains 3 components approximating
$578,000 related to our secured notes payable issued in March 2006:
$89,000 of coupon interest, $408,000 in note discount amortization, and $81,000
in deferred financing fee amortization classified as interest expense.
Liquidity
and Capital Resources
As of December 31,
2007, we had total current assets of $2,040,000 and total current liabilities
of $5,269,000, or negative working capital of $3,229,000. At December 31,
2007 and 2006, we had available cash of $1,044,000 and $939,000, respectively.
38
Net cash used in
operating activities was $2,875,000 for the year ended December 31, 2007,
as compared to $2,817,000 for the corresponding period in 2006. We used cash to
fund net losses of $3,568,000, excluding non-cash expenses (depreciation,
amortization, debt issuance costs, debt discount, stock-based compensation, and
provision for losses on accounts receivable, reductions in inventory valuation
allowance, and write-down of investments in equity securities) of $1,117,000
for the year ended December 31, 2007.
We used cash to fund net losses of $3,990,000, excluding non-cash
expenses (depreciation, amortization, debt issuance costs, debt discount,
stock-based compensation, and provision for losses on accounts receivable less
gains on sale of subsidiary) of $1,936,000 for the year ended December 31,
2006. For the year ended December 31,
2007, we generated cash of $913,000 through reductions in current assets and
used cash of $220,000 from decreases in current liabilities (excluding debt).
For the year ended December 31, 2006, we used cash of $267,000 to fund
increases in current assets offset by increases in current liabilities of
$1,440,000 (excluding debt).
Net cash used by
investing activities was $522,000 for the year ended December 31,
2007. Net cash used by investing
activities was $133,000 for the year ended December 31, 2006. For the year
ended December 31, 2007, we used cash to fund capital expenditures of
computer equipment and software, furniture and fixtures and leasehold
improvements of approximately $86,000. The level of equipment purchases
resulted primarily from continued growth of the business and replacement of
older equipment. For the year ended December 31,
2007, we used cash of $410,000 for our acquisition of Sol Logic, Inc. and
used cash of $26,000 to fund increases in restricted cash securing our
performance of certain software implementation contracts. For the year ended December 31, 2006, we
used cash to fund capital expenditures of computer equipment and software,
furniture and fixtures and leasehold improvements of approximately $158,000.
The level of equipment purchases resulted primarily from continued growth of
the business and replacement of older equipment. For the year ended December 31, 2006, we
generated cash of $25,000 for the sale of our wholly-owned Digital Photography
component.
Net cash provided by
financing activities was $3,560,000 for the year ended December 31, 2007.
We generated cash of $2,621,000 from our issuance of common stock in a private
placement and generated cash of $1,233,000 from our issuance of preferred stock
in a private placement. We also
generated cash of $1,121,000 from our issuance of common stock pursuant to
warrant exercises. In 2007, we used cash
of $1,310,000 to repay notes payable and used cash of $51,000 for the payment
of dividends on our Series B Preferred Stock and incurred financing
related expenses of $54,000. Net cash
provided by financing activities was $3,224,000 for the year ended December 31,
2006. In 2006, we generated cash of
$2,064,000 from our issuance of preferred stock in a private placement. We also generated cash of $1,550,000 from our
issuance of senior secured notes payable offset by debt issuance costs of
$98,000. In 2006, we used cash of
$240,000 to repay notes payable and used cash of $52,000 for the payment of
dividends on our Series B Preferred Stock.
Contractual
Obligations and Commercial Commitments
We conduct operations in
leased facilities under operating leases expiring at various dates through
2009. In conjunction with our
performance on various software installation and implementation contracts, we
are contingently liable under two irrevocable letters of credit in an aggregate
amount of $169,000. The letters of credit expire on April 30, 2008 in the
amount of $37,000 and on December 26, 2008 in the amount of $132,000. We also have various short-term notes payable
and capital lease obligations due at various times during 2009. The following
table sets forth a summary of our obligations under operating leases, capital
leases, notes payable and irrevocable letters of credit for the next five
years:
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum annual
lease payments under operating leases
|
|
$
|
492,000
|
|
$
|
158,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters
of credit
|
|
$
|
169,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
169,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations and other commercial commitments
|
|
$
|
661,000
|
|
$
|
158,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
819,000
|
|
39
The report of the Companys
independent accountants included with this Annual Report contains an
explanatory paragraph regarding our ability to continue as a going
concern. We are seeking additional
financing that we believe is necessary to fund our working capital requirements
for at least the next twelve months in conjunction with the successful
implementation of our business plan. Our business plan includes, among other
things, the monitoring and controlling of operating expenses, collection of
significant trade and other accounts receivables, and controlling of capital
expenditures. If we are unable to secure
additional financing or successfully implement our business plan, we will be
required to seek funding from alternate sources and/or institute cost reduction
measures. We may seek to sell equity or
debt securities, secure a bank line of credit, or consider strategic alliances. The sale of equity or equity-related
securities could result in additional dilution to our shareholders. There can be no assurance that additional
financing, in any form, will be available at all or, if available, will be on
terms acceptable to us. In addition, our
ability to raise additional capital may be dependent upon our common stock
being quoted on the American Stock Exchange.
On December 14, 2007, we received a letter from AMEX indicating
that we do not comply with AMEXs continued listing standards. We filed an
appeal of AMEXs determination and requested an oral hearing before an AMEX
Listing Qualifications Panel (a Qualifications Panel). On March 10, 2008, we received a letter
from AMEX granting our request. Our
hearing with a Qualifications Panel is scheduled for April 16, 2008. If the Qualifications Panel does not grant
the relief sought, our common stock will be delisted from AMEX following which
it is expected that our common stock would be quoted on the Over-the-Counter
Bulletin Board.
Insufficient funds may
require us to delay, scale back or eliminate some or all of our activities, and
if we are unable to obtain additional funding there is substantial doubt about
our ability to continue as a going concern.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Foreign
Currency Exchange Risk
Market risk is the
potential loss arising from adverse changes in market rates and prices, such as
interest rates and foreign currency exchange rates. Changes in foreign currency exchange rates
have an impact on our results of operations. Our exposure to adverse movements
in foreign currency exchange rates is primarily related to our subsidiaries
operating expense, primarily in Canada and Germany, denominated in the
respective local currency. We currently do not enter into forward exchange
contracts to hedge exposures denominated in foreign currencies and do not use
derivative financial instruments for trading or speculative purposes. The
effect of an immediate 10% change in foreign currency exchange rates should not
have a material effect on our future operating results or cash flows; however,
a long term change in foreign currency rates would likely result in increased
technical support and engineering expenses. The vast majority of our sales are
transacted in U. S. dollars.
Item 8.
Consolidated Financial Statements and Supplementary Data.
The index to our
Consolidated Financial Statements and the Report of Independent Registered
Public Accounting Firm appears in Part IV of this Form 10-K.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
Not
applicable
Item 9A.
Controls and Procedures.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting of the Company.
Evaluation
of disclosure controls and procedures
. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e))
as of December 31, 2007 (the Evaluation Date), have concluded that as of
such date, our disclosure controls and procedures were adequate and effective
to ensure that information required to be disclosed in the reports that we file
under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Commissions rules and
forms.
The Companys management
assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2007 in accordance with the standards set
forth by the Public Company Accounting Oversight Board (PCAOB). In accordance with these standards,
management assessed and tested, on a sample basis, the Companys internal
control over financial reporting according to a comprehensive risk analysis
using the Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, (COSO). It is managements opinion that the testing
methodology of the internal control framework is appropriate and provides
reasonable assurance as to the integrity and reliability of our internal
controls over financial reporting. Based on the
40
results of its evaluation,
the Companys management has concluded that the Companys internal control over
financial reporting was effective as of December 31, 2007. This annual report does not include an
attestation report of the Companys registered public accounting firm regarding
internal control over financial reporting.
Managements report was not subject to attestation by the Companys
registered public accounting firm pursuant to the temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report
Changes in internal controls
.
There has been no change in our internal controls over financial
reporting during the quarter ended December 31, 2007, that has materially
affected, or is reasonably likely to materially affect our internal control
over financial reporting.
Item 9B.
Other Information.
Not applicable.
PART III
Item 10.
Directors, Executive Officers and Corporate
Governance
(a)
Identification of Directors.
The
information under the caption Election of Directors, appearing in the Proxy
Statement to be filed for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.
(b)
Identification of Executive Officers.
The
information under the caption Certain Information with Respect to Executive
Officers, appearing in the Proxy Statement to be filed for the 2008 Annual
Meeting of Stockholders is incorporated herein by reference.
(c)
Compliance with Section 16(a) of the
Exchange Act.
The information under the caption Compliance
with Federal Securities Laws, appearing in the Proxy Statement to be filed for
the 2008 Annual Meeting of Stockholders is incorporated herein by reference.
(d)
Code of Ethics.
The Company has
adopted a
Code of Business Conduct and Ethics
policy that applies to our directors and employees (including the Companys
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons
performing similar functions). The
Company intends to promptly disclose (i) the nature of any amendment to
this code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions and (ii) the nature of any waiver, including
an implicit waiver, from a provision of this code of ethics that is granted to
one of these specified individuals, the name of such person who is granted the
waiver and the date of the waiver on our website in the future. A copy of our Code of Business Conduct and
Ethics can be obtained from our website at http://www.iwsinc.com.
(e)
Audit
Committee.
The information under the caption Information
Regarding the Board and its Committees, appearing in the Proxy Statement to be
filed for the 2008 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 11.
Executive Compensation
The information under the
heading Executive Compensation and Other Information appearing in the Proxy
Statement to be filed for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
The information under the
heading Principal Stockholders appearing in the Proxy Statement to be filed
for the 2008 Annual Meeting of Stockholders is incorporated herein by
reference.
41
Item 13.
Certain Relationships and Related
Transactions
The information under the
heading Certain Relationships and Related Transactions, appearing in the
Proxy Statement to be filed for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information under the
heading Principal Accountant Fees and Services, appearing in the Proxy
Statement to be filed for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
1.
Index to Consolidated Financial Statements
See Index to Consolidated
Financial Statements and financial statement schedules.
(a)
2.
Index to Financial Statement Schedules
Refer
to Schedule II, Valuation and Qualifying Accounts, hereto.
Schedule II
Valuation and Qualifying Accounts and Reserves
(in thousands)
For the Fiscal Years Ended December 31, 2005,
2006 and 2007
|
|
Balance at
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
at End
|
|
|
|
of Year
|
|
Additions
|
|
Deductions
|
|
of Year
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007:
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
|
483
|
|
$
|
25
|
(a)
|
$
|
508
|
(b)
|
$
|
|
|
Reserve for
inventories
|
|
52
|
|
|
|
36
|
(d)
|
$
|
16
|
|
Deferred income
tax valuation allowance
|
|
15,981
|
|
1,227
|
(e)
|
|
|
$
|
17,208
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006:
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
|
478
|
|
$
|
39
|
(a)
|
$
|
34
|
(b)
|
$
|
483
|
|
Reserve for
inventories
|
|
300
|
|
3
|
|
251
|
(d)
|
52
|
|
Deferred income
tax valuation allowance
|
|
14,644
|
|
1,337
|
(e)
|
|
|
15,981
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2005:
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
|
303
|
|
$
|
450
|
(a)
|
$
|
275
|
(b)
|
$
|
478
|
|
Reserve for
inventories
|
|
47
|
|
281
|
(c)
|
28
|
|
300
|
|
Deferred income
tax valuation allowance
|
|
11,882
|
|
2,762
|
(e)
|
|
|
14,644
|
|
(a)
|
Represents increase in the
required allowance for doubtful accounts reserve based on the Companys
evaluation of accounts receivable.
|
(b)
|
Represents amounts written
off as uncollectible.
|
(c)
|
Represents increase in the
required reserve based on the Companys evaluation of obsolete inventory.
|
(d)
|
Represents amounts written
off as obsolete inventory.
|
(e)
|
Represents net increases in
deferred income tax valuation allowance
|
42
(b)
Exhibits
The following Exhibits
are filed as part of, or incorporated by reference into, this Report on Form 10-K:
Item 16.
Exhibits
and Financial Statement Schedules
(a) Exhibits
Exhibit
Number
|
|
Description
|
2.1
|
|
Stock Purchase
Agreement, dated March 1, 2005, between the Registrant and Argus
Solutions Ltd. (incorporated by reference to Exhibit 2.1 to the
Registrants Current Report on Form 8-K, filed March 9, 2005).
|
2.2
|
|
Agreement and Plan of
Merger, dated October 27, 2005 (incorporated by reference to Annex A to
the Registrants Definitive Proxy Statement on Schedule 14A, filed
November 15, 2005).
|
3.1
|
|
Certificate of
Incorporation (incorporated by reference to Annex B to the Registrants
Definitive Proxy Statement on Schedule 14A, filed November 15, 2005).
|
3.2
|
|
Bylaws (incorporated by
reference to Annex C to the Registrants Definitive Proxy Statement on
Schedule 14A, filed November 15, 2005).
|
3.3
|
|
Certificate of
Designations of Preferences, Rights and Limitations of Series C 8%
Convertible Preferred Stock dated November 2, 2006, as amended
(incorporated by reference to Exhibit 3.1 to the Registrants Current
Report on Form 8-K, filed November 20, 2006).
|
3.4
|
|
Certificate of
Designations of Preferences, Rights and Limitations of Series D 8%
Convertible Preferred Stock dated March 8, 2007 (incorporated by
reference to Exhibit 3.1 to the Registrants Current Report on
Form 8-K, filed March 15, 2007).
|
4.1
|
|
Warrant to Purchase
Common Stock in favor of Imperial Bank, dated January 15, 1998
(incorporated by reference to Exhibit 10.42 to the Registrants
Registration Statement on Form SB-2 (No. 333-93131), filed
December 20, 1999, as amended).
|
4.2
|
|
Registration Rights
Agreement, dated May 22, 2002, by and between the Registrant and Perseus
2000 L.L.C. (incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K, filed May 24, 2002).
|
4.3
|
|
Warrant to Purchase
Common Stock, dated June 13, 2003, issued by the Registrant to L.F.
Global Holdings, LLC (incorporated by reference to Exhibit 10.5 to the
Registrants Current Report on Form 8-K, filed June 20, 2003).
|
4.4
|
|
Form of Warrant
dated November 24, 2003 (incorporated by reference to Exhibit 99.2
to the Registrants Current Report on Form 8-K, filed February 9,
2004).
|
4.5
|
|
Form of
Registration Rights Agreement dated November 24, 2003 (incorporated by
reference to Exhibit 99.3 to the Registrants Current Report on
Form 8-K, filed February 9, 2004).
|
4.6
|
|
Form of
Registration Rights Agreement dated March 13, 2003 (incorporated by
reference to Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-QSB, filed May 15, 2003).
|
4.7
|
|
Form of Warrant
dated January 29, 2004 (incorporated by reference to Exhibit 99.5
to the Registrants Current Report on Form 8-K, filed February 9,
2004).
|
4.8
|
|
Form of
Registration Rights Agreement dated January 29, 2004 (incorporated by
reference to Exhibit 99.8 to the Registrants Current Report on
Form 8-K, filed February 9, 2004).
|
4.9
|
|
Form of Warrant
dated July 22, 2005 and dated July 28, 2005 (incorporated by
reference to Exhibit A to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed July 26, 2005).
|
4.10
|
|
Form of Warrant dated
March 17, 2006 (incorporated by reference to Exhibit 4.1 to the
Registrants Quarterly Report on Form 10-Q, filed May 22, 2006).
|
4.11
|
|
Registration Rights
Agreement, dated November 14, 2006 by and among the Registrant and
certain investors (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K, filed November 20, 2006).
|
4.12
|
|
Form of Warrant to
Purchase Common Stock dated November 14, 2006 (incorporated by reference
to Exhibit 10.3 to the Registrants Current Report on Form 8-K,
filed November 20, 2006).
|
4.13
|
|
Registration Rights
Agreement, dated March 9, 2007, by and among the Registrant and certain
accredited investors (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K, filed March 15, 2007).
|
4.14
|
|
Form of Warrant to
Purchase Common Stock dated March 9, 2007 (incorporated by reference to
Exhibit 10.3 to the Registrants Current Report on Form 8-K, filed
March 15, 2007).
|
43
4.15
|
|
Registration Rights
Agreement, dated September 25, 2007, by and among the Registrant and
certain accredited investors (incorporated by reference to Exhibit 10.2
to the Registrants Current Report on Form 8-K, filed September 26,
2007).
|
4.16
|
|
Form of Warrant to
Purchase Common Stock dated September 25, 2007 (incorporated by
reference to Exhibit 10.3 to the Registrants Current Report on
Form 8-K, filed September 26, 2007).
|
4.17
|
|
Registration Rights
Agreement, dated December 19, 2007, by and among the Registrant, Sol
Logic, and Wink Jones, as the representative of Sol Logic (incorporated by
reference to Exhibit 4.1 to the Registrants Current Report on
Form 8-K, filed December 21, 2007).
|
4.18
|
|
Amendment No. 1 to
Registration Rights Agreement, dated March 28, 2008, by and among the
Registrant, Sol Logic, and Wink Jones, as the representative of Sol Logic,
and Wink Jones, as the representative of Sol Logic (incorporated by reference
to Exhibit 4.1 to the Registrants Current Report on Form 8-K, filed April 1,
2008).
|
10.1
|
|
Employment Agreement,
dated September 27, 2005, between the Registrant and S. James Miller
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed September 30, 2005).
|
10.2
|
|
Employment Agreement, dated
September 27, 2005, between the Registrant and Wayne G. Wetherell
(incorporated by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K, filed September 30, 2005).
