ImageWare Systems,
Inc., a Delaware corporation since 2005 and previously incorporated
in California in 1987 as a California corporation, has its
principal place of business at 13500 Evening Creek Drive N, Suite
550, San Diego, California 92128. We maintain a corporate website
at www.iwsinc.com.
Our common stock, par value $0.01 per share (“Common Stock”), is currently
listed for quotation on the OTCQB marketplace under the symbol
“IWSY”. As used in this Annual Report,
“we”,
“us”,
“our”,
“ImageWare”,
“ImageWare
Systems” or the “Company” refers to ImageWare
Systems, Inc. and all of its subsidiaries.
Overview
The
Company is a pioneer and leader in the emerging market for
biometrically enabled software-based identity management solutions.
Using those human characteristics that are unique to us all, the
Company creates software that provides a highly reliable indication
of a person’s identity and its “flagship” product
is the patented IWS Biometric Engine®. The Company’s
products are used to manage and issue secure credentials, including
national IDs, passports, driver licenses and access control
credentials. The Company’s products also provide law
enforcement with integrated mugshot, fingerprint LiveScan and
investigative capabilities. The Company also provides comprehensive
authentication security software using biometrics to secure
physical and logical access to facilities or computer networks or
internet sites. Biometric technology is now an integral part of all
markets the Company addresses, and all the products are integrated
into the IWS Biometric Engine.
Our IWS
Biometric Engine is a patented biometric identity management
software platform for multi-biometric enrollment, management and
authentication, managing population databases of virtually
unlimited sizes. It is hardware agnostic and can utilize different
types of biometric algorithms. It allows different types of
biometrics to be operated at the same time on a seamlessly
integrated platform. It is also offered as a Software Development
Kit (“SDK”)
based search engine, enabling developers and system integrators to
implement a biometric solution or integrate biometric capabilities
into existing applications without having to derive biometric
functionality from preexisting applications.
Our
secure credential solutions empower customers to create secure and
smart digital identification documents with complete ID systems. We
develop, sell and support software and design systems that utilize
digital imaging and biometrics in the production of photo
identification cards, credentials and identification systems. Our
products in this market consist of IWS EPI Suite and IWS EPI
Builder. These products allow for production of digital
identification cards and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
or governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine to our secure credential product
line.
The
Company is also a developer of a biometric based multi-factor
authentication (MFA) cloud-based service. The service,
GoVerifyID® brings together cloud and mobile technologies to
offer multi-factor authentication for smartphone users, for the
enterprise, and across industries. GoVerifyID® consists of
mobile and desktop client applications and a cloud-based
Software-as-a-Service (“SaaS”) which services cloud-based
template matching requests for authentication requests.
GoVerifyID® is leveraged by product developers to enable
biometric authentication for their consumers and enterprises
securing access to company property and IP. For the enterprise,
GoVerifyID® provides turnkey integration with Microsoft
Windows, Microsoft Active Directory, CA SSO, IBM Security Access
Manager (“ISAM”), SAP Cloud Platform, and
HPE’s Aruba ClearPass. These integrations provide multi-modal
biometric authentication to replace or augment passwords for use
with enterprise and consumer class systems.
Our law
enforcement solutions enable agencies to quickly capture, archive,
search, retrieve, and share digital images, fingerprints and other
biometrics as well as criminal history records on a stand-alone,
networked, wireless or web-based platform. We develop, sell and
support a suite of modular software products used by law
enforcement and public safety agencies to create and manage
criminal history records and to investigate crime. Our IWS Law
Enforcement solution consists of five software modules: Capture and
Investigative modules, which provide a criminal booking system with
related databases as well as the ability to create and print mug
photo/SMT image lineups and electronic mug-books; a Facial
Recognition module, which uses biometric facial recognition to
identify suspects; a Web module, which provides access to centrally
stored records over the Internet in a connected or wireless
fashion; and a LiveScan module, which incorporates LiveScan
capabilities into IWS Law Enforcement providing integrated
fingerprint and palm print biometric management for civil and law
enforcement use. The IWS Biometric Engine is also available to our
law enforcement clients and allows them to capture and search using
other biometrics such as iris or DNA.
Coronavirus (COVID-19) Pandemic
On March 11, 2020 the World Health Organization
declared the novel strain of coronavirus
(“COVID-19”)
a global pandemic and recommended containment and mitigation
measures worldwide. Our offices are currently under a shelter-in-place mandate and
many of our clients worldwide are similarly
impacted. The global outbreak of COVID-19
continues to rapidly evolve, and the extent to which COVID-19
may impact our business and the markets we serve will depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, such as the ultimate geographic spread
of the disease, the duration of the outbreak, travel restrictions
and social distancing in the United States and other countries,
business closures or business disruptions, and the effectiveness of
actions taken in the United States and other countries to contain
and treat the disease. We are continuing to vigilantly
monitor the situation with our primary focus on the health and
safety of our employees and clients.