|
10.3
|
|
Change of Control and
Severance Benefits Agreement, dated October 31, 2005, between Registrant
and Charles Aubuchon (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed November 3, 2005).
|
10.4
|
|
Offer of Employment
Letter Agreement, dated December 19, 2007, between the Registrant and
Frank Mitchell (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K, filed December 21, 2007).
|
10.5
|
|
Form of
Indemnification Agreement entered into by the Registrant with its directors
and executive officers (incorporated by reference to Exhibit 10.4 to the
Registrants Registration Statement on Form SB-2 (No. 333-93131),
filed December 20, 1999, as amended).
|
10.6
|
|
1994 Employee Stock
Option Plan (incorporated by reference to Exhibit 10.6 to the Registrants
Registration Statement on Form SB-2 (No. 333-93131), filed
December 20, 1999, as amended).
|
10.7
|
|
1994 Nonqualified Stock
Option Plan (incorporated by reference to Exhibit 10.7 to the
Registrants Registration Statement on Form SB-2 (No. 333-93131),
filed December 20, 1999, as amended).
|
10.8
|
|
Amended and Restated
1999 Stock Plan Award (incorporated by reference to Appendix B of the
Registrants Definitive Proxy Statement on Schedule 14A, filed
November 21, 2007).
|
10.9
|
|
Form of Stock
Option Agreement (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on
Form 8-K, filed July 14, 2005).
|
10.10
|
|
2001 Equity Incentive
Plan (incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on
Form 10-QSB, filed November 14, 2001).
|
10.11
|
|
Form of Restricted
Stock Bonus Agreement (incorporated by reference to Exhibit 99.3 to the
Registrants Registration Statement on Form S-8, filed November 27,
2001).
|
10.12
|
|
Form of Stock
Option Agreement (incorporated by reference to Exhibit 99.2 to the
Registrants Registration Statement on Form S-8, filed November 27,
2001).
|
10.13
|
|
Note and Warrant
Purchase Agreement, dated May 22, 2002, by and between the Registrant
and Perseus (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K, filed May 24, 2002).
|
10.14
|
|
Form of Securities
Purchase Agreement dated November 14, 2003 (incorporated by reference to
Exhibit 99.1 to the Registrants Current Report on Form 8-K, filed
February 9, 2004).
|
10.15
|
|
Form of Securities
Purchase Agreement dated January 29, 2004 (incorporated by reference to Exhibit 99.4
to the Registrants Current Report on Form 8-K, filed February 9,
2004).
|
|
10.16
|
|
Offer of Restricted
Stock in Exchange for Certain Stock Options Previously Granted Offer Made
to James Miller (incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-QSB, filed August 16,
2004).
|
|
10.17
|
|
Offer of Restricted
Stock in Exchange for Certain Stock Options Previously Granted Offer Made
to Wayne Wetherell, dated March 30, 2004 (incorporated by reference to Exhibit 10.3
to the Registrants Quarterly Report on Form 10-QSB, filed August 16,
2004).
|
|
10.18
|
|
Form of Securities
Purchase Agreement dated July 22, 2005 and July 28, 2005 (incorporated
by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K,
filed July 26, 2005).
|
|
10.19
|
|
Security Agreement,
dated March 17, 2006, executed by the Registrant in favor of Little Bear
Investments, LLC (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed March 23, 2006).
|
|
10.20
|
|
Form of Secured
Promissory Note dated March 17, 2006 (incorporated by reference to Exhibit 10.1
to the
|
|
|
|
|
|
|
44
|
|
Registrants Quarterly Report on Form 10-Q,
filed May 22, 2006).
|
10.21
|
|
Securities Purchase Agreement, dated November 14,
2006 by and among the Registrant and certain accredited investors
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed November 20, 2006).
|
10.22
|
|
Securities Purchase Agreement, dated March 9,
2007, by and among the Registrant and certain accredited investors
(incorporated by reference to Exhibit 10.1 to the Registrant Current
Report on Form 8-K, filed March 15, 2007).
|
10.23
|
|
Securities Purchase Agreement, dated September 25,
2007, by and among the Registrant and certain accredited investors
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed September 26, 2007).
|
10.24
|
|
Asset Purchase Agreement and Plan of Reorganization,
among Sol Logic, Frank Mitchell, as shareholder of Sol Logic, and Wink Jones,
as the representative of Sol Logic (incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K, filed December 21,
2007).
|
10.25
|
|
Amendment No. 1 to Asset Purchase and Plan of Reorganization,
by and between the Registrant and Wink Jones, as the representative of Sol
Logic (incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed April 1, 2008).
|
10.26
|
|
Product Line Purchase Agreement, dated November 30,
2006, by and between the Registrant and PhotoLynx, Inc. (incorporated by
reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K,
filed December 26, 2006).
|
10.27
|
|
Standard Commercial Lease, dated September 26,
2003, by and between Thornmint I and the Registrant (incorporated by
reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-QSB,
filed November 14, 2003).
|
10.28
|
|
Amendment to Office Lease, dated June 12, 2006,
by and between Thornmint I and the Registrant (incorporated by reference to Exhibit 10.1
to the Registrants Quarterly Report on Form 10-Q, filed August 14,
2006).
|
10.29
|
|
Office Lease, dated September 7, 2006, by and
between Union Bank of California as Trustee for Quest Group Trust VII and the
Registrant (incorporated by reference to Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q, filed November 20, 2006).
|
10.30
|
|
Office Space Lease between I.W. Systems Canada
Registrant and Dundeal Canada (GP) Inc. dated June 1, 2006 (incorporated
by reference to Exhibit 10.40 to the Registrants Annual Report on Form 10-K,
filed April 17, 2007).
|
21.1
|
|
Subsidiaries of the Registrant
|
23.1
|
|
Consent of Stonefield Josephson, Inc.,
Independent Registered Public Accounting Firm
|
31.1
|
|
Certification of the Principal Executive Officer
pursuant to Rule 13a-14(a) and 15d-14(a)
|
31.2
|
|
Certification of the Principal Financial and
Accounting Officer pursuant to Rule 13a-14(a) and 15d-14(a)
|
32.1
|
|
Certification by the Principal Executive Officer and
Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
45
SIGNATURES
In accordance with
Section 13 or 15(d) of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
IMAGEWARE SYSTEMS, INC.
|
|
|
|
|
|
|
April 15, 2008
|
By:
|
/s/
S. JAMES MILLER, JR.
|
|
|
S.
James Miller, Jr.
|
|
|
Chief Executive
Officer and
Chairman of the Board of Directors
|
In accordance with
the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ S. JAMES
MILLER, JR.
|
|
Chief Executive Officer
and Chairman of the Board of Directors
|
|
April 15,
2008
|
S. James
Miller, Jr.
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ WAYNE G.
WETHERELL
|
|
Senior Vice President
of Administration and Chief Financial Officer
|
|
April 15,
2008
|
Wayne G.
Wetherell
|
|
(Principal Financial and
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ JOHN CALLAN
|
|
Director
|
|
April 15,
2008
|
John Callan
|
|
|
|
|
|
|
|
|
|
/s/ PATRICK J.
DOWNS
|
|
Director
|
|
April 15,
2008
|
Patrick J. Downs
|
|
|
|
|
|
|
|
|
|
/s/ JOHN L.
HOLLERAN
|
|
Director
|
|
April 15,
2008
|
John L. Holleran
|
|
|
|
|
|
|
|
|
|
/s/ DAVID LOESCH
|
|
Director
|
|
April 15,
2008
|
David Loesch
|
|
|
|
|
|
|
|
|
|
/s/ STEVE HAMM
|
|
Director
|
|
April 15,
2008
|
Steve Hamm
|
|
|
|
|
|
|
|
|
|
/s/ DAVID CAREY
|
|
Director
|
|
April 15,
2008
|
David Carey
|
|
|
|
|
46
IMAGEWARE
SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
47
REPORT of Independent Registered
Public Accounting Firm
Board of Directors and Shareholders
ImageWare Systems, Inc.
We have audited the accompanying consolidated
balance sheets of ImageWare Systems,
Inc. as of December 31, 2007 and 2006, and the related consolidated statements
of operations, comprehensive loss, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2007. Our audits also
included the consolidated financial statement schedule listed in the Index at
Item 15(a)(2) as of and for the years ended December 31, 2007, 2006 and 2005.
These consolidated financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ImageWare
Systems, Inc. as of December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the three years in the period ended December
31, 2007 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred substantial net losses since
inception and has substantial monetary liabilities as of December 31,
2007. These matters, among others, raise
a substantial doubt about the Companys ability to continue as a going concern.
Managements plans concerning these
matters are described in Note 1. These
consolidated financial statements do not include any adjustments relating to
the recoverability and classifications of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
/s/ Stonefield Josephson, Inc.
Los Angeles California
April 14, 2008
48
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2007
|
|
December 31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash
|
|
$
|
1,044,242
|
|
$
|
938,553
|
|
Accounts
receivable, net of allowance for doubtful accounts of $0 and $483,132 at
December 31, 2007 and 2006, respectively
|
|
424,739
|
|
1,721,892
|
|
Inventories, net
|
|
130,342
|
|
57,990
|
|
Other current
assets
|
|
440,459
|
|
137,609
|
|
Total Current
Assets
|
|
2,039,782
|
|
2,856,044
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
287,989
|
|
351,700
|
|
Other assets
|
|
24,307
|
|
175,952
|
|
Pension assets
|
|
693,907
|
|
608,507
|
|
Intangible
assets, net
|
|
2,436,576
|
|
141,294
|
|
Goodwill
|
|
4,452,042
|
|
3,415,647
|
|
Total
Assets
|
|
9,934,603
|
|
$
|
7,549,144
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,415,492
|
|
$
|
1,718,820
|
|
Deferred revenue
|
|
1,010,514
|
|
1,258,045
|
|
Accrued expenses
|
|
1,340,947
|
|
1,138,718
|
|
Acquisition
related obligation
|
|
1,502,000
|
|
|
|
Notes payable to
third parties
|
|
|
|
1,097,378
|
|
Total Current
Liabilities
|
|
5,268,953
|
|
5,212,961
|
|
|
|
|
|
|
|
Pension
obligation
|
|
1,138,911
|
|
1,016,293
|
|
Total
Liabilities
|
|
6,407,864
|
|
6,229,254
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
Preferred stock,
authorized 4,000,000 shares:
|
|
|
|
|
|
Series B convertible
redeemable preferred stock, designated 750,000 shares, 389,400 shares issued,
and 239,400 shares outstanding at December 31, 2007 and 2006,
liquidation preference $598,500 at December 31, 2007 and
December 31, 2006
|
|
2,394
|
|
2,394
|
|
Series C
convertible non-redeemable preferred stock, designated 3,500 shares, 2,500
shares issued, and 2,200 and 2,500 shares outstanding at December 31,
2007 and 2006, respectively, liquidation preference $2,200,000 and $2,500,000
at December 31, 2007 and 2006, respectively
|
|
22
|
|
25
|
|
Series D
convertible non-redeemable preferred stock, designated 2,000 shares, 1,500
shares issued, and 1,388 and 0 shares outstanding at December 31, 2007
and 2006, respectively, liquidation preference $1,388,000 and $0 at
December 31, 2007 and 2006, respectively
|
|
14
|
|
|
|
Common stock,
$.01 par value, 50,000,000 shares authorized, 17,797,826 and 13,700,849
shares issued at December 31, 2007 and 2006, respectively, 17,791,122
and 13,694,145 shares outstanding at December 31, 2007 and 2006,
respectively
|
|
176,729
|
|
135,759
|
|
|
|
|
|
|
|
Additional paid
in capital
|
|
79,293,500
|
|
71,553,329
|
|
Treasury stock,
at cost - 6,704 shares
|
|
(63,688
|
)
|
(63,688
|
)
|
Accumulated
other comprehensive income
|
|
6,983
|
|
24,773
|
|
Accumulated
deficit
|
|
(75,889,215
|
)
|
(70,332,702
|
)
|
Total
shareholders equity
|
|
3,526,739
|
|
1,319,890
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders Equity
|
|
$
|
9,934,603
|
|
$
|
7,549,144
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
49
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
TWELVE MONTHS ENDED
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Product
|
|
$
|
5,652,174
|
|
$
|
7,605,598
|
|
$
|
7,134,119
|
|
Maintenance
|
|
2,836,403
|
|
2,583,968
|
|
2,040,054
|
|
|
|
8,488,577
|
|
10,189,566
|
|
9,174,173
|
|
Cost of
revenues:
|
|
|
|
|
|
|
|
Product
|
|
1,380,173
|
|
2,215,921
|
|
2,916,759
|
|
Maintenance
|
|
1,166,259
|
|
1,113,118
|
|
1,125,103
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
5,942,145
|
|
6,860,527
|
|
5,132,311
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
General &
administrative
|
|
3,865,463
|
|
4,411,864
|
|
4,970,060
|
|
Sales and
marketing
|
|
2,647,444
|
|
3,565,341
|
|
3,335,139
|
|
Research &
development
|
|
3,669,099
|
|
3,652,081
|
|
2,922,049
|
|
Impairment
losses
|
|
|
|
|
|
253,000
|
|
Depreciation and
amortization
|
|
257,532
|
|
304,323
|
|
568,519
|
|
|
|
10,439,538
|
|
11,933,609
|
|
12,048,767
|
|
|
|
|
|
|
|
|
|
Loss from
operations
|
|
(4,497,393
|
)
|
(5,073,082
|
)
|
(6,916,456
|
)
|
|
|
|
|
|
|
|
|
Interest
(income) expense, net
|
|
215,155
|
|
564,524
|
|
(53,288
|
)
|
|
|
|
|
|
|
|
|
Other (income)
expense, net
|
|
22,221
|
|
(119,330
|
)
|
(166,390
|
)
|
|
|
|
|
|
|
|
|
Loss from
continuing operations before income taxes
|
|
(4,734,769
|
)
|
(5,518,276
|
)
|
(6,696,778
|
)
|
|
|
|
|
|
|
|
|
Income tax
benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations
|
|
(4,734,769
|
)
|
(5,518,276
|
)
|
(6,696,778
|
)
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Gain (loss) from
operations of discontinued Digital Photography and Digital Imaging Asia
Component (including gain on disposal of Digital Photography component of
$50,000 in 2007; $19,956 in 2006 and gain on disposal of Digital Imaging Asia
Pacific Component of $232,508 in 2005)
|
|
$
|
50,000
|
|
$
|
(407,939
|
)
|
$
|
(1,658,926
|
)
|
Income tax
benefit (expense)
|
|
|
|
|
|
|
|
Gain (loss) on
discontinued operations
|
|
50,000
|
|
(407,939
|
)
|
(1,658,926
|
)
|
|
|
|
|
|
|
|
|
Net loss
|
|
(4,684,769
|
)
|
(5,926,215
|
)
|
(8,355,704
|
)
|
Preferred
dividends
|
|
(1,171,258
|
)
|
(110,998
|
)
|
(52,997
|
)
|
Net loss
available to common shareholders
|
|
$
|
(5,856,027
|
)
|
$
|
(6,037,213
|
)
|
$
|
(8,408,701
|
)
|
|
|
|
|
|
|
|
|
Basic and
diluted loss per common share - see note 2
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.31
|
)
|
$
|
(0.41
|
)
|
$
|
(0.53
|
)
|
Discontinued
operations
|
|
|
|
(0.03
|
)
|
(0.13
|
)
|
Preferred
dividends
|
|
(0.08
|
)
|
|
|
|
|
Basic and
diluted loss per common available to common shareholders
|
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding (basic and diluted)
|
|
15,070,308
|
|
13,592,841
|
|
12,731,304
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
50
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
TWELVE MONTHS ENDED
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net loss
|
|
(4,684,769
|
)
|
$
|
(5,926,215
|
)
|
$
|
(8,355,704
|
)
|
Adjustments to
reconcile net loss to net cash used by operating activities Depreciation and
amortization
|
|
257,532
|
|
307,118
|
|
599,950
|
|
Amortization of
debt discount and debt issuance costs
|
|
228,872
|
|
489,731
|
|
|
|
Stock based
compensation
|
|
556,384
|
|
1,117,596
|
|
310,597
|
|
Gain on sale of
subsidiary
|
|
|
|
(19,956
|
)
|
(232,508
|
)
|
Inventory
write-down
|
|
|
|
3,000
|
|
280,768
|
|
Provision on
losses on accounts receivable
|
|
25,000
|
|
39,000
|
|
450,000
|
|
Write-down of
certain long-lived assets
|
|
|
|
|
|
1,570,128
|
|
Write-down of
investment in equity securities
|
|
84,956
|
|
|
|
146,525
|
|
Restructuring
charges
|
|
|
|
|
|
204,000
|
|
Reduction in
inventory obsolescence reserve
|
|
(35,618
|
)
|
|
|
|
|
Change in assets
and liabilities
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
1,221,771
|
|
(420,738
|
)
|
(72,571
|
)
|
Inventories
|
|
(36,734
|
)
|
141,799
|
|
365,853
|
|
Other current
assets
|
|
(187,100
|
)
|
97,190
|
|
10,943
|
|
Pension assets
|
|
(85,400
|
)
|
(85,532
|
)
|
62,409
|
|
Other assets
|
|
|
|
|
|
18,105
|
|
Accounts payable
|
|
(303,328
|
)
|
1,028,360
|
|
(529,661
|
)
|
Accrued expenses
|
|
208,061
|
|
173,659
|
|
(687,672
|
)
|
Deferred revenue
|
|
(247,532
|
)
|
174,491
|
|
38,735
|
|
Contract costs
|
|
|
|
|
|
(424,299
|
)
|
Pension
obligation
|
|
122,618
|
|
63,965
|
|
37,175
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
1,809,482
|
|
3,109,683
|
|
2,148,477
|
|
|
|
|
|
|
|
|
|
Net cash used by
operating activities
|
|
(2,875,287
|
)
|
(2,816,532
|
)
|
(6,207,227
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(85,914
|
)
|
(157,825
|
)
|
(309,415
|
)
|
Restricted cash
and cash equivalents
|
|
(26,000
|
)
|
|
|
|
|
Acquisition of
businesses, net of cash acquired
|
|
(409,761
|
)
|
|
|
|
|
Proceeds from
sales of subsidiary net of cash sold and direct transaction costs
|
|
|
|
25,000
|
|
1,208,630
|
|
|
|
|
|
|
|
|
|
Net cash
generated by (used in) investing activities
|
|
(521,675
|
)
|
(132,825
|
)
|
899,215
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds from
issuance of preferred stock, net of issuance costs
|
|
1,232,704
|
|
2,063,176
|
|
|
|
Proceeds from
issuance of common stock, net of issuance costs
|
|
2,621,472
|
|
|
|
3,234,128
|
|
Proceeds from
issuance of notes payable with warrants
|
|
|
|
1,550,000
|
|
|
|
Other financing
issuance costs
|
|
(54,258
|
)
|
(97,500
|
)
|
|
|
Repayment of
notes payable
|
|
(1,310,000
|
)
|
(240,000
|
)
|
(18,491
|
)
|
Dividends paid
|
|
(50,872
|
)
|
(51,935
|
)
|
(52,997
|
)
|
Proceeds from
exercise of stock purchase warrants
|
|
1,120,707
|
|
|
|
62,652
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
3,559,753
|
|
3,223,741
|
|
3,225,292
|
|
Effect of
exchange rate changes on cash
|
|
(57,102
|
)
|
(77,015
|
)
|
(87,861
|
)
|
Net increase
(decrease) in cash
|
|
105,689
|
|
197,369
|
|
(2,170,581
|
)
|
|
|
|
|
|
|
|
|
Cash at
beginning of period
|
|
938,553
|
|
741,184
|
|
2,911,765
|
|
|
|
|
|
|
|
|
|
Cash at end of
period
|
|
$
|
1,044,242
|
|
$
|
938,553
|
|
$
|
741,184
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
46,087
|
|
$
|
62,402
|
|
$
|
|
|
Cash paid for
income taxes
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Summary of
non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Beneficial
conversion feature of preferred stock
|
|
$
|
814,000
|
|
$
|
33,000
|
|
|
|
Exchange of
common shares for marketable equity securities
|
|
$
|
|
|
$
|
|
|
$
|
231,481
|
|
Changes in
minimum pension liability
|
|
$
|
(37,371
|
)
|
$
|
(177,203
|
)
|
$
|
280,668
|
|
Unrealized
holding losses on marketable securities
|
|
$
|
|
|
$
|
39,311
|
|
$
|
|
|
Conversion of
preferred stock to common
|
|
$
|
4
|
|
$
|
100
|
|
$
|
|
|
Warrants issued
with notes payable
|
|
$
|
|
|
$
|
621,103
|
|
$
|
|
|
Equipment
received in lieu of cash on accounts receivable
|
|
$
|
50,382
|
|
$
|
|
|
$
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
51
IMAGEWARE
SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
|
|
TWELVE MONTHS ENDED
DECEMBER 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,684,769
|
)
|
$
|
(5,926,215
|
)
|
$
|
(8,355,704
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities arising during period
|
|
39,311
|
|
(39,311
|
)
|
|
|
Additional
minimum pension liability
|
|
37,371
|
|
177,203
|
|
(280,668
|
)
|
Foreign currency
translation adjustment
|
|
(94,472
|
)
|
(77,015
|
)
|
(87,861
|
)
|
Comprehensive
loss
|
|
$
|
(4,702,559
|
)
|
$
|
(5,865,338
|
)
|
$
|
(8,724,233
|
)
|
The accompanying
notes are an integral part of these consolidated financial statements.
52
ImageWare
Systems, Inc.
Consolidated Statements of Shareholders Equity
(Deficit)
for the
Years Ended December 31, 2005, 2006 and 2007
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible,
|
|
Series C
|
|
Series D
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Redeemable
|
|
Convertible,
|
|
Convertible,
|
|
|
|
|
|
|
|
|
|
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, 2004
|
|
249,400
|
|
2,494
|
|
|
|
|
|
|
|
|
|
11,969,089
|
|
118,442
|
|
(6,704
|
)
|
(63,688
|
)
|
63,789,396
|
|
332,425
|
|
(55,912,850
|
)
|
8,266,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock for cash, net of financing commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,397,287
|
|
13,973
|
|
|
|
|
|
3,220,155
|
|
|
|
|
|
3,234,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock as consideration for investment in equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,225
|
|
712
|
|
|
|
|
|
230,769
|
|
|
|
|
|
231,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,481
|
|
905
|
|
|
|
|
|
347,447
|
|
|
|
|
|
348,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock pursuant to option and warrant exercise for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,284
|
|
263
|
|
|
|
|
|
62,390
|
|
|
|
|
|
62,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on
Series B Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,998
|
)
|
(52,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280,668
|
)
|
|
|
(280,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,861
|
)
|
|
|
(87,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,355,704
|
)
|
(8,355,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2005
|
|
249,400
|
|
2,494
|
|
|
|
|
|
|
|
|
|
13,554,366
|
|
134,295
|
|
(6,704
|
)
|
(63,688
|
)
|
67,650,157
|
|
(36,104
|
)
|
(64,321,552
|
)
|
3,365,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
in conjunction with secured debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418,500
|
|
|
|
|
|
418,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant price
reduction issued as consideration for debt acceleration waiver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,693
|
|
|
|
|
|
27,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
as consideration for debt acceleration waiver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,910
|
|
|
|
|
|
174,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
preferred stock for cash, net of financing commissions
|
|
|
|
|
|
2,500
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,063,151
|
|
|
|
|
|
2,063,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of series C preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,000
|
|
|
|
(33,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
conversion to common stock
|
|
(10,000
|
)
|
(100
|
)
|
|
|
|
|
|
|
|
|
1,895
|
|
19
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,588
|
|
1,445
|
|
|
|
|
|
474,596
|
|
|
|
|
|
476,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
711,241
|
|
|
|
|
|
711,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on
Series B Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,935
|
)
|
(51,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,203
|
|
|
|
177,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,311
|
)
|
|
|
(39,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,015
|
)
|
|
|
(77,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,926,215
|
)
|
(5,926,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
239,400
|
|
2,394
|
|
2,500
|
|
25
|
|
|
|
|
|
13,700,849
|
|
135,759
|
|
(6,704
|
)
|
(63,688
|
)
|
71,553,329
|
|
24,773
|
|
(70,332,702
|
)
|
1,319,890
|
|
53
ImageWare
Systems, Inc.
Consolidated Statements of Shareholders Equity
(Deficit)
for the
Years Ended December 31, 2005, 2006, and 2007 (continued)
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible,
|
|
Series C
|
|
Series D
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Redeemable
|
|
Convertible,
|
|
Convertible,
|
|
|
|
|
|
|
|
|
|
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, 2006
|
|
239,400
|
|
2,394
|
|
2,500
|
|
25
|
|
|
|
|
|
13,700,849
|
|
135,759
|
|
(6,704
|
)
|
(63,688
|
)
|
71,553,329
|
|
24,773
|
|
(70,332,702
|
)
|
1,319,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock pursuant to warrant exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
795,956
|
|
7,960
|
|
|
|
|
|
1,112,747
|
|
|
|
|
|
1,120,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,240
|
|
632
|
|
|
|
|
|
202,540
|
|
|
|
|
|
203,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock and warrants for cash, net of financing commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,016,666
|
|
20,167
|
|
|
|
|
|
2,601,306
|
|
|
|
|
|
2,621,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock for asset purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
935,089
|
|
9,351
|
|
|
|
|
|
1,468,090
|
|
|
|
|
|
1,477,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
preferred stock for cash, net of financing commissions
|
|
|
|
|
|
|
|
|
|
1,500
|
|
15
|
|
|
|
|
|
|
|
|
|
1,232,689
|
|
|
|
|
|
1,232,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing related
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,257
|
)
|
|
|
|
|
(54,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of series D preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
814,000
|
|
|
|
(814,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,040
|
|
|
|
|
|
359,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,472
|
)
|
|
|
(94,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,311
|
|
|
|
39,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
minumum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,371
|
|
|
|
37,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
conversion to common stock
|
|
|
|
|
|
(300
|
)
|
(3
|
)
|
(112
|
)
|
(1
|
)
|
286,026
|
|
2,860
|
|
|
|
|
|
4,016
|
|
|
|
(6,872
|
)
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on
Series B Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,872
|
)
|
(50,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,684,769
|
)
|
(4,684,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
239,400
|
|
2,394
|
|
2,200
|
|
22
|
|
1,388
|
|
14
|
|
17,797,826
|
|
176,729
|
|
(6,704
|
)
|
(63,688
|
)
|
79,293,500
|
|
6,983
|
|
(75,889,215
|
)
|
3,526,739
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
54
IMAGEWARE
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
1.
DESCRIPTION OF BUSINESS
AND OPERATIONS
Overview
ImageWare Systems, Inc.
is a leader in the emerging market for software-based identity management solutions,
providing biometric, secure credential, law enforcement and enterprise
authorization. Our flagship product is the IWS Biometric Engine.
Scalable for small city business or worldwide deployment, our biometric engine
is a multi-biometric platform that is hardware and algorithm independent,
enabling the enrollment and management of unlimited population sizes. Our
identification products are used to manage and issue secure credentials,
including national IDs, passports, driver licenses, smart cards and access
control credentials. Our law enforcement products provide law enforcement with
integrated mug shot, fingerprint LiveScan and investigative capabilities. We
also provide comprehensive authentication security software, as well as
real-time voice recognition, multilingual speech translation and voice
analytics technologies. Biometric technology is now an integral part of
all markets we address, and all of our products are integrated into the
Biometric Engine Platform. Elements of the IWS Biometric Engine can be
used as investigative tools for law enforcement utilizing multiple biometrics
and forensic data elements, and to enhance security and authenticity of public
and private sector credentials.
Our biometric technology
is a core software component of an organizations security infrastructure and
includes a multi-biometric identity management solution for enrolling,
managing, identifying and verifying the identities of people by the physical
characteristics of the human body. We develop, sell and support various
identity management capabilities within government (federal, state and local),
law enforcement, commercial enterprises, and transportation and aviation
markets for identification and verification purposes. Our IWS Biometric Engine
is a biometric identity management platform for multi-biometric enrollment,
management and authentication, managing population databases of virtually
unlimited sizes. It is also offered as a Software Development Kit (SDK) based
search engine, enabling developers and system integrators to implement a
biometric solution or integrate biometric capabilities into existing
applications without having to derive biometric functionality from pre-existing
applications. The IWS Biometric Engine combined with our secure credential
platform, IWS EPI Builder, provides a comprehensive, integrated biometric and
secure credential solution that can be leveraged for high-end applications such
as passports, driver licenses, national IDs, and other secure documents. It can
also be utilized within our law enforcement systems to incorporate any number
of various multiple biometrics into one system.
We recently added next
generation voice recognition, multilingual speech translation and voice
analytics capabilities to our suite of biometric identity management solutions,
enabling users to facilitate and improve communication across major language
groups globally. The ImageWare Mediator products are offered standalone or
integrated with our Biometric Engine platform providing an advanced multilingual
communications capability. Government, intelligence, defense, public safety and
border control customers are able to realize language translation and voice
recognition capabilities whereby an English-speaking user can understand and be
understood in numerous languages including Spanish, German, French, Korean,
Arabic and Polish, among others. ImageWare Mediator products support speech to
speech translation, multilingual collaboration, conversational environments,
which are represented for both voice and text and include biometric
functionality for speaker identification and voice analytics.
Our law enforcement
solutions enable agencies to quickly capture, archive, search, retrieve, and
share digital images, fingerprints and criminal history records on a
stand-alone, networked, wireless or Web-based platform. We develop, sell and
support a suite of modular software products used by law enforcement and public
safety agencies to create and manage criminal history records and to
investigate crime. Our IWS Law Enforcement solution consists of six software
modules: a Capture and Investigative module, which provides a criminal booking
system and related database; a Facial Recognition module, which uses biometric
facial recognition to identify suspects; a Suspect ID module, which facilitates
the creation of full-color, photo-realistic suspect composites; a wireless
module, which provides access to centrally stored records over the Internet in
a connected or wireless fashion; a PDA add-on module, which enables access to
centrally stored records while in the field on a handheld Pocket PC compatible
device combined with central repository services which allows for inter-agency
data sharing on a local, regional, and/or national level; and a LiveScan
module, which incorporates LiveScan capabilities into IWS Law Enforcement
providing integrated fingerprint and palm print biometric management for civil
and law enforcement use.
55
Our Secure Credential ID
solutions empower customers to create secure and smart digital identification
documents with complete ID systems. We develop, sell and support software and
design systems which utilize digital imaging in the production of photo
identification cards and credentials and identification systems. Our products
in this market consist of IWS EPI Suite, IWS EPI Builder (SDK), Identifier for
Windows and ID Card Maker. These products allow for the production of
digital identification cards and related databases and records and can be used
by, among others, schools, airports, hospitals, corporations or
governments. We have recently added the ability to incorporate multiple
biometrics into the ID systems we offer with the addition of our new IWS
Biometric Engine to our product line.
Our enterprise
authentication software includes the IWS Desktop Security product which is a
comprehensive authentication management infrastructure solution providing added
layers of security to workstations, networks and systems through advanced encryption
and authentication technologies. IWS Desktop Security is optimized to enhance
network security and usability, and uses multi-factor authentication methods to
protect access, verify identity and help secure the computing environment
without sacrificing ease-of-use features such as quick login. Additionally, IWS
Desktop Security provides an easy integration with various smart card-based
credentials including the Common Access Card (CAC), Homeland Security
Presidential Directive 12 (HSPD-12) Personal Identity Verification (PIV)
credential, and Transportation Worker Identification Credential (TWIC) with an
organizations access control process. IWS Desktop Security provides the
crucial end-point component of a Logical Access Control System (LACS), and when
combined with a Physical Access Control System (PACS), organizations benefit
from a complete door to desktop access control and security model.
Going Concern
As
reflected in the accompanying consolidated financial statements, the Company
has continuing losses, negative working capital and negative cash flows from
operations. These matters raise substantial doubt about the Companys ability
to continue as a going concern.
New
financing will be required to fund working capital and operations should the
Company be unable to generate positive cash flow from operations in the near
future. The Company is exploring the possible sale of equity securities and/or
debt financing. In the event financing is not available in the time frame
required, the Company will be forced to sell certain of its assets or license
its technologies to others. These actions, while necessary for the continuance
of operations during a time of cash constraints and a shortage of working
capital, could adversely affect the Companys business.
As a result of the
Companys continuing losses and negative cash flows from operations, the
Company currently does not meet certain listing standards of the American Stock
Exchange (AMEX) Company Guide. On December 14,
2007, we received a letter from AMEX indicating that we do not comply with AMEXs
continued listing standards due to our inability to maintain compliance with
Sections 1003(a)(ii), 1003(a)(iii) and 1003(a)(iv) of the Company
Guide and that AMEX intends to remove our common stock from listing and
registration on AMEX by filing a delisting application with the Securities and
Exchange Commission (SEC). The letter
from AMEX states that we were not in compliance with (i) Section 1003(a)(ii) of
the Company Guide because our shareholders equity was less than $4,000,000 and
we sustained losses from continuing operations and/or net losses in three out
of our four most recent fiscal years, and (ii) Section 1003(a)(iii) of
the Company Guide because our shareholders equity was less than $6,000,000 and
we sustained losses from continuing operations and/or net losses in our five
most recent fiscal years. We had also
been notified by AMEX that we were not in compliance with Section 1003(a)(iv) of
the Company Guide in that we had sustained losses which are so substantial in
relation to our overall operations or our existing financial resources, or our
financial condition had become so impaired that it appeared questionable, in
the opinion of AMEX, as to whether we would be able to continue operations
and/or meet our obligations as they matured.
We filed an appeal of
AMEXs determination and requested an oral hearing before an AMEX Listing
Qualifications Panel (a Qualifications Panel). On March 10, 2008, we received a letter
from AMEX granting our request. Our
hearing with a Qualifications Panel is scheduled for April 16, 2008. If the Qualifications Panel does not grant
the relief sought, our common stock will be delisted from AMEX following which
it is expected that our common stock would be quoted on the Over-the-Counter
Bulletin Board. As a consequence of any
such delisting, the public price of our common stock could be adversely
affected and a stockholder would likely find it more difficult to dispose of,
or to obtain accurate quotations as to the prices of, our common stock.
Insufficient funds will require the Company to sell certain of the
Companys assets or license the Companys technologies to others and if the
Company is unable to obtain additional funding there is substantial doubt about
the Companys ability to continue as a going concern.
56
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 Companys ability to continue to
raise capital and generate positive cash flows from operations. The
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue its existence.
The
Company operates in markets that are emerging and highly competitive. There is
no assurance that the Company will operate at a profit in the future.