Solutions and
Products
Our
identity management solutions are primarily focused around
biometrics and secure credentials providing complete,
cross-functional and interoperable systems.
IWS Biometric Engine. This is a
biometric identity management platform for multi-biometric
enrollment, management and authentication, managing population
databases of unlimited sizes without regard to hardware or
algorithm. Searches can be 1:1 (verification), 1:N
(identification), X:N (investigative) and N:N (database integrity).
IWS Biometric Engine is technology and biometric agnostic, enabling
the use of biometric devices and algorithms from any vendor, and
the support of the following biometric types: finger, face, iris,
hand geometry, palm, signature, DNA, voice, 3D face and retina. The
IWS Biometric Engine is available as an SDK, as well as a platform
for custom configurations to meet specific customer requirements.
The added suite of products provides government, law enforcement,
border management and enterprise businesses with a wide variety of
application-specific solutions that address specific government
mandates and technology standards. It also provides users with the
ability to integrate into existing legacy systems and expand based
upon specific customer requirements.
GoVerifyID®. The Company introduced
GoVerifyID®, a multi-factor biometric authentication solution
for the enterprise markets on November 14, 2016. Our GoVerifyID
products support multi-modal biometric authentication including,
but not limited to, face, voice, fingerprint, iris, palm, and more.
All the biometrics can be combined with or used as replacements for
authentication and access control tools, including tokens, digital
certificates, passwords, and PINS, to provide the ultimate level of
assurance, accountability, and ease of use for corporate networks,
web applications, mobile devices, and PC desktop environments.
GoVerifyID provides patented multi-modal biometric identity
authentication that can be used in place of passwords or as a
strong second factor authentication method. GoVerifyID is provided
as a cloud-based Software-as a-Service (“SaaS”) solution, thereby,
eliminating complex IT deployment of biometric software and
eliminating startup costs. GoVerifyID works with existing mobile
devices, eliminating the need for specialized biometric scanning
devices typically used with most biometric solutions.
IWS EPI Suite. This is an ID
software solution for producing, issuing, and managing secure
credentials and personal identification cards. Users can
efficiently manage large amounts of data, images and card designs,
as well as track and issue multiple cards per person, automatically
populate multiple cards and eliminate redundant data entry. IWS EPI
Suite was designed to integrate with our customers’ existing
security and computing infrastructure. We believe that this
compatibility may be an appealing feature to corporations,
government agencies, transportation departments, school boards and
other public institutions.
IWS EPI Builder. This is an
SDK and a leading secure credential component of identity
management and security solutions, providing all aspects of ID
functionality from image and biometric capture to the enrollment,
issuance and management of secure documents. It contains components
which developers or systems integrators can use to support and
produce secure credentials, including national IDs, passports,
International Civil Aviation Office -compliant travel documents,
smartcards and driver licenses. IWS EPI Builder enables
organizations to develop custom identification solutions or
incorporate sophisticated identification capabilities into existing
applications including the ability to capture images, biometric and
demographic data; enable biometric identification and verification
(1:1 and 1:X); as well as support numerous biometric hardware and
software vendors. It also enables users to add electronic
identification functionality for other applications, including
access control, tracking of time and attendance, point of sale
transactions, human resource systems, school photography systems,
asset management, inventory control, warehouse management,
facilities management and card production systems.
IWS Law Enforcement. IWS Law
Enforcement is a digital booking, identification and investigative
solution that enables users to digitally capture, store, search and
retrieve images and demographic data, including mugshots,
fingerprints and SMT’s. Law enforcement may choose between
submitting fingerprint data directly to the State Automated
Fingerprint Identification System (“AFIS”), FBI criminal repository,
or other agencies as required. Additional features and
functionality include real-time access to images and data, creation
of photo lineups and electronic mug books, and production of
identification cards and credentials. IWS Law Enforcement also
uses off-the-shelf hardware and is designed to comply with open
industry standards so that it can operate on an array of systems
ranging from a stand-alone personal computer to a wide area
network. To avoid duplication of entries, the system can be
integrated easily with several other information storage and
retrieval systems, such as a records/jail management system
(“RMS/JMS”) or an automated fingerprint
identification system.
Capture. This software
module allows users to capture and store a variety of images
(facial, SMT and others such as evidence photos) as well as
biographical text information. Each record includes images and text
information in an easy-to-view format made up of fields designed
and defined by the individual agency. Current customers of this
module range from agencies that capture a few thousand mug shots
per year to those that capture hundreds of thousands of mug shots
each year.
LiveScan. This software
module is FBI certified and complies with the FBI Integrated
Automated Fingerprint Identification System (“IAFIS”) Image Quality
Specifications (“IQS”) while utilizing FBI
certified LiveScan devices from most major vendors. LiveScan allows
users to capture single to ten prints and palm data, providing an
integrated biometric management solution for both civil and law
enforcement use. By adding LiveScan capabilities, law enforcement
organizations further enhance the investigative process by
providing additional identifiers to identify suspects involved in a
crime. In addition, officers no longer need to travel to
multiple booking stations to capture fingerprints and
mugshots. All booking information, including images, may be
located at a central designation and from there routed to the State
AFIS or FBI criminal history record repository.