2.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Use of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (U.S. 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 financial statements, and the reported amounts of revenue
and expense during the reporting period. Significant estimates include the
allowance for doubtful accounts receivable, calculation of our tax provision,
inventory obsolescence reserve, the determination of other than temporary
impairment on our marketable securities, deferred tax asset valuation
allowances, accounting for loss contingencies, recoverability of goodwill and
acquired intangible assets and amortization periods, assumptions used in the
Black-Scholes model to calculate the fair value of share based payments,
assumptions used in the application of fair value methodologies to calculate
the fair value of acquired assets and revenue and cost of revenues recognized
under the percentage of completion method. Actual results could differ from
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash
on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper that are readily convertible into cash with original
maturities of three months or less or that are redeemable upon demand.
Allowance for Doubtful Accounts
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.
Fair Value of Financial Instruments
For certain of the Companys financial instruments,
including accounts receivable, accounts payable, accrued expenses and deferred
revenues the carrying amounts approximate fair value due to their relatively
short maturities.
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 range from three to five years. Maintenance and repairs
are charged to expense as incurred. Major renewals or improvements are
capitalized. When assets are sold or abandoned, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain
or loss is recognized. Expenditures for leasehold improvements are capitalized.
Depreciation 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.
Goodwill:
Goodwill
arising from
the acquisition of Sol Logic, G & A Imaging and Castleworks and
E-Focus was first attributed to developed technology, trademarks and
tradenames, patents, agreements not-to-compete and customer
57
relationship
based upon their estimated fair value at the date of acquisition. These
intangible assets are being amortized over their estimated useful lives, which
range from 3-15 years.
Goodwill
acquired will
be reviewed for impairment pursuant to SFAS No. 142.
The Company accounts for its intangible assets under
the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. In
accordance with SFAS No. 142, intangible assets with a definite life are
accounted for impairment under SFAS No. 144 and intangible assets with an
indefinite life are accounted for impairment under SFAS No. 142. In
accordance with SFAS No. 142, goodwill, or the excess of cost over fair
value of net assets acquired, is no longer amortized but is tested for
impairment using a fair value approach at the reporting unit level. A
reporting unit is the operating segment, or a business one level below that
operating segment (referred to as a component) if discrete financial
information is prepared and regularly reviewed by management at the component
level. The Company recognizes an impairment charge for any amount by which the
carrying amount of a reporting units goodwill exceeds its fair value. The
Company uses fair value methodologies to establish fair values. When available
and as appropriate, comparative market multiples to corroborate discounted cash
flow results is used. When a business within a reporting unit is disposed of,
goodwill is allocated to the gain or loss on disposition using the relative
fair value methodology.
For the twelve months ended December 31, 2005,
the Company recorded goodwill impairment charges of approximately $1,245,000
for goodwill carried in the Companys former Digital Photography segment. The
impairment was a result of changes resulting from the effect of projecting
recent performance variances on future periods.
The Company did not record any goodwill impairment charges for the
twelve months ended December 31, 2006 and 2007.
Intangible and Long-lived assets
In October 2001,
the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the accounting and reporting provision of APB Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. This statement also amends ARB No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 also establishes a primary-asset approach to determine the
cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
At December 31, 2005, the Company recorded impairment losses on certain
long-lived assets aggregating $253,000.
At December 31, 2006 and 2007, there was no impairment of the
Companys intangible or long-lived assets.
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
may exceed the FDIC $100,000 insurance limit. 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. Accounts receivable are presented
net of an allowance for doubtful accounts of $0 and $483,132 at December 31,
2007 and 2006, respectively.
For
the twelve months ended December 31, 2007 one customer accounted for
approximately 18% of total revenues. For the twelve months ended December 31,
2006 one customer accounted for approximately 21% of total revenues. For the twelve months ended 2005 there were
no customers who accounted for more than 10% of the Companys revenues.
As of December 31,
2007, there was one customer who accounted for more than 10% of total accounts
receivable. As of December 31,
2006, there were three customers who each accounted for more than 10% of total
accounts receivable and who collectively comprised approximately 52% of total
accounts receivable. At December 31,
2006, two of these accounts were in good standing with the third account fully
reserved.
58
Stock-based compensation
At December 31,
2007, the Company had three stock-based compensation plans for employees and
nonemployee directors which authorize the granting of various equity-based
incentives including stock options and restricted stock.
Prior
to January 1, 2006, the Company accounted for the measurement and
recognition of stock-based compensation under the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations,
permitted under Statement of Financial Accounting Standard No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123). As a result, employee stock
option based compensation was included as a pro forma disclosure in the Notes
to the Companys financial statements for prior year periods.
Prior
to the adoption of Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, (SFAS 123(R)), the Company provided the disclosures
required under SFAS No. 123. The pro forma effect on net income and net
income per share as if the fair value of stock-based compensation had been
recognized as compensation expense for the twelve month periods ending December 31,
2005 was as follows:
|
|
Twelve
Months Ended
December 31,
2005
|
|
|
|
|
|
Net Loss:
|
|
|
|
As reported
|
|
$
|
(8,355,704
|
)
|
Stock-based
compensation included in net loss
|
|
$
|
310,597
|
|
Stock-based
employee compensation under fair value based method
|
|
$
|
(848,534
|
)
|
Pro forma net
loss
|
|
$
|
(8,893,641
|
)
|
|
|
|
|
Basic and
diluted loss per common share:
|
|
|
|
As reported
|
|
$
|
(0.66
|
)
|
Pro forma
|
|
$
|
(0.70
|
)
|
On January 1,
2006, the Company adopted the provisions of SFAS 123(R) using the modified
prospective transition method. SFAS 123(R) requires
companies to measure and recognized the cost of employee services received in
exchange for awards of equity instruments based on the grant date fair value of
those awards. For share option instruments issued subsequent to the adoption of
SFAS 123(R), compensation cost is recognized ratably using the straight-line
attribution method over the expected vesting period. For equity options issued
prior to the adoption of SFAS 123(R), compensation cost is recognized using a
graded vesting attribution method. In addition, pursuant to SFAS 123(R), we are
required to estimate the amount of expected forfeitures when calculating
compensation costs, instead of accounting for forfeitures as incurred, which
was our previous method. Prior periods are not restated under this transition
method. Options previously awarded and classified as equity instruments
continue to maintain their equity classification under SFAS 123(R). Stock-based compensation expense related to
equity options was approximately $359,000 and $711,000 for the twelve month
ended December 31, 2007 and 2006, respectively.
Prior
to adopting SFAS No. 123(R), the Company presented all excess tax
benefits, if any, resulting from the exercise of stock options as operating
cash flows in the Statement of Cash Flows. SFAS No. 123(R) requires
cash flows resulting from excess tax benefits to be classified as a financing
activity. Excess tax benefits are realized from tax deductions for exercised
options in excess of the deferred tax asset attributable to stock compensation
costs for such options. The Company did not record any excess tax benefits as a
result of adopting SFAS 123(R) in the twelve months ended December 31,
2006 because the Company is currently providing a full valuation on future tax
benefits realized in the United States until it can sustain a level of
profitability that demonstrates its ability to utilize the assets.
SFAS No. 123(R) requires
the use of a valuation model to calculate the fair value of stock-based awards.
For the twelve months ended December 31, 2006 and 2007, 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 Companys common stock. Historical volatility factors utilized in the
Companys Black-Scholes computations range from 64.4% to 98.5%. The Company has
elected to estimate the expected life of an award based upon the SEC approved simplified
method noted
59
under the provisions of
Staff Accounting Bulletin No. 107. Under this formula, the expected term
is equal to: ((weighted-average vesting term + original contractual term)/2).
The expected term used by the Company as computed by this method range from 3.5
years to 6.1 years. The interest rate used is the risk free interest rate and
is based upon U. S. Treasury rates appropriate for the expected term. Interest
rates used in the Companys Black-Scholes calculations range from 2.7% to 4.6%.
Dividend yield is zero as we do not expect to declare any dividends on our
common shares in the foreseeable future.
In
addition to the key assumptions used in the Black-Scholes model, the estimated
forfeiture rate at the time of valuation is a critical assumption. The Company has estimated an annualized
forfeiture rate of approximately 10% for corporate officers, 4% for members of
the Board of Directors and 24% for all other employees. The Company reviews the expected forfeiture
rate annually to determine if that percent is still reasonable based on
historical experience.
A
summary of the activity under the Companys stock option plans for the twelve
months ended December 31, 2007 is as follows:
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
1,603,164
|
|
$
|
2.45
|
|
7.84
|
|
Granted
|
|
165,250
|
|
$
|
2.38
|
|
9.32
|
|
Forfeited
|
|
(103,206
|
)
|
$
|
2.58
|
|
5.69
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
1,665,208
|
|
$
|
2.44
|
|
7.74
|
|
Options
exercisable at December 31, 2007 totaled 1,212,753 at a weighted-average
price of $2.50, with a remaining weighted average contractual term of
approximately 6.7 years.
The
weighted-average grant date fair value of options granted during the twelve
months ended December 31, 2007 was $1.48.
The
following table sets forth a summary of the status and changes of the Companys
unvested shares related to its stock option plans as of and during the twelve
months ended December 31, 2007:
|
|
Options
|
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
761,782
|
|
$
|
1.63
|
|
Granted
|
|
165,250
|
|
$
|
1.48
|
|
Vested
|
|
(418,529
|
)
|
$
|
1.64
|
|
Forfeited
|
|
(56,048
|
)
|
$
|
1.61
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
452,455
|
|
$
|
1.57
|
|
At December 31,
2007, the total remaining unrecognized compensation cost related to unvested
stock options amounted to approximately $308,897, which will be amortized over
the weighted-average remaining requisite service period of 1.41 years.
On March 30,
2004, the Company entered into a stock exchange agreement with certain
employees whereby the
employees would receive 255,792 shares of restricted
stock in exchange for 426,321 options previously granted under various stock
option plans. Under the terms of the agreement, the employees will receive
three shares of restricted stock for each five options exchanged. The
restricted stock will vest over three years on a quarterly basis and will fully
vest upon either a change in control or the sale of the Company.
60
On September 27, 2005, the Company issued to
certain employees 162,300 shares of restricted stock. The restricted stock will
vest over three years on a quarterly basis and will fully vest upon either a
change in control or the sale of the Company.
In conjunction with these restricted stock
agreements, the Company has recognized stock-based compensation expense of
$197,000, $406,000 and $311,000 for the twelve months ended December 31,
2007, 2006 and 2005, respectively.
Income taxes
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.
Foreign currency translation
The
financial position and results of operations of the Companys foreign
subsidiaries are measured using the foreign subsidiarys local currency as the
functional currency. Revenues and expenses of such subsidiaries have been
translated into U.S. dollars at 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 and Canadian subsidiaries.
The cumulative translation adjustment account, which is part of
accumulated other comprehensive income, decreased approximately $94,000 for the
twelve months ended December 31, 2007, decreased approximately $77,000 for
the twelve months ended December 31, 2006, and increased approximately
$88,000 for the twelve months ended December 31, 2005.
Comprehensive Income
Comprehensive
income consists of net gains and losses affecting shareholders equity that,
under generally accepted accounting principles, are excluded from net income
(loss). For the Company, the only items are the cumulative translation
adjustment, unrealized holding losses on marketable securities classified as
available-for-sale and the additional minimum liability related to the Companys
defined benefit pension plan, recognized pursuant to Statement of Financial
Accounting Standards No. 87 (SFAS 87), Employers Accounting for
Pensions and Statement of Financial Accounting Standards No 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87,
88, 106, and 132R).
Revenue recognition
The
Company recognizes revenue from the following major revenue sources:
·
Long-term fixed-price contracts involving
significant customization
·
Fixed-price contracts involving minimal
customization
·
Software licensing
·
Sales of computer hardware and
identification media
·
Postcontract customer support (PCS)
The
Companys revenue recognition policies are consistent with U. S. GAAP including
Statements of Position 97-2 Software Revenue Recognition and 98-9 Modification
of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions,
Securities and Exchange Commission Staff Accounting Bulletin 104 , Emerging
Issues Task Force Issue 00-21 Revenue Arrangements with Multiple Deliverables,
and Emerging Issues Task Force Issue 03-05 Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software. Accordingly, the Company recognizes revenue
when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
fee is fixed or determinable, and collectibility is reasonable assured.
The
Company recognizes revenue and profit as work progresses on long-term,
fixed-price contracts involving
61
significant amount of
hardware and software customization using the percentage of completion method
based on costs incurred to date compared to total estimated costs at
completion. Revenue from contracts for which we cannot reliably estimate total
costs or there are not significant amounts of customization are recognized upon
completion. The Company also generates non-recurring revenue from the licensing
of its software. Software license revenue is recognized upon the execution of a
license agreement, upon deliverance, when fees are fixed and determinable, when
collectibility is probable and when all other significant obligations have been
fulfilled. The Company also generates revenue from the sale of computer
hardware and identification media. Revenue for these items is recognized upon
delivery of these products to the customer. Our revenue from periodic
maintenance agreements is generally recognized ratably over the respective
maintenance periods provided no significant obligations remain and
collectibility of the related receivable is probable. Sales tax collected from
customers is excluded from revenue.
Capitalized software development costs
Software
development costs incurred prior to the establishment of technological
feasibility are charged to research and development expense as incurred.
Technological feasibility is established upon completion of a working model.
Software development costs incurred subsequent to the time a products
technological feasibility has been established, through the time the product is
available for general release to customers, are capitalized, if material. To
date, the Company has not capitalized any software costs as the period between
achieving technological feasibility and the general availability of the related
products has been short and software development costs qualifying for
capitalization have been insignificant.
Advertising costs
The
Company expenses advertising costs as incurred. Advertising expense totaled
approximately $29,000, $122,000 and $68,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
Loss per share
Basic
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 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,
increased to include, if dilutive, the number of additional common shares that
would have been outstanding if the potential common shares had been issued at
the date of issuance. The dilutive effect of outstanding stock options is
included in the calculation of diluted loss per common share, if dilutive,
using the treasury stock method. During the years ended December 31, 2007,
2006 and 2005, the Company has excluded the following securities from the
calculation of diluted loss per share, as their effect would have been
anti-dilutive due to the Companys net loss:
Potential Dilutive Securities:
|
|
Number of
Common Shares
Convertible into
at
December 31,
2007
|
|
Number of
Common Shares
Convertible into
at
December 31,
2006
|
|
Number of
Common Shares
Convertible into
at
December 31,
2005
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock Series B
|
|
45,384
|
|
45,384
|
|
47,280
|
|
Convertible preferred
stock Series C
|
|
1,466,666
|
|
1,666,664
|
|
|
|
Convertible
preferred stock Series D
|
|
925,333
|
|
|
|
|
|
Stock options
|
|
1,665,208
|
|
1,603,164
|
|
1,474,093
|
|
Warrants
|
|
5,955,830
|
|
5,821,149
|
|
4,293,305
|
|
The
following table sets forth the computation of basic and diluted loss per share
for the years ended December 31, 2007, 2006 and 2005:
62
|
|
|
|
TWELVE MONTHS ENDED
DECEMBER 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator loss
from continuing operations:
|
|
|
|
|
|
|
|
Net loss from
continuing operations
|
|
$
|
(4,734,769
|
)
|
$
|
(5,518,276
|
)
|
$
|
(6,696,778
|
)
|
Less preferred
stock dividends
|
|
(1,171,258
|
)
|
(110,998
|
)
|
(52,997
|
)
|
Net loss from
continuing operations available to common shareholders
|
|
$
|
(5,906,027
|
)
|
$
|
(5,629,274
|
)
|
$
|
(6,749,775
|
)
|
|
|
|
|
|
|
|
|
Numerator gain
(loss) from discontinued operations:
|
|
|
|
|
|
|
|
Net loss from
discontinued operations
|
|
50,000
|
|
(407,939
|
)
|
(1,658,926
|
)
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
15,070,308
|
|
13,592,841
|
|
12,731,304
|
|
|
|
|
|
|
|
|
|
Basic and
Diluted loss per share:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.31
|
)
|
$
|
(0.41
|
)
|
$
|
(0.53
|
)
|
Discontinued
operations
|
|
$
|
|
|
$
|
(0.03
|
)
|
$
|
(0.13
|
)
|
Preferred
dividends
|
|
$
|
(0.08
|
)
|
$
|
|
|
$
|
|
|
Net loss per
share
|
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.66
|
)
|
Segment information
Prior
to its acquisitions during 2001 of G & A, Castleworks and E-Focus, the
Company operated in one business segment. With its acquisition of G &
A, Castleworks and E-Focus, the Company determined it was comprised of three
reportable segments based on the management approach as prescribed by Statement
of Financial Accounting Standards No. 131 (As Amended), Disclosures about
Segments of an Enterprise and Related Information, (SFAS 131). These segments were determined to be: Law
Enforcement, Identification and Digital Photography. With the sale of its entire Digital
Photography product line in November 2006, the Company reassessed the
composition of its operating segments and determined that it no longer operates
in separate, distinct market segments but rather operates in one market
segment, that segment being identity management. The Companys determination was based on
fundamental changes in the Companys business structure due to the
consolidation of operations, restructuring of the Companys operations and
management team, and the integration of what where previously distinct,
mutually exclusive technologies. This
has resulted in changes in the manner by which the Companys chief decision
maker assesses performance and makes decisions concerning resource allocation.
As of
result of the Companys determination that operates in one market segment, that
segment being identify management, the Company has amended its segment
disclosure beginning with its annual report as filed on Form 10-K for the
twelve months ended December 31, 2006.
New
Accounting Pronouncements
In September 2006,
the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS No. 157).
SFAS No. 157 replaces the different definitions of fair value in the
accounting literature with a single definition. It defines fair value as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
SFAS No. 157 is effective for fair-value measurements already
required or permitted by other standards for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years, with earlier adoption encouraged. The FASB has deferred the
implementation of SFAS 157 by one year for certain non-financial assets
and liabilities such as this will be effective for the fiscal years beginning
after November 15, 2008. We are currently in the process of determining
the impact, if any, of adopting the provisions of SFAS No. 157 on our
results of operations or financial position.
In February 2007,
the FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115
(SFAS No. 159). SFAS
No. 159 provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of SFAS No. 159 is to
reduce both the complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate
63
comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007, with
earlier adoption permitted. We are currently in the process of determining the
impact of adopting the provisions of SFAS No. 159 on our results of
operations or statement of financial position.
In December 2007,
the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements. The standards
are intended to improve, simplify, and converge internationally the accounting
for business combinations and the reporting of non-controlling interests in
consolidated financial statements.
SFAS No. 141(R) requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. SFAS No. 141(R) is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15,
2008. SFAS No. 141(R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Earlier adoption
is prohibited. The Company is currently evaluating the impact of this standard
on its consolidated financial statements.
SFAS No. 160 is
designed to improve the relevance, comparability, and transparency of financial
information provided to investors by requiring all entities to report
non-controlling (minority) interests in subsidiaries in the same wayas equity
in the consolidated financial statements. Moreover, SFAS No. 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and non-controlling interests by requiring they be treated as
equity transactions. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited. In addition, SFAS No. 160 shall be
applied prospectively as of the beginning of the fiscal year in which it is
initially applied, except for the presentation and disclosure requirements. The
presentation and disclosure requirements shall be applied retrospectively for
all periods presented. We do not have an outstanding non-controlling interest
in one or more subsidiaries and therefore, SFAS No. 160 is not applicable
to us at this time.
Reclassifications
Certain
reclassifications were made to prior years consolidated financial statements
to conform to the current year presentation.
3.
Intangible Assets
The
following disclosure presents certain information about the Companys acquired
intangible assets as of December 31, 2007 and 2006. All intangible assets
are being amortized over their estimated useful lives, as indicated below, with
no estimated residual values.
64
Acquired Intangible Assets
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
After
Impairment
Charge
|
|
Accumulated
Amortization
|
|
Net
Balance
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Amortized
acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
Technology
|
|
5 years
|
|
$
|
3,178,242
|
|
$
|
(1,160,000
|
)
|
$
|
2,018,242
|
|
Trademarks and
tradenames
|
|
14.5 years
|
|
377,000
|
|
(251,426
|
)
|
125,574
|
|
Customer
relationship
|
|
5 years
|
|
293,000
|
|
(200,000
|
)
|
93,000
|
|
Non-compete
Agreements
|
|
3 years
|
|
324,760
|
|
(125,000
|
)
|
199,760
|
|
Patents
|
|
4 years
|
|
60,000
|
|
(60,000
|
)
|
|
|
|
|
|
|
$
|
4,233,002
|
|
$
|
(1,796,426
|
)
|
$
|
2,436,576
|
|
At
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Amortized
acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
Technology
|
|
5 years
|
|
$
|
1,160,000
|
|
$
|
(1,160,000
|
)
|
$
|
|
|
Trademarks and
tradenames
|
|
14.5 years
|
|
377,000
|
|
(235,706
|
)
|
141,294
|
|
Customer
relationship
|
|
5 years
|
|
200,000
|
|
(200,000
|
)
|
|
|
Non-compete
Agreements
|
|
3 years
|
|
125,000
|
|
(125,000
|
)
|
|
|
Patents
|
|
4 years
|
|
60,000
|
|
(60,000
|
)
|
|
|
|
|
|
|
$
|
1,922,000
|
|
$
|
(1,780,706
|
)
|
$
|
141,294
|
|
As
more fully described in Note 6 to these consolidated financial statements, in December 2007,
the Company completed the acquisition of substantially all the assets of Sol
Logic, Inc. resulting in acquired intangible assets of approximately
$2,311,000. Based on fair value
methodologies employed by a professional, independent valuation firm, the
Company recorded approximately $2,018,000 in intangibles assets for developed
technology, $93,000 in customer relationship intangible assets and $200,000 for
a non-compete agreement.
In 2005, we recorded an
impairment charge of approximately $253,000 related to our intangible asset for
certain trademark and tradenames carried in our former Identification segment.
This loss reflects the amount by which the carrying value of this asset
exceeded its estimated fair value determined by the assets future discounted
cash flows. The impairment loss is recorded as a component of Operating
expenses in the Consolidated Statement of Operations for 2005. There were no impairment losses recorded for
the years ended December 31, 2007 and 2006.
Amortization
expense for the twelve months ended December 31, 2007, 2006 and 2005, was
approximately $16,000, $77,000 and $293,000, respectively.
The
estimated acquired intangible amortization expense for the next five fiscal
years is as follows:
Fiscal Year Ended December 31,
|
|
Estimated Amortization Expense
|
|
2008
|
|
505,000
|
|
2009
|
|
505,000
|
|
2010
|
|
505,000
|
|
2011
|
|
438,000
|
|
2012
|
|
438,000
|
|
Thereafter
|
|
45,294
|
|
4.
Goodwill
The
changes in the carrying amount of goodwill for the years ended December 31,
2005, 2006 and 2007 are as follows:
65
|
|
Total
|
|
Balance of
Goodwill as of January 1, 2005
|
|
$
|
5,297,627
|
|
|
|
|
|
Goodwill
acquired
|
|
|
|
Impairment
losses
|
|
(1,245,353
|
)
|
Imaging Asia
Pacific component of Identification segment
|
|
(636,627
|
)
|
|
|
|
|
Balance of
Goodwill as of December 31, 2005
|
|
$
|
3,415,647
|
|
|
|
|
|
Goodwill
acquired
|
|
|
|
Impairment
losses
|
|
|
|
Balance of
goodwill as of December 31, 2006
|
|
$
|
3,415,647
|
|
|
|
|
|
Goodwill
acquired
|
|
1,036,395
|
|
Impairment
losses
|
|
|
|
|
|
|
|
Balance of
Goodwill as of December 31, 2007
|
|
$
|
4,452,042
|
|
As
more fully described in Note 6 to these consolidated financial statements, in December 2007,
the Company completed the acquisition of substantially all the assets of Sol
Logic, Inc. resulting in goodwill acquired of approximately $1,036,000.
The
Company annually, or more frequently if events or circumstances indicate a
need, tests the carrying amount of goodwill for impairment. The Company
performs its annual impairment test in the fourth quarter of each year. A
two-step impairment test is used to first identify potential goodwill
impairment and then measure the amount of goodwill impairment loss, if any. These
tests were conducted by determining and comparing the fair value of our
reporting units, as defined in SFAS 142, to the reporting units carrying
value. In 2006, we determined that our only reporting unit is Identity
Management. Based on the results of these impairment tests, we determined that
our goodwill assets were not impaired as of December 31, 2007 and 2006.
During
2005, the Company determined that because of a change in competitive dynamics
the fair value of the Companys former Digital Photography unit had been
reduced to an amount less that the reporting units carrying amount, and
accordingly the Company recorded a pre-tax, non-cash goodwill impairment charge
of approximately $1,245,000 as a component of general and administrative
expenses. The Company utilized the assistance of an unaffiliated third-party
valuation specialist who employed various fair value methodologies, including
present value techniques and prices of comparable businesses, to determine the
implied fair value of the Companys goodwill in its 2005 impairment testing.
5.
Investments
In
conjunction with the sale of the Companys wholly-owned subsidiary, Digital
Imaging Asia Pacific, as more fully described in Note 7 to these consolidated
financial statements, in March 2005, the Company and Argus Solutions Ltd each
agreed to purchase $250,000 of each others common stock at a per share price
equal to 108% of the closing price of each others stock as determined by the
American Stock Exchange and Australian Stock Exchange, respectively. As legal
consideration, each Company paid the other cash of $250,000. The Company and
Argus consummated the transaction through the exchange of common shares. The
Company exchanged 71,225 shares of its common stock for 1,929,914 shares of
common stock of Argus Solutions Ltd., which represents approximately one
percent of the voting equity of Argus. In accordance with Statement of
Financial Accounting Standards No. 153, Exchange of Nonmonetary Assets,
an amendment of APB Opinion No. 29, the Company has recorded this
transaction as a nonmonetary exchange based on the fair value of the shares
exchanged as determined by the closing price of the Companys shares on the
American Stock Exchange on the transaction date of $3.25 or $231,000.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities and based on
our intentions regarding these instruments, we classify marketable equity
securities into trading or available-for-sale categories. Marketable securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading securities and are reported at fair value,
with unrealized gains and losses recognized in earnings. Marketable securities
not classified as trading are classified as available-for-sale and are carried
at fair market value, with the unrealized gains and losses, net of tax,
included in the determination of comprehensive income and reported in
shareholders equity. Marketable equity securities are included in other
non-current
66
assets. The Company
reviews its marketable equity holdings in publicly-traded companies on a
regular basis to determine if any security has experienced an
other-than-temporary decline in fair value. The Company considers the investee
companys cash position, earnings and revenue outlook, and stock price
performance, among other factors, in its review. If it is determined that an
other-than-temporary decline exists in a marketable equity security, the
Company writes down the investment to its market value and records the related
write-down as an investment loss in its Statement of Operations.
At December 31,
2007, the Company wrote down to fair market value its remaining investment in
Argus common stock. The write-down
amounted to $39,000 and was due to a decline in the fair value of the equity
security which, in the opinion of management, was considered to be other than
temporary. The write-down is included in
the caption Other income, net in the accompanying Statement of Operations for
the twelve months ended December 31, 2007. At December 31, 2005, the
Company wrote down to fair market value its investment in Argus common stock. The
write-down amounted to $146,000 and was due to a decline in the fair value of
the equity security which, in the opinion of management, was considered to be
other than temporary. The write-down is included in the caption Other income,
net in the accompanying Statement of Operations for the twelve months ended December 31,
2005.
6.
Acquisition
In December 2007,
the Company entered into an agreement for the purchase of certain assets of Sol
Logic, Inc. (Sol Logic) pursuant to an Asset Purchase Agreement (the Asset
Purchase Agreement). The assets acquired include certain customer
contracts, software licenses and intellectual property (collectively, the Acquired
Assets). As a result of this asset acquisition, the Company expects to
integrate real-time voice recognition, multiple language translation and voice
analytic capabilities into its biometric offerings. The Asset Purchase Agreement contains
customary representations and warranties on behalf of Sol Logic.
In consideration for the
acquisition of the Acquired Assets, the Company: (1) issued to Sol Logic
on December 19, 2007 (the Closing) 935,089 shares of restricted common
stock of the Company (the Initial Shares), and (2) on June 19, 2008
(the Additional Issuance Date) will issue to Sol Logic that number of shares
of restricted common stock (the Additional Shares and collectively with the
Initial Shares, the Shares) equal to the quotient obtained by dividing
$1,502,000 by the greater of (A) $1.633 and (B) the volume weighted
average closing price of the Companys common stock over the 20 trading-day
period ending on June 18, 2008, as reported on The American Stock Exchange
(AMEX) or the Over-the-Counter Bullet Board (OTCBB). Fifty percent of
the Initial Shares and ten percent of the Additional Shares will be held in
escrow until the one-year anniversary of the Closing. The Company has recorded the obligation to
issue the required number of shares on the Additional Issuance Date as a
current liability in the accompanying Consolidated Balance Sheet as of December 31,
2007 under the caption Acquisition related obligation.
The aggregate purchase
price, not including direct transaction costs of $218,000, was approximately
$3,171,000 and consisted of $147,000 in cash and other non-equity consideration
of $45,000 and common stock valued at $2,979,000. The value of the 935,089
common shares issued was determined based on the average market price of the
Companys common shares over the 2-day period before and after the terms of the
acquisition were consummated on December 19, 2007 in accordance with EITF
99-12, Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination.
The following table
presents the allocation of the acquisition cost, including professional fees
and other related acquisition costs, to the assets acquired and liabilities
assumed, based on their fair values:
Property, plant
and equipment
|
|
$
|
42,000
|
|
Intangible
assets
|
|
2,311,000
|
|
Goodwill
|
|
1,036,000
|
|
Total assets
acquired
|
|
$
|
3,389,000
|
|
The following (unaudited)
pro forma consolidated results of operations have been prepared as if the
acquisition of Sol Logic, Inc. had occurred at January 1, 2006:
67
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Sales
|
|
$
|
8,902,000
|
|
$
|
10,611,000
|
|
Net loss
available to common shareholders
|
|
$
|
(6,960,000
|
)
|
$
|
(6,796,000
|
)
|
Net loss per
share available to common shareholders
|
|
$
|
(0.44
|
)
|
$
|
(0.47
|
)
|
The
pro forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
As
more fully described in Note 20 to these consolidated financial statements, in March 2008,
the Company and Sol Logic, Inc. agreed to amend the Asset Purchase
Agreement.
The Amendment provides
that in consideration for the Acquired Assets, the Company will adjust the
number of shares issued to the Seller to 677,940 shares of restricted common
stock of the Company (the Initial Shares). In addition to the Initial
Shares, the Company will issue to Sol Logic certain additional shares upon
achievement of a milestone. In the event the Companys revenues on
certain specified products (the Products) equals or exceeds $3,000,000 for
the six-month period commencing on March 6, 2008 and ending on September 6,
2008, the Company will issue to Sol Logic that number of shares of the Companys
common stock (the Additional Shares) equal to (A) the quotient obtained
by dividing $1,008,224 by the greater of (i) the volume weighted average
closing price of the Companys common stock (Common Stock) over the 20
trading-day period ending on the date immediately preceding the Additional
Issuance Date and (ii) $1.10 (the Additional Per Share Price), and
deposit into an escrow account (the Escrow Account) that number of shares of
the Companys common stock (the Escrow Shares) equal to the quotient obtained
by dividing $913,700 by the Additional Per Share Price. In the event the
Company does not achieve the $3,000,000 product revenue milestone, the revenue
determination period will be extended and the Company will issue Sol Logic the
Additional Shares if the Companys revenues on the Products equals or exceeds
$5,000,000 for the 18-month period commencing on March 6, 2008 and ending
on September 8, 2009.
The Company will record
the provisions of the amended Asset Purchase Agreement during the first fiscal
quarter of 2008.
7.
Sale of
Businesses and Discontinued Operations
On November 30,
2006, the Company completed the sale of its entire Digital Photography (PDI)
product line and inventory (the PDI Products) to an unaffiliated third party
for a total of $400,000, including an initial cash payment of $25,000. The purchaser is required to pay up to the
full remaining amount of $375,000 in a series of quarterly installments equal
to 12.5% of all newly acquired sales and license revenues relating to the PDI
product line (the Percentage Payments).
Until such time when the Company has received the full purchase price of
$400,000, during any 12-month period during which the aggregate Percentage
Payments to the Company are less than $50,000, the purchaser will pay the
Company the difference between the Percentage Payments and $50,000. This component of the Companys business was
previously classified as the Companys Digital Photography segment.
The Company decided to
sell this component because it has incurred significant operating losses in
each of the last five years and has lost significant market share in the last
three years. The assets sold consisted
primarily of a suite of software and related inventory including source,
copyrights, trademarks, documentation and client base.
In 2007, the Company
recognized a gain of approximately $50,000 from the disposal of this component
representing the cash proceeds received less the value of net assets sold. At December 31, 2007, the Company has
recorded the fair value of the remaining amount due of $325,000 offset by a
full valuation allowance due to the uncertainty of the ultimate collectibility
of such amounts. This determination was based upon the maximum repayment period
of 6.5 years of amounts owing the Company combined with the purchaser operating
in a highly competitive business environment evidenced by rapid technological
change. Accordingly, the Company has
deferred any remaining gain from the disposal of this component until such time
as the Company determines that the realization of the remaining amounts owed is
reasonably assured.
Digital Photography
sales, reported in discontinued operations, for the years ended December 31,
2006 and 2005 were $176,000 and 345,000, respectively. Digital Photographys pretax loss, reported
in discontinued operations for the years ended December 31, 2006 and 2005
were $408,000 and $1,881,000, respectively.
68
Net assets sold of the
Digital Photography component were inventory and equipment of $5,000. All software related assets such as source,
copyrights, trademarks, documentation and client base were either fully expensed
or fully amortized and had a net carrying value of zero at the date of sale.
On March 3,
2005, the Company sold its wholly-owned Singapore subsidiary, Digital Imaging
Asia Pacific Pte. Ltd., for cash of $1,300,000, (theDIAP transaction). The
Company decided to sell this subsidiary as part of its overall strategic
partnership with Argus Solutions Ltd (Argus), as a means of strengthening its
position in the Asia-Pacific region. In conjunction with this strategy, the
Company entered into an International Distributor Agreement with Argus pursuant
to which Argus will distribute the Companys biometric engine, law enforcement
and secure credential solutions in the Asia-Pacific region, excluding Japan and
Korea, for a period of three years.
In
accordance with SFAS 144, this subsidiary, previously included in the Companys
former Identification segment, was treated as a discontinued operation. The net
loss for this subsidiary for the twelve months ended December 31, 2005 is
reflected in the Companys Consolidated Statement of Operations as loss from
discontinued operations. Included in the 2005 loss results is a gain on sale of
subsidiary of $233,000 net of direct transaction costs of $49,000 and including
the allocation of $637,000 of goodwill.