Investigative. This software
module allows users to search the database created with IWS Law
Enforcement. Officers can conduct text searches in many fields,
including file number, name, alias, distinctive features, and other
information, such as gang membership and criminal history. The
Investigative module creates a catalogue of possible matches,
allowing officers or witnesses to save time by looking only at mug
shots that closely resemble the description of the suspect. This
module can also be used to create a line-up of similar facial
images from which a witness may identify the suspect.
Facial Recognition. This
software module uses biometric facial recognition and retrieval
technology to help authorities identify possible suspects. Images
taken from surveillance videos or photographs can be searched
against a digital database of facial images to retrieve any desired
number of faces with similar characteristics. This module can also
be used at the time of booking to identify persons using multiple
aliases. Using biometrics-based technology, the application can
search through thousands of facial images in a matter of seconds,
reducing the time it would otherwise take a witness to flip through
a paper book of facial images that may or may not be similar to the
description of the suspect. The Facial Recognition module then
creates a selection of possible matches ranked in order of
similarity to the suspect, and a percentage confidence level is
attributed to each possible match. The application incorporates
search engine technology, which we license from various facial
recognition algorithm providers.
EPI Designer for Law
Enforcement. The EPI Designer for LE software is
a design solution created for the IWS Law Enforcement databases
based on the IWS EPI Suite program. This program allows
integration with various IWS databases for the production of unique
booking/inmate reports, wristbands, photo ID cards, Wanted or BOLO
fliers, etc., created from the information stored in booking
records. Designs can be created in minutes and quickly added to the
IWS Law Enforcement system, allowing all users with appropriate
permissions immediate access to the newly added
form.
Quick Capture. QuickCapture is a
multiple biometric capture application that dynamically adapts to a
client’s required use case, including different city, state,
and federal charge codes. With it, you can collect a variety of
biometrics (face, finger, palm, iris, voice, etc.) using a variety
of biometric hardware in the order desired as well as any needed
biographic information associated with the subjects.
Maintenance and Customer Support
Maintenance and support enrollment entitle software license
customers to technical support services, including telephone and
internet support and problem resolution services, and the right to
receive unspecified product upgrades, maintenance releases and
patches released during the term of the support period on a
when-and-if-available basis. Maintenance and support service fees
are an important source of recurring revenue, and we invest
significant resources in providing maintenance and support
services.
Customers
We have
a wide variety of domestic and international customers. Most of our
IWS Law Enforcement customers are government agencies at the
federal, state and local levels in the United States. Our secure
credential products are also being used in Australia, Canada, the
United Arab Emirates, Kuwait, Saudi Arabia, Mexico, Colombia, Costa
Rica, Venezuela, Singapore, Indonesia and the Philippines. For the
year ended December 31, 2019, two customers accounted for
approximately 37% or $1,301,000 of total revenue and had $161,000
trade receivables as of the end of the year, as compared to one
customer that accounted for approximately 36% or $1,573,000 of
total revenue and had $0 trade receivables as of the end of the
December 31, 2018.
Our Strategy
Our
strategy is to provide biometric-based identity management
solutions to governments and enterprises through key partners and
large systems integrators and by our own direct sales
team.
With
recent COVID-19 events, remote work and social distancing have
quickly been brought to the forefront of society. And while the
impact of these events will be uncovered over the coming years,
many problems have been immediately realized by corporations and
government agencies, which are diligently looking for solutions to
these new challenges.
Within
a matter of weeks corporations and government agencies have had to
heavily rely upon remote access technologies to enable work
continuity through the pandemic. This increase in employees
remotely accessing sensitive corporate systems has increased the
risk of both cybercrime and unintentional information leaks. This
risk is also increased by the fact that many employees now use a
mixture of personal and corporate owned devices on the job, a trend
known as Bring Your Own Device (BYOD).
Verification of an
individual through biometrics is an effective way to authenticate
users accessing sensitive information and systems. GoVerifyID®
provides this functionality and is already integrated in many of
the authentication systems leveraged by large companies and
agencies to manage the identities of their employees and users. We
will market and sell GoVerifyID® as a solution as a solution
for protecting corporate systems during this time of increased
awareness and opportunity, leveraging targeted web ads and our
inside sales team to increase sales through the increased need to
securely provide remote access to employees.
Additionally,
social distancing and the need to limit personal contact throughout
everyday life is driving governments and corporations to deploy new
ways to continue work and commerce while minimizing contact points
between individuals. We believe this trend will increase the
acceptance and use of biometrics as a means of contactless
authentication for retail, finance, government services and
transportation.
Scaling
out biometrics across these verticals is going to require new
methods and solutions to support the increased number of users and
transactions. With our decades of experience innovating and scaling
government grade biometric solutions and our years executed
strategy of creating multimodal, vendor agnostic solutions,
Imageware has had a rich portfolio of products and solutions to
address these new challenges brought on by the pandemic. Over the
next year we will work with customers, partners, and sales
prospects to leverage and integrate existing product assets to
support an end-to-end workflow. Enroll, Validate, Credential and
Authenticate. A streamlined, scalable solution to capture biometric
data from individuals and then make them usable through smart card
and mobile-based access management and authentication to support
the operationalization of biometrics in a way that is cost
effective, transparent and secure.
Additionally, the
law enforcement community continues to be an important market and
customer base. Over the past few years innovation within our law
enforcement product line has been static, which has resulted in
revenue being primarily driven from support and maintenance.
Recently Imageware released a new product offering to the law
enforcement sector called, Quick Capture. Quick Capture streamlines
the process of capturing biometrics from perpetrators. The law
enforcement market will immediately benefit from this product, but
we also believe we can leverage this into new places such as;
corporate, academia, hospitality, entertainment. We will continue
to strategically invest our law enforcement product
offerings.
We
believe the increasing demand for biometric technology will drive
demand for our solutions. Our identity management products are
built to accommodate the use of biometrics and meet the demanding
requirements across the entire identity life cycle.
The recent
outbreak of the novel coronavirus, COVID-19, which has been
declared by the World Health Organization to be a pandemic, has
spread across the globe and is impacting worldwide economic
activity and may impact our strategy. A pandemic,
including COVID-19 or other public health epidemic, poses
the risk that we or our employees, contractors, suppliers, and
other partners may be prevented from conducting business activities
for an indefinite period of time and causing shutdowns that may be
requested or mandated by governmental authorities. While it is not
possible at this time to estimate the impact
that COVID-19 could have on our business,
the COVID-19 pandemic and mitigation measures have had
and may continue to have an adverse impact on global economic
conditions which could have an adverse effect on our
business.
Sales and Marketing
We
market and sell our products in most major world markets directly
through our sales force and indirectly through channel partners,
including resellers, distributors and systems integrators. Our
sales force includes both field, and an inside sales which provides
us a lower-cost channel for additional sales into existing
customers and for expanding our customer base.
International Operations
We are
a global company that conducts sales, sales support, professional
services, and support, marketing and product distribution services
from a number of international offices. In addition to our sales
offices located in San Diego CA, we also conduct Sales activities
in Canada, Mexico, Chile, Australia, and Japan. Our product
manufacturing and distribution operations are based in San Diego
CA, and Portland OR. We regularly seek out opportunities to
efficiently expand our operations in international locations that
offer highly talented resources as a way to maximize our global
competitiveness.
Software Licenses
We
license our software under both perpetual and term license models
for customer on-premise use. Under perpetual license arrangements,
our customers receive the perpetual license right to use our
software in conjunction with related maintenance and support
services that are generally purchased on an annual or multi-year
basis. Under term license arrangements, our customers receive
license rights to use our software along with bundled maintenance
and support services for the term of the contract. The majority of
our contracts provide customers with the right to use one or more
of our products up to a specific license capacity. Capacity can be measured in many ways,
including the number of servers, number of users, or
identities.
Software as a Service Business Model
We also provide on-demand SaaS
offerings for certain of our products. With the advent of
cloud-based computing and the proliferation of smart mobile
devices, which allow for reliable biometric capture and the need to
secure access to data, products and services, the Company believes
that the market for multi-biometric solutions will expand to
encompass significant deployments of biometric systems in the
commercial and consumer markets.
Competition
Biometric Market
The
market to provide biometric systems to the identity management
market is evolving and we face competition from a number of
sources. We believe that the strength of our competitive position
is based on:
●
our
ability to provide a system which enables the enrollment,
management and authentication of multiple biometrics managing
population databases of unlimited sizes;
●
searches
can be 1:1 (verification), 1:N (identification), X:N
(investigative), and N:N (database integrity); and
●
the
system is technology and biometric agnostic, enabling the use of
biometric devices and algorithms from any vendor, and the support
of the following biometric types: finger, face, iris, hand
geometry, palm, DNA, signature, voice, 3D face and
retina.
Our
multi-biometric product faces competition from French-based Safran,
Irish-based Daon, 3M and Aware Inc., none of which have offerings
with the scope and flexibility of our IWS Biometric Engine and its
companion suite of products or relevant patent
protection.
Due to
the breadth of our software offering in the secure credential
market space, we face differing degrees of competition in certain
market segments. The strength of our competitive position is based
upon:
●
our
strong brand reputation with a customer base, which includes small
and medium-sized businesses, Fortune 500 corporations and large
government agencies;
●
the
ease of integrating our technology into other complex applications;
and
●
the
leveraged strength that comes from offering customers software
tools, packaged solutions and web-based service applications that
support a wide range of hardware peripherals.