The
assets and liabilities sold as part of the DIAP transaction included the
following:
Cash
|
|
$
|
41,000
|
|
Accounts
receivable
|
|
80,000
|
|
Inventories
|
|
242,000
|
|
Prepaid expenses
and other current assets
|
|
18,000
|
|
Property and
equipment, net
|
|
17,000
|
|
Goodwill
|
|
637,000
|
|
|
|
$
|
1,035,000
|
|
|
|
|
|
Accounts payable
and other current liabilities
|
|
$
|
17,000
|
|
Digital
Imaging Asia Pacifics sales, reported in discontinued operations, for the
twelve months ended December 31, 2005 were $42,000. Digital Imaging Asia
Pacifics pretax loss, reported in discontinued operations for the twelve
months ended December 31, 2005, was $10,000.
Prior
period financial statements for the twelve months ended December 31, 2005
have been restated to present the operations of Digital Photography and Digital
Imaging Asia Pacific as discontinued operations.
8.
Related Parties
Subsequent
to the Companys sale of its wholly-owned subsidiary, Digital Imaging Asia
Pacific Pte. Ltd., to Argus Solutions Ltd (Argus), as more fully described in
Note 7 to these consolidated financial statements, the Companys Chief
Executive Officer accepted an invitation to become a member of Argus Board of
Directors. Prior to the closing of the Companys sale transaction with Argus,
the Company had no material relationship with Argus Solutions. Effective December 31, 2006, the Companys
Chief Executive Officer resigned from the Argus Board.
9.
Inventory
Inventories
at December 31, 2007 were comprised of work in process of $29,000
representing direct labor costs on in-process projects and finished goods of
$101,000 net of reserves for obsolete and slow-moving items of $16,000. Inventories at December 31, 2006
consisted of finished goods of $58,000 net of reserves of $52,000. Appropriate
consideration is given to obsolescence, excessive levels, deterioration, and
other factors in evaluating net realizable value and required reserve levels.
10.
Property and Equipment
Property
and equipment at December 31, 2007 and 2006, consists of:
69
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,411,000
|
|
$
|
1,193,222
|
|
Leasehold
improvements
|
|
149,020
|
|
131,057
|
|
Furniture
|
|
161,808
|
|
161,808
|
|
|
|
1,721,828
|
|
1,486,087
|
|
Less accumulated
depreciation
|
|
(1,433,839
|
)
|
(1,134,387
|
)
|
|
|
$
|
287,989
|
|
$
|
351,700
|
|
Total
depreciation expense for the years ended December 31, 2007, 2006 and 2005
was approximately $242,000, $230,000 and $307,000, respectively.
11.
Accrued Liabilities
Principal components of accrued liabilities consist of:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Compensated
absences
|
|
$
|
214,595
|
|
$
|
236,161
|
|
Wages and sales
commissions
|
|
112,571
|
|
146,436
|
|
Customer
deposits
|
|
266,801
|
|
212,945
|
|
Liquidated
damages
|
|
279,896
|
|
279,896
|
|
Royalties
|
|
251,105
|
|
46,150
|
|
Professional
fees
|
|
73,199
|
|
52,637
|
|
Other
|
|
142,780
|
|
164,493
|
|
|
|
1,340,947
|
|
$
|
1,138,718
|
|
|
|
|
|
|
|
|
|
12.
Notes Payable and Line
of Credit
Notes payable consist of
the following:
|
|
2007
|
|
2006
|
|
Notes payable to third parties:
|
|
|
|
|
|
Senior secured
promissory notes to accrue interest at 8%. Face value of note $1,310,000. Discount
on note at December 31, 2006 is $212,622. Note due March 17, 2006
|
|
|
|
$
|
1,097,378
|
|
Short-term note
payable to certain vendors
|
|
|
|
$
|
|
|
Total notes
payable to third parties
|
|
|
|
1,097,378
|
|
|
|
|
|
|
|
Total notes
payable
|
|
|
|
$
|
1,097,378
|
|
Less current
portion
|
|
|
|
(1,097,378
|
)
|
Long-term notes
payable
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In March 2006,
the Company completed a secured debt financing in the aggregate amount of
$1,550,000, with net proceeds to Company approximating $1,452,000. The Company
issued a series of secured promissory notes (the Notes) aggregating
$1,550,000 which bear interest at 8% per annum, with interest compounded
monthly and payable quarterly. The principal balance becomes due in one year or
earlier upon the occurrence of the following contractually defined events: (i) payments
received by the Company in connection with contracts with Grupo Inffinix and
Argus Solutions or any affiliate thereof, or any extension, renewal or
amendment of such contracts; or (ii) payments made against any new contract
signed by the Company which contract amount is in excess of $1,500,000; or (iii) the
receipt by the Company of proceeds from the sale of equity or equity-linked
securities by the Company; or (iv) receipt of proceeds from the issuance
by the Company of any type of debt instruments, including lines of credit. In
addition, the Company may prepay the notes in whole or in part upon
five days prior written notice. As a
condition to the loan, the Company entered into a security agreement whereby
the Company granted a security interest in all of the Companys goods and
equipment, inventory, contract rights and general intangibles, accounts or
other obligations owing to the Company, and cash deposit accounts and other
investment property to secure payment of the note.
70
Also a
condition to the loan, the Company issued warrants to purchase 387,500 shares
of the Companys common stock. Such warrants have a 5-year term and an exercise
price $2.30 per share. Common shares
underlying the warrants have piggyback registration rights and cashless
exercise after 12 months from closing date if there is no effective
registration statement covering the underlying shares.
The
Company initially recorded the secured debt financing net of a discount equal
to the fair value allocated to the warrants using the relative fair value
method of approximately $419,000. The Company estimated the fair value of the
warrants using the Black-Scholes option pricing model and the following
assumptions: term of 5 years, a risk free interest rate of 4.52%, a dividend
yield of 0%, and volatility of 82%.
As
more fully discussed in Note 15 to these consolidated financial statements, in November and
December 2006, the Company issued a total of 2,500 shares of its Series C
Preferred Stock. The issuance of Series C
preferred stock triggered a Right of Acceleration included in the Notes. As consideration for the note holders waiving
this Right of Acceleration, the Company issued 200,250 warrants to purchase
common stock at an exercise price of $1.80 per share and reduced the exercise
price of 387,500 warrants to purchase common stock from $2.30 per share to
$1.80 per share.
The
Company has calculated the fair value of the 200,250 warrants using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 4.52%; dividend yield of 0%; volatility factor of the expected
market price of the Companys common stock of 82%; and an expected life of the
warrant of 5 years. The fair value of
the warrants was approximately $175,000.
The
Company has computed the fair value of the modification to the 387,500 warrants
to be approximately $28,000. The Company
calculated the fair value of these warrants immediately before and after the
modification using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 4.52%; dividend yield of 0%; volatility
factor of the expected market price of the Companys common stock of 82%; and
an expected life of the warrant of 5 years.
The
total of the fair value of the new warrants and the modification of existing
warrants of approximately $203,000 has been recorded as an increase to the
discount on the notes payable and an increase to additional paid in
capital. The discount will be amortized
over the remaining term of the notes.
As
more fully described in Note 15 below, the issuance of the Series D
Preferred Stock caused all amounts outstanding under the Senior Secured
Promissory Notes, due March 17, 2007 (the Notes) to become immediately
due and payable in full. As of March 9,
2007 there was $1,196,259 in principal and $19,319 in accrued but unpaid
interest outstanding under the Notes.
Upon receipt of the funds from the issuance of the Series D Preferred
Stock, the Company immediately repaid, in full, all outstanding principal and
accrued but unpaid interest due under the Notes, and the Notes have terminated
in their entirety. The remaining debt discount was amortized over the remaining
term of the note to the date the notes were repaid in full, resulting in the
Company recording approximately $213,000 of debt discount amortization during
the twelve months ended December 31, 2007.
During the twelve months ended December 31, 2006, the Company recorded
approximately $408,000 in debt discount amortization. These amortization
expenses are included as a component of net interest expense in the Companys
Consolidated Statement of Operations.
13.
Income Taxes
The
significant components of the income tax provision (benefit) are as follows:
71
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Current
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
State
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
|
|
|
|
|
State
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
The
principal components of the Companys deferred tax assets (liabilities) at December 31,
2007 and 2006 are as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net operating
loss carryforwards
|
|
$
|
16,117,685
|
|
$
|
14,779,554
|
|
Intangible
Assets
|
|
713,288
|
|
761,466
|
|
Stock based
compensation
|
|
426,340
|
|
283,319
|
|
Reserves and
accrued expenses
|
|
(3,668
|
)
|
203,273
|
|
Other
|
|
(46,372
|
)
|
(46,916
|
)
|
|
|
17,207,273
|
|
15,980,696
|
|
Less valuation
allowance
|
|
(17,207,273
|
)
|
(15,980,696
|
)
|
|
|
|
|
|
|
Net deferred tax
assets
|
|
$
|
|
|
$
|
|
|
A
reconciliation of the provision (benefit) for income taxes to the amount
computed by applying the statutory income tax rates to loss before income taxes
is as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Amounts computed
at statutory rates
|
|
$
|
(1,592,821
|
)
|
$
|
(2,014,913
|
)
|
State income
tax, net of federal benefit
|
|
(125,545
|
)
|
(224,438
|
)
|
Expiration of
net operating loss carryforwards
|
|
485,383
|
|
382,645
|
|
Federal research
and development credit
|
|
|
|
513,013
|
|
Other
|
|
6,106
|
|
6,824
|
|
Net change in
valuation allowance
|
|
1,226,877
|
|
1,336,869
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
The
Company has established a valuation allowance against its deferred tax asset
due to the uncertainty surrounding the realization of such asset. Management
periodically evaluates the recoverability of the deferred tax asset. At such
time as it is determined that is more likely than not that deferred tax assets
are realizable, the valuation allowance will be reduced.
At December 31,
2007 and 2006, the Company had federal net operating loss carryforwards of
approximately $42,330,000 and $38,814,000, respectively, state net operating
loss carryforwards of approximately $29,576,000 and $27,126,000, respectively,
which may be available to offset future taxable income for tax purposes.
The federal net operating loss carryforwards expire at various dates from 2008
through 2027. The state net operating loss carryforwards expire at various
dates from 2008 through 2017.
The
Internal Revenue Code (the Code) limits the availability of certain tax
credits that arose prior to certain cumulative changes in a corporations
ownership resulting in a change of control of the Company. The Company has reduced its deferred tax
assets to zero relating to its federal and state research credits because of
such limitations.
72
The
Code also limits the availability of net operating losses that arose prior to
certain cumulative changes in a corporations ownership resulting in a change
of control of the Company. The Companys use of its net operating loss
carryforwards and tax credit carryforwards will be significantly limited
because the Company underwent ownership changes in 1991, 1995, 2000, 2003 and
2004.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements. The
interpretation prescribes a recognition threshold and measurement attribute
criteria for the financial statement recognition and measurement of an
uncertain tax position taken or expected to be taken in a tax return. The
interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
The Company adopted the provisions of FIN 48 on January 1,
2007. The implementation of FIN 48 did not have a material impact on the
Companys financial statements. At the adoption date on January 1, 2007,
and as of December 31, 2007, the Company recorded no cumulative effect
adjustments related to the adoption of FIN 48.
Upon adoption of FIN 48 on January 1, 2007, and
as of December 31, 2007, the Company had no unrecognized tax benefits or
accruals for the potential payment or interest and penalties. For the twelve
months ended December 31, 2007, no interest or penalties were recorded.
The Company files tax returns in the U.S. federal
jurisdiction, and in various states and foreign jurisdictions. The Company is
not aware of any jurisdictions currently under examination by tax authorities.
14.
Commitments and Contingencies
Employment Agreements
The
Company has employment agreements with its Chief Executive Officer and Senior
Vice President of Administration and Chief Financial Officer. The Company
may terminate the agreements with or without cause. Subject to the
conditions and other limitations set forth in each respective employment
agreement, each executive will be entitled to the following severance benefits
if we terminate the executives employment without cause or in the event of an
involuntary termination (as defined in
the employment agreements) by us or by the executive: (i) a lump sum cash
payment equal to twenty-four months and twelve months of base salary,
respectively; (ii) continuation of the executives fringe benefits and
medical insurance for a period of three years; and (iii) immediate vesting
of 50% of each executives outstanding stock options and restricted stock
awards. In the event that the executives employment is terminated within the
six months prior to or the thirteen months following a change of control (as
defined in the employment agreements), the executive is entitled to the
severance benefits described above, except that 100% of each executives
outstanding stock options and restricted stock awards will immediately vest.
Each executives eligibility to receive any severance payments or other
benefits upon his termination is conditioned upon him executing a general
release of liability.
Letter of Credit
As
collateral for performance on certain software installation and implementation
contracts, the Company is contingently liable under two irrevocable standby
letters of credit in an aggregate amount of approximately $169,000. The letters
of credit expire on March 30, 2008 in the amount of $37,000 and on December 26,
2008 in the amount of $132,000. As a condition to the letter of credit expiring
on December 26, 2008, the bank requires the Company to invest an equal
amount in the form of certificate of deposit. As of December 31,
2007, there were no drawings against the outstanding balances. This certificate
of deposit is included as a component of other current assets in the Companys
Consolidated Balance Sheets at December 31, 2007 and as a component of
noncurrent other assets at December 31, 2006.
Litigation
The
Company is involved in certain legal proceedings generally incidental to its
normal business activities. While the outcome of such proceedings cannot be
accurately predicted, the Company does not believe the ultimate resolution of
any such existing matters should have a material effect on its financial
position, results of operations or cash flows.
73
Leases
The
Company currently leases office and research and development space under
operating leases which expire at various dates through December 2009.
At December 31,
2007, future minimum lease payments are as follows:
2008
|
|
$
|
492,000
|
|
2009
|
|
$
|
158,000
|
|
2010
|
|
$
|
|
|
2011
|
|
$
|
|
|
2012
|
|
$
|
|
|
|
|
$
|
650,000
|
|
Rental
expense from continuing operations incurred under operating leases for the
years ended December 31, 2007, 2006 and 2005, was approximately $579,000,
$562,000 and $750,000 respectively. Rent expense for the year 2005 contains
approximately $124,000 in accrued for exit activity costs related to the
closure of our office in Stuttgart, Germany.
Registration Payment Arrangements
On September 25, 2007, the Company sold to
certain accredited investors a total of 2,016,666 shares of the Companys
common stock, par value $0.01 per share, at a purchase price of $1.50 per share
for aggregate gross proceeds of $3,025,003 (the Common Stock Financing). As
part of the Common Stock Financing, the Company entered into a Registration
Payment Arrangement as defined by FASB Staff Position No. EITF 00-19-2, Accounting
for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 specifies that the contingent
obligation to make future
payments or
otherwise transfer consideration under a registration payment arrangement
should be
separately recognized and measured in accordance with SFAS No. 5
Accounting for Contingencies (SFAS No. 5). EITF 00-19-2 is effective
for registration payment arrangements entered into after December 21, 2006
or for the fiscal year beginning after December 15, 2006. The Company determined that no loss
contingency related to the Common Stock Financing registration payment
arrangement was required to be recorded as of December 31, 2007.
As part of the September 25, 2007 Common Stock
registration payment arrangement, the Company agreed to register the shares of
common stock issued in the financing and the shares of common stock underlying
the warrants issued to the investors in the Common Stock Financing with the SEC
within certain contractually specified time periods. The Company also agreed to use its best
efforts to keep the registration statement continuously effective until the
earlier of either the second year after the date the registration statement is
declared effective by the SEC or the date when all the common stock, including
the common stock underlying the warrants have been sold or may be sold without
volume limitations. If the Company is
unable to register the shares of common stock with the SEC or keep the registration
statement continuously effective in accordance with the Securities Purchase
Agreement dated September 25, 2007, between the Company and certain
accredited investors, the Company is subject to a liquidated damages penalty
equal to 1% of the aggregate purchase price paid for each month the
registration statement is not effective, provided that such liquidated damages
shall not exceed 12% of the aggregate purchase price. The maximum exposure at December 31,
2007 is approximately $363,000. The Company has met the requirements of the
Common Stock Financing registration payment arrangement by filing the required
registration statement with the SEC within the time frame specified by the
agreement. Company management believes
that it will be able to maintain current filing status with the SEC over the
prescribed period.
On March 9, 2007, the Company entered into a
Securities Purchase Agreement with certain accredited investors pursuant to
which the Company sold to the investors an aggregate of 1,500 shares of the
Companys Series D 8% Convertible Preferred Stock (the Series D
Preferred Stock) at a stated value of $1,000 per share for aggregate gross
proceeds of $1,500,000 and issued to the investors warrants to purchase up to
an aggregate of 59,207 shares of common stock of the Company. As part of the Series D Preferred Stock
financing, the Company entered into a Registration Payment Arrangement as
defined by FSP No. EITF 00-19-2.
EITF 00-19-2 specifies that the contingent obligation to make future
payments or otherwise transfer consideration under
a registration payment arrangement should be
separately recognized and
measured in accordance with SFAS No. 5. EITF 00-19-2 is effective for
registration payment arrangements entered into after December 21, 2006 or
for the fiscal year beginning after December 15, 2006. The Company determined that no loss
contingency
74
related to the Series D Preferred Stock
registration payment arrangement was required to be recorded as of December 31,
2007.
As part of the Series D Preferred Stock
registration payment arrangement, the Company agreed to register the shares of
common stock the Series D Preferred Stock is convertible into and the
shares of common stock underlying the warrants issued to the investors in the Series D
Preferred Stock financing with the SEC within certain contractually specified
time periods. The Company also agreed to
use its best efforts to keep the registration statement continuously effective
until the earlier of either the fifth year after the date the registration
statement is declared effective by the SEC or the date when all the common
stock, including the common stock underlying the warrants have been sold. If the Company is unable to register the
shares of common stock with the SEC or keep the registration statement
continuously effective in accordance with the Securities Purchase Agreement
dated March 9, 2007, between the Company and certain accredited investors,
the Company is subject to a liquidated damages penalty equal to 1% of the
aggregate purchase price paid for each month the registration statement is not
effective, provided that such liquidated damages shall not exceed 12% of the
aggregate purchase price. The maximum
exposure at December 31, 2007 is approximately $180,000. The Company has
met the requirements of the Series D Preferred Stock registration payment
arrangement by filing the required registration statement with the SEC within
the time frame specified by the agreement. Company management believes that it will be
able to maintain current filing status with the SEC over the prescribed period.