Our
software faces competition from Datacard Corporation, a privately
held manufacturer of hardware, software and consumables for the ID
market, as well as small, regionally based companies.
The Law Enforcement and Public Safety Markets
Due to
the fragmented nature of the law enforcement and public safety
market and the modular nature of our product suite, we face
different degrees of competition with respect to each IWS Law
Enforcement module. We believe the principal bases on which we
compete with respect to all of our products are:
●
the
unique ability to integrate our modular products into a complete
biometric, LiveScan, imaging and investigative system;
●
our
reputation as a reliable systems supplier;
●
the
usability and functionality of our products; and
●
the
responsiveness, availability and reliability of our customer
support.
Our law
enforcement product line faces competition from other companies
such as DataWorks Plus and 3M. Internationally, there are
often a number of local companies offering solutions in most
countries.
Intellectual Property
We rely
on trademark, patent, trade secret and copyright laws and
confidentiality and license agreements to protect our intellectual
property. We have several federally registered trademarks,
including the trademark ImageWare and IWS Biometric Engine, as well
as trademarks for which there are pending trademark registrations
with the United States, Canadian and other International Patent
& Trademark Offices.
We hold
several issued patents and have several other patent applications
pending for elements of our products. We believe we have the
foundational patents regarding the use of multiple biometrics and
continue to be an IP leader in the biometric arena. It is our
belief that this intellectual property leadership will create a
sustainable competitive advantage.
We are
an early pioneer in the first to file patents related to
multi-modal biometrics and currently are the worldwide leader in
multi-modal biometric patents, with 23 issued patents worldwide and
18 patents pending. These technologies allow biometric
matching using any type of biometric modality for identity
verification while protecting the privacy of an individual. It is
our belief that such technology will be critical to providing
biometric management solutions for the consumer market where
privacy protection has been a historical issue and barrier to
biometric adoption.
Employees
We
had a total of 75 and 73 full-time employees as of December 31,
2019 and 2018, respectively. In 2019, we had 66 employees based in
the United States, six employees based in Canada and three
employees based in other countries. In 2018, we had 64 employees
based in the United States, six employees based in Canada and three
employees based in other countries. Our employees are not covered
by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe that our relations with our
employees are good.
Environmental Regulation
Our
business does not require us to comply with any particular
environmental regulations.
Additional Available Information
We make
available, free of charge, at our corporate website www.iwsinc.com copies of our
annual reports filed with the United States Securities and Exchange
Commission (“SEC”) on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements, and all amendments to these
reports, as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC pursuant to
Section 13(a) or 15(d) of the Exchange Act. We also provide
copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at
no charge to investors upon request. Additionally, all reports
filed by us with the SEC are available free of charge via EDGAR
through the SEC website at www.sec.gov.
Our
business is subject to significant risks. You should carefully
consider the risks described below and the other information in
this Annual Report, including our financial statements and related
notes, before you decide to invest in our Common Stock. If any of
the following risks or uncertainties actually occur, our business,
results of operations or financial condition could be materially
harmed, the trading price of our Common Stock could decline, and
you could lose all or part of your investment. The risks and
uncertainties described below are those that we currently believe
may materially affect us; however, they may not be the only ones
that we face. Additional risks and uncertainties of which we are
unaware or currently deem immaterial may also become important
factors that may harm our business. Except as required by law, we
undertake no obligations to update any risk factors.
Available
cash resources will be insufficient to provide for our working
capital needs for the next twelve months. As a result, we will
need to raise additional capital to continue as a going
concern.
At
December 31, 2019, we had negative working capital of approximately
$1,653,000. Our principal source of liquidity at December 31, 2019
consisted of cash and cash equivalents of $1,030,000. Considering
our projected cash requirements, and assuming we are unable to
generate incremental revenue, our available cash will be
insufficient to satisfy our cash requirements for the next twelve
months from the date of this filing. These factors raise
substantial doubt about our ability to continue as a going concern.
To address our working capital requirements, management intends to
seek additional equity and/or debt financing through the issuance
of additional debt and/or equity securities and may seek strategic
or other transactions intended to increase shareholder value. There
are currently no formal committed financing arrangements to support
our projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, or other agreements, and
no assurances can be given that we will be successful in raising
additional capital through the issuance of debt and/or equity
securities, or entering into any other transaction that addresses
our ability to continue as a going concern.
We have a history of significant recurring losses totaling
approximately $203.2 million at December 31, 2019 and
$186.6 million at December 31, 2018, and these losses may
continue in the future.
As of December 31, 2019 and 2018, we had an
accumulated deficit of approximately $203.2 million and
$186.6 million,
respectively, and these losses may continue in the future. We
expect to continue to incur significant sales and marketing,
research and development, and general and administrative expense.
As a result, we will need to generate significant revenue to
achieve profitability, and we may never achieve
profitability.
Our business is subject to risks arising from epidemic diseases,
such as the recent global outbreak of
the COVID-19 coronavirus.