In November and December of 2006, the
Company entered into a Securities Purchase Agreement with certain accredited
investors to which the Company sold to the investors an aggregate of 2,500
shares of the Companys Series C 8% Convertible Preferred Stock (the Series C
Preferred Stock) at a stated value of $1,000 per share for aggregate gross
proceeds of $2,500,000 and issued to the investors warrants to purchase up to
an aggregate of 125,000 shares of the Companys common stock. As part of the Series C
Preferred Stock financing consummated in November and December of
2006, the Company entered into a Registration Payment Arrangement as defined by
EITF 00-19-2. EITF 00-19-2 specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is
effective for registration payment arrangements entered into after December 21,
2006 or for the fiscal year beginning after December 15, 2006, however
early adoption is permitted for interim or annual periods for which financial
statements have not been issued. The
Company adopted the provisions of FSP EITF 00-19-2 for the annual period ending
December 31, 2006. The Company
determined that no loss contingency related to the Series C Preferred
Stock registration payment arrangement was required to be recorded as of December 31,
2007.
As part of the Series C Preferred Stock
registration payment arrangement, the Company agreed to register the shares of
common stock the Series C Preferred Stock is convertible into and the
shares of common stock underlying the warrants issued to the Series C
investors with the SEC within certain contractually specified time
periods. The Company also agreed to use
its best efforts to keep the registration statement continuously effective
until the earlier of either the fifth year after the date the registration
statement is declared effective by the SEC or the date when all the common
stock, including the common stock underlying the warrants have been sold. If the Company is unable to register the
shares of common stock with the SEC or keep the registration statement
continuously effective in accordance with the Securities Purchase Agreement
dated November 14, 2006, between the Company and certain accredited
investors, the Company is subject to a
liquidated damages penalty equal to 1% of the aggregate purchase price paid for
each month the registration statement is not effective, provided that such
liquidated damages shall not exceed 12% of the aggregate purchase price. The maximum exposure at December 31,
2007 is approximately $300,000. The Company has met the requirements of the Series C
Preferred Stock registration payment arrangement by registering the shares of
common stock with the SEC within the time frame specified by the agreement and
has kept the registration continuously effective thereafter. Company management believes that it will be
able to maintain current filing status with the SEC over the prescribed period.
15.
Equity
The
Companys Articles of Incorporation were amended effective August 31, 1994
and authorize the issuance of two classes of stock to be designated Common
Stock and Preferred Stock, provide that both Common and Preferred Stock
shall have a par value of $.01 per share and authorize the Company to issue
50,000,000 shares of Common Stock and 4,000,000 shares of 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.
75
Series B Convertible, Redeemable Preferred Stock
In April 1995,
the Companys Articles of Incorporation were amended to authorize 750,000
shares of Series B Convertible Redeemable Preferred Stock (Series B).
Each 5.275 shares of Series B are convertible into one share of the
Companys common stock.
The
holders of Series B are entitled to cumulative preferred dividends payable
at the rate of $.2125 per share per annum commencing April 30, 1996,
subject to legally available funds. The Series B plus accrued but unpaid
dividends are convertible at the option of the holder into shares of common
stock at a conversion price equal to the original Series B issue price as
adjusted to prevent dilution. The Series B will automatically be converted
into shares of common stock upon the closing of an underwritten public offering
at a price per common share of not less than $31.65. If the public offering
price is less than $31.65 but at least $21.10 per share, the conversion shall
still be automatic upon written consent of a majority of the then outstanding
shareholders of Series B.
The
holders of Series B, on an as-converted basis, have the same voting rights
per share as the Companys common shares; provided, that the holders of Series B
has a special right to elect one director if the Company defaults in the
payment of any dividend to the holders of Series B. The holders of Series B
are entitled to initial distributions of $2.50 per share of Series B
outstanding, upon liquidation and in preference to common shares and any other
series of preferred stock plus all accrued but unpaid dividends.
Any
time after December 31, 2000, the Company has the right to redeem all or
some of the outstanding shares of Series B at a price equal to the
original issue price, plus all accrued but unpaid dividends.
The
Company had 239,400 shares of Series B outstanding as of December 31,
2007 and 2006. At December 31, 2007
and 2006, the Company had cumulative undeclared dividends of approximately
$9,000.
During
the twelve months ended December 31, 2006, 10,000 shares of Series B
were converted into 1,895 shares of the Companys common stock. There were no conversions during the
corresponding period in 2007.
Series C Convertible, Non-Redeemable Preferred Stock
In November 2006,
the Companys Articles of Incorporation were amended to authorize 3,500 shares
of Series C Convertible Preferred Stock (Series C). Each share of Series C
has a par value of $0.01, a stated value of $1,000 and is convertible into
666.66 shares of the Companys common stock.
The Series C preferred stock does not have voting rights.
The
holders of Series C are entitled to receive cumulative dividends, at the
option of the Company, (i) in common stock upon conversion of the Series C
preferred stock, or (ii) in cash after the payment of cash dividends to
the holders of Series B Preferred Stock at the rate per share (as a
percentage of the stated value per share) of 8% per annum.
The
holders of Series C are entitled to initial distributions of $1,000 per
share of Series C outstanding, upon liquidation and in preference to
common shares and any other series of preferred stock with the exception
of Series B Preferred Stock, plus all accrued but unpaid dividends.
The
Company had 2,200 and 2,500 shares of Series C outstanding as of December 31,
2007 and 2006, respectively. At December 31,
2007 and 2006, the Company had cumulative undeclared dividends of approximately
$234,000 and $25,000.
During
the twelve months ended December 31, 2007, 300 shares of Series C
were converted into 206,778 shares of the Companys common stock. There were no conversions during the
corresponding period in 2006.
Series D Convertible, Non-Redeemable Preferred Stock
In March 2007, the Companys
Articles of Incorporation were amended to authorize
2,000 shares of Series D
8% Convertible Preferred Stock (Series D Preferred Stock). Each share of
Series D Preferred Stock has a
par
value of $0.01, a
stated
value of $1,000 and is convertible into the Companys common stock
at an initial conversion price of $1.90 per share. The Series D Preferred
Stock does not have voting rights.
The
Company had 1,388 and 0 shares of Series D outstanding as of December 31,
2007 and 2006, respectively. At December 31,
2007 and 2006, the Company had cumulative undeclared dividends of approximately
$98,000 and $0.
76
During
the twelve months ended December 31, 2007, 112 shares of Series D
were converted into 79,248 shares of the Companys common stock. There were no conversions during the
corresponding period in 2006.
In conjunction with the issuance of the Series D
Preferred Stock, the Company issued warrants to the holders of the Series D
Preferred Stock to purchase 59,207 shares of the Companys common stock at
$2.33 per share. These warrants have been classified as equity instruments on
the balance sheet. The proceeds from the
Series D Preferred Stock financing were allocated to the warrants and the Series D
Preferred Stock based on the relative fair value of each on the date of
issuance. This allocation process
resulted in the initial recognition of a discount attributable to an embedded
beneficial conversion feature of approximately $344,000. The discount was amortized over the minimum
period from the date of issuance to the date at which the preferred
shareholders are permitted to convert as a dividend to the Series D
Preferred Stock shareholders.
The issuance of common stock and warrants pursuant to
the Common Stock Financing triggered certain antidilution clauses in the
Companys Series D Preferred Stock agreement. As a result of these
antidilution clauses, the
Company was
required to adjust the conversion price of the Series D Preferred Stock
from $1.90 per share to $1.50 per share.
This antidilution feature will cause an additional 210,528 common shares
to be issued upon conversion of the Series D Preferred Stock into common
stock.
In accordance with EITF Issue 00-27, Application of Issue No. 98-5
to Certain Convertible Instruments, this antidilution feature resulted in the
additional recognition of a discount attributable to an embedded beneficial
conversion feature of approximately $470,000.
This discount was amortized over the minimum period from the date of the
conversion price adjustment to the date at which the preferred shareholders are
permitted to convert as a dividend to the Series D Preferred Stock
shareholders.
Common
Stock
On September 25, 2007, the Company sold to
certain accredited investors a total of 2,016,666 shares of the Companys
common stock, par value $0.01 per share, at a purchase price of $1.50 per share
for aggregate gross proceeds of $3,025,003 (the Common Stock Financing).
In conjunction with the issuance of the common stock,
the Company issued to the investors warrants (the Investor Warrants) to
purchase up to an aggregate of 1,008,333 shares of Common Stock with an
exercise price of $1.67 per share. The Investor Warrants have been classified
as equity instruments on the balance sheet in accordance with the provisions of
Emerging Issues Task Force (EITF) Issue 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock.
The issuance of common stock and warrants pursuant to
the Common Stock Financing triggered certain antidilution and exercise price
reduction clauses in existing warrant agreements. As a result of these
modifications, the
Company was required to
issue an additional 113,834 warrants and reduce the exercise price of
certain previously issued warrants. As these warrants were classified as
permanent equity, and the adjustment was related to antidilution features
within these financial instruments, this increase in warrants and reduction of
exercise price resulted in no adjustment to the financial statements.
As compensation to the placement agent for the Common
Stock Financing, the Company
paid
approximately $212,000
in placement agent fees and agreed to reimburse
up to $25,000 of placement agent legal expense incurred in connection with this
financing. In addition, the Company
issued the placement agent for the financing, and certain of its affiliates, a
5.5 year warrant (the Placement Agent Warrants) to purchase up to an
aggregate of 151,249 shares of Common Stock on the same terms and conditions
included in the Investor Warrants. The cash payment has been recorded as
adjustment to additional paid in capital as a reduction of net proceeds. The Placement Agent Warrants have been
classified as equity instruments on the balance sheet.
During twelve month
periods ended December 31, 2007 and 2006, the Company issued 63,240 and
144,588 shares of its common stock, respectively, pursuant to stock-based
compensation agreements with certain employees.
During the twelve months ended December 31, 2007 the Company issued
206,778 shares of its common stock pursuant to the conversion of 300 shares of Series C
Preferred Stock and issued 79,248 shares of its common stock pursuant to the
conversion of 112 shares of Series D Preferred Stock. During the twelve months ended December 31,
2006 the Company issued 1,895 shares of its common stock pursuant to the
conversion of 10,000 shares of Series B Preferred Stock.
During the twelve months
ended December 31, 2007, the Company issued 795,956 shares of its common
stock pursuant to the exercise of common stock purchase warrants. The Company received gross proceeds of
approximately $1,121,000 from these warrant exercises.
77
In December 2007,
the Company issued 935,089 shares of its common stock pursuant to its
acquisition of substantially all the assets of Sol Logic, Inc.
During the twelve months
ended December 31, 2007, 300 shares of Series C were converted into
206,778 shares of the Companys common stock.
During the twelve months ended December 31, 2007, 112 shares of Series D
were converted into 79,248 shares of the Companys common stock.
Warrants
As of December 31,
2007, warrants to purchase 5,955,830 shares of common stock at prices ranging
from $1.43 to $5.48 were outstanding. All warrants are exercisable as of December 31,
2007, and expire at various dates through March 2013.
The following table summarizes warrant activity for the following periods:
|
|
Warrants
|
|
Weighted- Average
Exercise Price
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
4,293,305
|
|
$
|
2.94
|
|
Granted
|
|
1,527,844
|
|
$
|
1.70
|
|
Expired
/ Canceled
|
|
0
|
|
$
|
0
|
|
Exercised
|
|
(0
|
)
|
$
|
0
|
|
Balance
at December 31, 2006
|
|
5,821,149
|
|
$
|
2.37
|
|
Granted
|
|
1,286,776
|
|
$
|
1.34
|
|
Expired
/ Canceled
|
|
(224,998
|
)
|
$
|
3.16
|
|
Exercised
|
|
(927,097
|
)
|
$
|
1.59
|
|
Balance
at December 31, 2007
|
|
5,955,830
|
|
$
|
2.24
|
|
The following table
summarized information about warrants outstanding and exercisable at December 31,
2007:
Exercise Price
|
|
Number
Outstanding
|
|
WeightedAverage
Remaining Life
(Years)
|
|
WeightedAverage
Exercise Price
|
|
|
|
|
|
|
|
|
|
$
|
1.43
|
|
75,149
|
|
2.0
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
$
|
1.50
|
|
2,292,982
|
|
2.3
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
$
|
1.67
|
|
1,159,582
|
|
5.2
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
$
|
1.83
|
|
29,070
|
|
0.9
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
$
|
2.14
|
|
344,951
|
|
0.9
|
|
$
|
2.14
|
|
|
|
|
|
|
|
|
|
$
|
2.40
|
|
381,737
|
|
0.9
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
$
|
2.58
|
|
473,824
|
|
0.9
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
$
|
2.97
|
|
635,767
|
|
2.6
|
|
$
|
2.97
|
|
|
|
|
|
|
|
|
|
$
|
4.66
|
|
63,012
|
|
1.1
|
|
$
|
4.66
|
|
|
|
|
|
|
|
|
|
$
|
5.48
|
|
499,756
|
|
1.1
|
|
$
|
5.48
|
|
|
|
|
|
|
|
|
|
|
|
5,955,830
|
|
|
|
|
|
In conjunction with the Common Stock Financing, the
Company issued to the investors warrants (the Investor Warrants) to purchase
up to an aggregate of 1,008,333 shares of Common Stock with an exercise price
of $1.67 per share. The Investor Warrants have been classified as equity
instruments on the balance sheet in accordance with the provisions of
78
Emerging Issues Task Force (EITF) Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock.
The issuance of common stock and warrants pursuant to
the Common Stock Financing triggered certain antidilution and exercise price
reduction clauses in existing warrant agreements. As a result of these
modifications, the Company was required to issue an additional 67,987 warrants
and reduce the exercise price of certain previously issued warrants. As these
warrants were classified as permanent equity, and the adjustment was related to
antidilution features within these financial instruments, this increase in
warrants and reduction of exercise price resulted in no adjustment to the
financial statements.
As partial compensation to the placement agent for the
Common Stock Financing, the Company issued the placement agent for the
financing, and certain of its affiliates, a 5.5 year warrant (the Placement
Agent Warrants) to purchase up to an aggregate of 151,249 shares of Common
Stock on the same terms and conditions included in the Investor Warrants. The
cash payment has been recorded as adjustment to additional paid in capital as a
reduction of net proceeds. The Placement
Agent Warrants have been classified as equity instruments on the balance sheet.
In conjunction with the issuance of the Series D
Preferred Stock, the Company issued warrants to the holders of the Series D
Preferred Stock to purchase 59,207 of the Companys common stock at $2.33 per
share. These warrants have been
classified as equity instruments on the balance sheet.
In 2007, the holders of the Companys common stock
warrants exercised 927,097 warrants in a combination of cash exercised and
cashless exercises pursuant to which the Company issued 795,956 shares of its
common stock.
16.
Stock
Option Plans
On August 31, 1994,
the directors of the Company adopted the Companys 1994 Employee Stock Option
Plan (the 1994 Plan) and the 1994 Nonqualified Stock Option Plan (the Nonqualified
Plan). The 1992 Stock Option Plan and options previously granted were canceled
by the Board of Directors.
The 1994 Plan originally
provided for officers and other key employees to receive nontransferable
incentive stock options to purchase up to 170,616 shares of the Companys
common stock. The number of stock options issued and outstanding and the number
of stock options remaining available for future issuance are shown in the table
below. The option price per share must be at least equal to 100% of the market
value of the Companys common stock on the date of grant and the term
may not exceed ten years.
The Nonqualified Plan
originally provided for directors and consultants to receive nontransferable
options to purchase up to 18,957 shares of the Companys common stock. The
number of options issued and outstanding and the number of options remaining
available for future issuance are shown in the table below. The option price
per share must be at least equal to 85% of the market value of the Companys
common stock on the date of grant and the term may not exceed five years.
Both the 1994 Plan and
the Nonqualified Plan are administered by the Board of Directors or a Committee
of the Board which determines the employees, directors or consultants which
will be granted options and the terms of the options, including vesting
provisions which to date has been over a three year period. Both the 1994 Plan
and the Nonqualified Plan expired on August 31, 2004.
On December 17, 1999,
the Companys Board of Directors adopted the ImageWare Systems, Inc.
Amended and Restated 1999 Stock Option Plan (the 1999 Plan). Under the terms
of the 1999 Plan, the Company could, originally, issue up to 350,000
non-qualified or incentive stock options to purchase common stock of the
Company. The number of options issued and outstanding and the number of options
remaining available for future issuance are shown in the table below. The 1999
Plan has substantially the same terms as the 1994 Employee Stock Option Plan
and the 1994 Nonqualified Stock Option Plan and expires on December 17,
2009.
On September 12,
2001, the Companys Board of Directors approved adoption of the 2001 Equity
Incentive Plan (the 2001 Plan). Under the terms of the 2001 Plan, the Company
may issue stock awards to employees, directors and consultants of the
Company, and such stock awards may be given for non-statutory stock
options (options not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended),
stock bonuses, and rights to acquire restricted stock. The Company originally
reserved 1,000,000 shares of its common stock for issuance under the 2001 Plan.