The
recent outbreak of the novel coronavirus, COVID-19, which has
been declared by the World Health Organization to be a pandemic,
has spread across the globe and is impacting worldwide economic
activity. A pandemic, including COVID-19 or other public
health epidemic, poses the risk that we or our employees,
contractors, suppliers, and other partners may be prevented from
conducting business activities for an indefinite period of time,
including shutdowns that may be requested or mandated by
governmental authorities. While it is not possible at this time to
estimate the impact that COVID-19 could have on our
business, the COVID-19 pandemic and mitigation measures
have had and may continue to have an adverse impact on global
economic conditions which could have an adverse effect on our
business and financial condition, including impairing our ability
to raise capital when needed. In addition, we are currently under a
shelter-in-place mandate and many of our clients worldwide are
similarly impacted.
Our operating results have fluctuated in the past and are likely to
fluctuate significantly in the future.
Our
operating results have fluctuated in the past. These
fluctuations in operating results are the consequence of the
following, amongst other things:
●
varying demand for and market acceptance of our technology and
products;
●
changes in our product or customer mix;
●
the gain or loss of one or more key customers or their key
customers, or significant changes in the financial condition of one
or more of our key customers or their key customers;
●
our ability to introduce, certify and deliver new products and
technologies on a timely basis;
●
the announcement or introduction of products and technologies by
our competitors;
●
competitive pressures on selling prices;
●
costs associated with acquisitions and the integration of acquired
companies, products and technologies;
●
our ability to successfully integrate acquired companies, products
and technologies;
●
our accounting and legal expense; and
●
general economic conditions.
These
factors, some of which are not within our control, will likely
continue in the future. To respond to these and other factors, we
may need to make business decisions that could result in failure to
meet financial expectations. If our quarterly operating results
fail to meet or exceed the expectations of securities analysts or
investors, our stock price could drop suddenly and significantly.
Most of our expense, such as employee compensation
and inventory, is relatively fixed in the short term.
Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if our
revenue for a particular period was below our expectations, we may
not be able to proportionately reduce our operating expense for
that period. Any revenue shortfall would have a disproportionately
negative effect on our operating results for the
period.
We depend upon a
small number of large system sales ranging from $100,000 to in
excess of $2,000,000 and we may fail to achieve one or more large
system sales in the future.
Historically,
we have derived a substantial portion of our revenue from a small
number of sales of large, relatively expensive systems, typically
ranging in price from $100,000 to $2,000,000. If we fail to receive
orders for these large systems in a given sales cycle on a
consistent basis, our business could be significantly harmed.
Further, our quarterly results are difficult to predict because we
cannot predict in which quarter, if any, large system sales will
occur in a given year. As a result, we believe that
quarter-to-quarter comparisons of our results of operations are not
a good indication of our future performance. In some future
quarters, our operating results may be below the expectations of
securities analysts and investors, in which case the market price
of our Common Stock may decrease significantly.
Our lengthy sales
cycle may cause us to expend significant resources for one year or
more in anticipation of a sale to certain customers, yet we still
may fail to complete the sale.
When
considering the purchase of a large computerized identity
management system, potential customers may take as long as eighteen
months to evaluate different systems and obtain approval for the
purchase. Under these circumstances, if we fail to complete a sale,
we will have expended significant resources and received no revenue
in return. Generally, customers consider a wide range of issues
before committing to purchase our products, including product
benefits, ability to operate with their current systems, product
reliability and their own budgetary constraints. While potential
customers are evaluating our products, we may incur substantial
selling costs and expend significant management resources in an
effort to accomplish potential sales that may never occur. In times
of economic recession, our potential customers may be unwilling or
unable to commit resources to the purchase of new and costly
systems.
A significant
number of our customers and potential customers are government
agencies that are subject to unique political and budgetary
constraints and have special contracting requirements, which may
affect our ability to obtain new and retain current government
customers.
A
significant number of our customers are government agencies. These
agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend from
quarter-to-quarter or year-to-year. In addition, these agencies
experience political pressure that may dictate the manner in which
they spend money. Due to political and budgetary processes and
other scheduling delays that may frequently occur relating to the
contract or bidding process, some government agency orders may be
canceled or substantially delayed, and the receipt of revenue or
payments from these agencies may be substantially delayed. In
addition, future sales to government agencies will depend on our
ability to meet government contracting requirements, certain of
which may be onerous or impossible to meet, resulting in our
inability to obtain a particular contract. Common requirements in
government contracts include bonding requirements, provisions
permitting the purchasing agency to modify or terminate at will the
contract without penalty, and provisions permitting the agency to
perform investigations or audits of our business practices, any of
which may limit our ability to enter into new contracts or maintain
our current contracts.
Two customers accounted for approximately 37% of our total revenue
during the year ended December 31, 2019, and one customer accounted
for approximately 36% of our total revenue during the year ended
December 31, 2018. In the event of any material decrease in revenue
from these customers, or if we are unable to replace the revenue
through the sale of our products to additional customers, our
financial condition and results from operations could be materially
and adversely affected.
During
the years ended December 31, 2019 and 2018, two customers accounted
for approximately 37% or $1,301,000 of
our total revenue, and 36% or
$1,573,000 of
our total revenue, respectively. If this customer were to
significantly reduce its relationship with the Company, or in the
event the we are unable to replace the revenue through the sale of
our products to additional customers, our financial condition and
results from operations could be negatively impacted, and such
impact would be material.
We occasionally
rely on systems integrators to manage our large projects, and if
these companies do not perform adequately, we may lose
business.
We
occasionally act as a subcontractor to systems integrators who
manage large projects that incorporate our systems, particularly in
foreign countries. We cannot control these companies, and they may
decide not to promote our products or may price their services in
such a way as to make it unprofitable for us to continue our
relationship with them. Further, they may fail to perform under
agreements with their customers, in which case we might lose sales
to these customers. If we lose our relationships with these
companies, our business, financial condition and results of
operations may suffer.
We are dependent upon third parties for the successful integration
of our products, and/or the launch of our products. Any delay in
the integration of our products or the launch of third-party
products may materially affect our results from operations and
financial condition.
Our current marketing
strategy involves the distribution of our products through larger
product partners and/or resellers that will either resell our
product alongside theirs, OEM a white label version of our
products, or sell our products fully integrated into their
offerings. Our strategy leaves us largely dependent upon the
successful rollout of our products by our distribution partners. We
have experienced delays in the rollout of our products due to these
factors during the years ended December 31, 2018 and 2019, and no
assurances can be given that we will not experience delays in the
future. Any delays negatively affect our results from operations
and financial condition.
If the patents we
own or license, or our other intellectual property rights, do not
adequately protect our products and technologies, we may lose
market share to our competitors and our business, financial
condition and results of operations would be adversely
affected.
Our success depends significantly on our ability
to protect our rights to the technologies used in our products. We
rely on patent protection, trade secrets, as well as a combination
of copyright and trademark laws and nondisclosure, confidentiality
and other contractual arrangements to protect our technology.
However, these legal means afford only limited protection and may
not adequately protect our rights or permit us to gain or keep any
competitive advantage. In addition, we cannot be assured that any
of our current and future pending patent applications will result
in the issuance of a patent to us. The U.S. Patent and Trademark
Office (“PTO”) may deny or require significant narrowing
of claims in our pending patent applications, and patents issued as
a result of the pending patent applications, if any, may not
provide us with significant commercial protection or may not be
issued in a form that is advantageous to us. We could also incur
substantial costs in proceedings before the PTO. These proceedings
could result in adverse decisions as to the claims included in our
patents.
Our
issued and licensed patents and those that may be issued or
licensed in the future may be challenged, invalidated or
circumvented, which could limit our ability to stop competitors
from marketing related products. Additionally, upon expiration of
our issued or licensed patents, we may lose some of our rights to
exclude others from making, using, selling or importing products
using the technology based on the expired patents. We also must
rely on contractual rights with the third parties that license
technology to us to protect our rights in the technology licensed
to us. Although we have taken steps to protect our intellectual
property and technology, there is no assurance that competitors
will not be able to design around our patents. We also rely on
unpatented proprietary technology. We cannot assure you that we can
meaningfully protect all our rights in our unpatented proprietary
technology or that others will not independently develop
substantially equivalent proprietary products or processes or
otherwise gain access to our unpatented proprietary technology. We
seek to protect our know-how and other unpatented proprietary
technology with confidentiality agreements and intellectual
property assignment agreements with our employees. However, such
agreements may not provide meaningful protection for our
proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements or in the event that
our competitors discover or independently develop similar or
identical designs or other proprietary information. In addition, we
rely on the use of registered and common law trademarks with
respect to the brand names of some of our products. Our common law
trademarks provide less protection than our registered trademarks.
Loss of rights in our trademarks could adversely affect our
business, financial condition and results of
operations.
Furthermore,
the laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States. If we fail to apply for intellectual property protection or
if we cannot adequately protect our intellectual property rights in
these foreign countries, our competitors may be able to compete
more effectively against us, which could adversely affect our
competitive position, as well as our business, financial condition
and results of operations.
If third parties
claim that we infringe their intellectual property rights, we may
incur liabilities and costs and may have to redesign or discontinue
selling certain products.