The number of options issued and outstanding and the number of options
remaining
79
available for future issuance are shown in the table below.
The 2001 Plan is
administered by the Board of Directors or a Committee of the Board as provided
in the 2001 Plan. Options granted under the 2001 Plan shall not be less than
85% of the market value of the Companys common stock on the date of the grant,
and, in some cases, may not be less than 110% of such fair market value.
The term of options granted under the 2001 Plan as well as their vesting are
determined by the Board and to date, options have been granted with a ten year
term and vesting over a three year period. While the Board may suspend or
terminate the 2001 Plan at any time, if not terminated earlier, it will
terminate on the day before its tenth anniversary of the date of adoption.
On June 7, 2005, the
shareholders approved the Amendment and Restatement of the 1999 Stock Award
Plan. Key changes that were made to the plan in the amendment and restatement
included:
·
We increased
the share reserve of the amended and restated 1999 plan by 883,000 shares of
our common stock. This number consists of an increase in the share reserve of
800,000 of our shares of common stock and 83,000 shares of our common stock
that were reserved and available for grants under the 2001 Equity Incentive
Plan, which we refer to as the 2001 plan. Prior to amendment, the 1999 plan had
350,000 shares reserved for issuance under the 1999 plan.
·
Any shares
not issued in connection with awards outstanding under the 2001 plan or the
1994 Employee Stock Option Plan (which we refer to as the 1994 plan) on June 7,
2005, will become available for issuance under the amended and restated 1999
plan.
·
Any shares
not issued in connection with awards granted under the 1999 plan, will become
available for issuance under the amended and restated 1999 plan.
·
The amended
and restated 1999 plan prohibits the grant of stock option or stock
appreciation right awards with an exercise price less than fair market value of
Common Stock on the date of grant.
·
The amended
and restated 1999 plan also generally prohibits the re-pricing of stock
options or stock appreciation rights, although awards may be bought out
for a payment in cash or our stock.
·
The amended and
restated 1999 plan permits the grant of stock based awards other than stock
options, including the grant of full value awards such as restricted stock,
stock units and performance shares.
·
The amended
and restated 1999 plan permits the qualification of awards under the plan
(payable in either stock or cash) as performance-based compensation within
the meaning of Section 162(m) of the Internal Revenue Code.
On November 9,
2007, the Companys Board of Directors approved an amendment to the 1999 Plan,
subject to shareholder approval, pursuant to which an additional 1,000,000
shares would be reserved for issuance under the plan. In December 2007, the Companys
shareholders approved this amendment resulting in 1,000,000 shares being added
to the 1999 Plan.
Stock
Option Plans
As of December 31, 2007
|
|
Number of securities to be
issued upon exercise of
outstanding options
(a)
|
|
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
|
|
1994 Plan
|
|
23,750
|
|
-0-
|
|
Nonqualified
Plan
|
|
|
|
-0-
|
|
1999 Plan
|
|
1,377,698
|
|
1,037,255
|
|
2001 Plan
|
|
344,904
|
|
-0-
|
|
Total
|
|
1,746,352
|
|
1,037,255
|
|
80
The following table
summarizes employee stock option activity since December 31, 2004:
|
|
Options
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
Balance at
December 31, 2004
|
|
894,359
|
|
$
|
2.72
|
|
Granted
|
|
677,300
|
|
$
|
2.59
|
|
Expired/canceled
|
|
(71,282
|
)
|
$
|
2.32
|
|
Exercised
|
|
(26,284
|
)
|
$
|
2.38
|
|
|
|
|
|
|
|
Balance at
December 31, 2005
|
|
1,474,093
|
|
$
|
2.68
|
|
Granted
|
|
363,000
|
|
$
|
1.90
|
|
Expired/canceled
|
|
(233,929
|
)
|
$
|
3.17
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
1,603,164
|
|
$
|
2.45
|
|
|
|
|
|
|
|
Granted
|
|
165,250
|
|
$
|
2.38
|
|
Expired/canceled
|
|
(103,206
|
)
|
$
|
2.58
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
1,665,208
|
|
$
|
2.44
|
|
|
|
|
|
|
|
|
|
At December 31,
2007, a total of 1,212,753 options were exercisable at a weighted average price
of $2.50 per share. At December 31, 2006, a total of 810,527 options were
exercisable at a weighted average price of $2.66 per share. At December 31,
2005, a total of 624,163 options were exercisable at a weighted average price
of $2.87 per share.
The intrinsic value of
options exercised during the twelve months ended December 31, 2007, 2006
and 2005 were $0, $0, and $22,000, respectively. The intrinsic value of options
exercisable at December 31, 2007, 2006 and 2005 was $0.
The following table
summarizes information about employee stock options outstanding and exercisable
at December 31, 2007:
|
|
Options Outstanding
|
|
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number
Outstanding
|
|
Weighted-
Average
Remaining Life
(Years)
|
|
Weighted-
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.65 - 1.71
|
|
167,750
|
|
8.5
|
|
$
|
1.66
|
|
77,834
|
|
$
|
1.67
|
|
$ 1.97 2.15
|
|
226,000
|
|
6.7
|
|
$
|
2.01
|
|
163,515
|
|
$
|
2.02
|
|
$ 2.20 2.45
|
|
503,304
|
|
7.3
|
|
$
|
2.36
|
|
440,688
|
|
$
|
2.36
|
|
$ 2.62 2.74
|
|
565,000
|
|
7.8
|
|
$
|
2.60
|
|
337,562
|
|
$
|
2.63
|
|
$ 3.00 6.51
|
|
203,154
|
|
4.5
|
|
$
|
3.32
|
|
193,154
|
|
$
|
3.32
|
|
Total
|
|
1,665,208
|
|
|
|
|
|
1,212,753
|
|
|
|
The weighted-average
grant-date fair value per share of options granted to employees during the
years ended December 31, 2007 and 2006 was $1.48 and $1.38, respectively.
17.
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 days employment. The Plan provides for
annual contributions by the Company of 50% of employee contributions not to
exceed 8% of employee compensation.
Participants may contribute up to 100% of the annual contribution
limitations determined by the Internal Revenue Service.
Employees are fully
vested in their share of the Companys contributions after the completion of
five years of
81
service. The Company made contributions in 2006 of approximately
$15,000 for the 2005 plan year and $75,000 for the 2006 plan year. In 2007, the Company made contributions of
approximately $28,000 for the 2006 plan year and made contributions of
approximately $75,000 for the 2007 plan year and has accrued a contribution of
approximately $6,000 for the 2007 plan year which was paid in January 2008.
18.
Pension Plan
One of the Companys
foreign subsidiaries maintains a defined benefit pension plan that provides
benefits based on length of service and final average earnings.
82
The following table sets
forth the benefit obligation, fair value of plan assets, and the funded status
of the Companys plan; amounts recognized in the Companys consolidated
financial statements; and the assumptions used in determining the actuarial
present value of the benefit obligations as of December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
Change in
benefit obligation:
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
1,457,082
|
|
$
|
1,520,238
|
|
$
|
1,153,882
|
|
Service cost
|
|
1,759
|
|
1,794
|
|
249
|
|
Interest cost
|
|
75,633
|
|
66,903
|
|
57,554
|
|
Actuarial gain
(loss)
|
|
(8,104
|
)
|
(173,963
|
)
|
261,181
|
|
Effect of
exchange rate changes
|
|
109,169
|
|
42,110
|
|
47,372
|
|
Effect of
curtailment
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
|
|
|
|
|
Benefit
obligation at end of year
|
|
1,635,539
|
|
1,457,082
|
|
1,520,238
|
|
|
|
|
|
|
|
|
|
Change in plan
assets
|
|
|
|
|
|
|
|
Fair value of
plan assets at beginning of year
|
|
440,790
|
|
390,708
|
|
342,194
|
|
Actual return of
plan assets
|
|
11,441
|
|
9,474
|
|
8,261
|
|
Company
contributions
|
|
44,397
|
|
40,608
|
|
40,253
|
|
Benefits paid
|
|
|
|
|
|
|
|
Fair value of
plan assets at end of year
|
|
496,628
|
|
440,790
|
|
390,708
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
(1,138,911
|
)
|
(1,016,292
|
)
|
(1,129,530
|
)
|
Unrecognized
actuarial loss (gain)
|
|
342,493
|
|
343,018
|
|
502,488
|
|
Unrecognized
prior service (benefit) cost
|
|
|
|
|
|
|
|
Additional
minimum liability
|
|
(342,493
|
)
|
(343,018
|
)
|
(502,488
|
)
|
Unrecognized
transition (asset) liability
|
|
|
|
|
|
|
|
Net amount
recognized
|
|
(1,138,911
|
)
|
$
|
(1,016,292
|
)
|
$
|
(1,129,530
|
)
|
|
|
|
|
|
|
|
|
The weighted
average assumptions used to determine benefit obligations for the years ended
December 31 were:
|
|
|
|
|
|
|
|
Discount rate
|
|
4.60
|
%
|
4.60
|
%
|
4.15
|
%
|
Expected return
on plan assets
|
|
4.00
|
%
|
4.00
|
%
|
4.5
|
%
|
Rate of
compensation increase
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Plan Assets
|
|
|
|
|
|
|
|
Pension plan
assets were comprised of the following asset categories at December 31,
|
|
|
|
|
|
|
|
Equity
securities
|
|
6.90
|
%
|
8.20
|
%
|
9.90
|
%
|
Debt securities
|
|
89.50
|
%
|
87.90
|
%
|
85.20
|
%
|
Other
|
|
3.60
|
%
|
3.90
|
%
|
4.90
|
%
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
Components of
net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
Service cost
|
|
1,759
|
|
1,794
|
|
200
|
|
Interest cost on
projected benefit obligations
|
|
75,634
|
|
66,903
|
|
46,240
|
|
Expected return
on plan assets
|
|
|
|
|
|
76
|
|
Amortization of
prior service costs
|
|
|
|
|
|
|
|
Amortization of
actuarial loss
|
|
|
|
|
|
|
|
Net periodic
benefit costs
|
|
77,393
|
|
68,697
|
|
46,516
|
|
|
|
|
|
|
|
|
|
The weighted
average assumptions used to determine net periodic benefit cost for the years
ended December 31, were
|
|
|
|
|
|
|
|
Discount rate
|
|
4.60
|
%
|
4.60
|
%
|
4.15
|
%
|
Expected return
on plan assets
|
|
4.00
|
%
|
4.00
|
%
|
4.5
|
%
|
Rate of
compensation increase
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
83
The following
discloses information about our defined benefit pension plan that had an
accumulated benefit obligation in excess of plan assets as of
December 31,
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
1,635,539
|
|
1,457,082
|
|
1,520,238
|
|
Accumulated
benefit obligation
|
|
1,635,539
|
|
1,457,082
|
|
1,520,238
|
|
Fair value of
plan assets
|
|
496,628
|
|
440,790
|
|
390,708
|
|
The
following benefit payments are expected to be paid as follows:
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2013 2017
|
|
77,623
|
|
The Company expects to
make contributions to the plan of approximately $32,500 during 2008.
The investment objectives
for the plan are the preservation of capital, current income and long-term
growth of capital. All plan assets are managed in a policyholder pool in
Germany by outside investment managers. The expected long-term return on plan
assets is between 4.0% to 4.5%. The measurement date used to determine the
benefit information of the plan was January 1, 2008.
19.
Quarterly
Financial Data (Unaudited)
The following table sets forth selected quarterly
financial data for 2007 and 2006 (in thousands, except per share data):
|
|
2007 (by quarter)
|
|
|
|
1
|
|
2
|
|
3
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,336
|
|
$
|
1,778
|
|
$
|
3,510
|
|
$
|
1,865
|
|
Cost of Sales
|
|
479
|
|
592
|
|
791
|
|
684
|
|
Operating
expenses
|
|
3,084
|
|
2,513
|
|
2,308
|
|
2,536
|
|
Loss from
Operations
|
|
(2,227
|
)
|
(1,327
|
)
|
411
|
|
(1,355
|
)
|
Interest expense
(income), net
|
|
243
|
|
(5
|
)
|
(2
|
)
|
(21
|
)
|
Other expense
(income), net
|
|
(38
|
)
|
82
|
|
(6
|
)
|
(16
|
)
|
Loss from continuing
operations
|
|
(2,432
|
)
|
(1,404
|
)
|
419
|
|
(1,317
|
)
|
Discontinued
operations
|
|
|
|
11
|
|
6
|
|
33
|
|
Net loss
|
|
(2,432
|
)
|
(1,393
|
)
|
425
|
|
(1,284
|
)
|
Preferred
dividends
|
|
(433
|
)
|
(88
|
)
|
(555
|
)
|
(95
|
)
|
Net loss
|
|
(2,865
|
)
|
(1,481
|
)
|
(130
|
)
|
(1,379
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations
|
|
$
|
(0.18
|
)
|
$
|
(0.09
|
)
|
$
|
0.03
|
|
$
|
(0.08
|
)
|
Discontinued
operations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Preferred
dividends
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
|
|
Net loss per
share
|
|
$
|
(0.21
|
)
|
$
|
(0.10
|
)
|
$
|
(0.01
|
)
|
$
|
(0.08
|
)
|
84
|
|
2006 (by quarter)
|
|
|
|
1
|
|
2
|
|
3
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,765
|
|
$
|
2,867
|
|
$
|
2,177
|
|
$
|
2,381
|
|
Cost of Sales
|
|
842
|
|
920
|
|
752
|
|
815
|
|
Operating
expenses
|
|
3,241
|
|
2,992
|
|
2,923
|
|
2,778
|
|
Loss from
Operations
|
|
(1,318
|
)
|
(1,045
|
)
|
(1,498
|
)
|
(1,212
|
)
|
Interest expense
(income), net
|
|
26
|
|
157
|
|
156
|
|
226
|
|
Other expense
(income), net
|
|
(69
|
)
|
(37
|
)
|
(5
|
)
|
(8
|
)
|
Loss from
continuing operations
|
|
(1,275
|
)
|
(1,165
|
)
|
(1,649
|
)
|
(1,429
|
)
|
Discontinued operations
|
|
(73
|
)
|
(159
|
)
|
(114
|
)
|
(62
|
)
|
Net loss
|
|
(1,348
|
)
|
(1,324
|
)
|
(1,763
|
)
|
(1,491
|
)
|
Preferred
dividends
|
|
(13
|
)
|
(13
|
)
|
(13
|
)
|
(72
|
)
|
Net loss
|
|
(1,361
|
)
|
(1,337
|
)
|
(1,776
|
)
|
(1,563
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations
|
|
$
|
(0.10
|
)
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.11
|
)
|
Discontinued
operations
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
Preferred
dividends
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Net loss per
share
|
|
$
|
(0.10
|
)
|
$
|
(0.10
|
)
|
$
|
(0.13
|
)
|
$
|
(0.11
|
)
|
20.
Subsequent
Event
In March 2008, the Company and Sol Logic agreed
to amend the Asset Purchase Agreement.
The Amendment provides that in consideration for the Acquired Assets,
the Company issued to the Seller 677,940 shares of restricted common stock of
the Company (the Initial Shares). In addition to the Initial Shares,
the Company will issue to Sol Logic certain additional shares upon achievement
of a milestone. In the event the Companys revenues on certain specified
products (the Products) equals or exceeds $3,000,000 for the six-month period
commencing on March 6, 2008 and ending on September 6, 2008, the
Company will issue Sol Logic that number of shares of the Companys common
stock (the Additional Shares) equal to (A) the quotient obtained by
dividing $1,008,224 by the greater of (i) the volume weighted average
closing price of the Companys common stock (Common Stock) over the 20
trading-day period ending on the date immediately preceding the Additional
Issuance Date and (ii) $1.10 (the Additional Per Share Price) and deposit
into an escrow account (the Escrow Account) that number of shares of the
Companys common stock (the Escrow Shares) equal to the quotient obtained by
dividing $913,700 by the Additional Per Share Price. In the event the
Company does not achieve the $3,000,000 product revenue milestone, the revenue
determination period will be extended and the Company will issue Sol Logic the
Additional Shares if the Companys revenues on the Products equals or exceeds
$5,000,000 for the 18-month period commencing on March 6, 2008 and ending
on September 8, 2009.
On March 12, 2008,
ImageWare Systems, Inc. (the Company) received $541,666 from the
exercise of 541,666 warrants to purchase shares of the Companys common stock,
par value $0.01 per share. The warrants were originally issued in connection
with a private placement of Common Stock to certain accredited investors (the Investors).
The Financing was previously reported in a Current Report on Form 8-K
filed on September 26, 2007. The Company agreed to reprice all warrants
issued in the Financing, which originally had an exercise price of $1.67 per
share, to an exercise price of $1.00 per share, in consideration for their
immediate exercise (the Warrant Repricing) by the Investors who participated
in the Warrant Repricing or their transferees, as applicable (the Participating
Investors).
In connection with the
Warrant Repricing, the Company also issued to the Participating Investors new
warrants (the Warrants) to purchase up to an aggregate of 270,833 shares of
Common Stock with an exercise price of $1.20 per share. The Warrants may be
exercised at any time from March 12, 2008 until March 12, 2013. In
addition, if the shares of Common Stock issuable upon exercise of the Warrants
are not registered for resale with the Securities and Exchange Commission on or
before the later of September 12, 2008 or the end of the applicable
holding period for resales of securities by non-affiliates under Rule 144
of the Securities Act, but in any event no later than March 12, 2009, the
Warrants may be exercised by the Participating Investors by cashless
exercise.
The net proceeds to the
Company from the Warrant Repricing, after deducting for expenses, were
approximately $540,000. The Company intends to use the net proceeds from the
Warrant Repricing to fund ongoing operations.
85
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