Whether a product infringes a patent involves
complex legal and factual issues, the determination of which is
often uncertain. We face the risk of claims that we have infringed
on third parties’ intellectual property rights. Searching for
existing intellectual property rights may not reveal important
intellectual property and our competitors may also have filed for
patent protection, which is not yet a matter of public knowledge,
or claimed trademark rights that have not been revealed through our
availability searches. Our efforts to identify and avoid infringing
on third parties’ intellectual property rights may not always
be successful. Any claims of patent or other intellectual property
infringement, even those without merit,
could:
●
increase the cost of our products;
●
be expensive and time consuming to defend;
●
result in us being required to pay significant damages to third
parties;
●
force us to cease making or selling products that incorporate the
challenged intellectual property;
●
require us to redesign, reengineer or rebrand our
products;
●
require us to enter into royalty or licensing agreements in order
to obtain the right to use a third party’s intellectual
property, the terms of which may not be acceptable to
us;
●
require us to indemnify third parties pursuant to contracts in
which we have agreed to provide indemnification to such parties for
intellectual property infringement claims;
●
divert the attention of our management; and
●
result in our customers or potential customers deferring or
limiting their purchase or use of the affected products until the
litigation is resolved.
In
addition, new patents obtained by our competitors could threaten a
product’s continued life in the market even after it has
already been introduced.
If our security measures or those of our third-party data center
hosting facilities, cloud computing platform providers, or
third-party service partners, are breached, and unauthorized access
is obtained to a customer’s data, our data or our IT systems,
or authorized access is blocked or disabled, our services may be
perceived as not being secure, customers may curtail or stop using
our services, and we may incur significant legal and financial
exposure and liabilities.
Our
services involve the storage and transmission of our
customers’ and our customers’ customers’
proprietary and other sensitive data, including financial
information and other personally identifiable information. While we
have security measures in place, they may be breached as a result
of efforts by individuals or groups of hackers and sophisticated
organizations, including state-sponsored organizations or
nation-states. Our security measures could also be compromised by
employee error or malfeasance, which could result in someone
obtaining unauthorized access to, or denying authorized access to
our IT systems, our customers’ data or our data, including
our intellectual property and other confidential business
information. Additionally, third parties may attempt to
fraudulently induce employees or customers into disclosing
sensitive information such as usernames, passwords or other
information to gain access to our customers’ data, our data
or our IT systems.
We
take extraordinary measures to ensure identity authentication of
users who access critical IT infrastructure, including but not
limited to, two-factor, multi-factor and biometric identity
verification. This substantially reduces the threat of unauthorized
access by bad actors using compromised user
credentials.
Because
the techniques used to breach, obtain unauthorized access to, or
sabotage IT systems change frequently, grow more complex over time,
and generally are not recognized until launched against a target,
we may be unable to anticipate or implement adequate measures to
prevent against such techniques.
Our
services operate in conjunction with and are dependent on products
and components across a broad ecosystem and, as illustrated by the
recent Spectre and Meltdown threats, if there are security
vulnerabilities in one of these components, a security breach could
occur. In addition, our internal IT systems continue to evolve, and
we are often early adapters of new technologies and new ways of
sharing data and communicating internally and with partners and
customers, which increases the complexity of our IT systems. These
risks are mitigated by our ability to maintain and improve business
and data governance policies and processes and internal security
controls, including our ability to escalate and respond to known
and potential risks.
In
addition, our customers may authorize third-party technology
providers to access their customer data, and some of our customers
may not have adequate security measures in place to protect their
data that is stored on our servers. Because we do not control our
customers or third-party technology providers, or the processing of
such data by third-party technology providers, we cannot ensure the
integrity or security of such transmissions or processing.
Malicious third parties may also conduct attacks designed to
temporarily deny customers access to our services.
A
security breach could expose us to a risk of loss or inappropriate
use of proprietary and sensitive data, or the denial of access to
this data. A security breach could also result in a loss of
confidence in the security of our services, damage our reputation,
negatively impact our future sales, disrupt our business and lead
to legal liability. Finally, the detection, prevention and
remediation of known or potential security vulnerabilities,
including those arising from third-party hardware or software may
result in additional direct and indirect costs, for example
additional infrastructure capacity to mitigate any system
degradation that could result from remediation
efforts.
We operate in
foreign countries and are exposed to risks associated with foreign
political, economic and legal environments and with foreign
currency exchange rates.
We
have significant foreign operations. As a result, we are exposed to
risks, including among others, risks associated with foreign
political, economic and legal environments and with foreign
currency exchange rates. Our results may be adversely affected by,
among other things, changes in government policies with respect to
laws and regulations, anti-inflation measures, currency
conversions, collection of receivables abroad and rates and methods
of taxation.
We depend on key personnel, the loss of any of whom could
materially adversely affect future operations.
Our
success will depend to a significant extent upon the efforts and
abilities of our executive officers and other key personnel. The
loss of the services of one or more of these key employees and any
negative market or industry perception arising from the loss of
such services could have a material adverse effect on us and the
trading price of our Common Stock. Our business will also be
dependent upon our ability to attract and retain qualified
personnel. Acquiring and keeping these personnel could prove more
difficult or cost substantially more than estimated and we cannot
be certain that we will be able to retain such personnel or attract
a high caliber of personnel in the future.
We may have additional tax assessments.
We are subject to income taxes in the United
States. Significant judgments are required in determining our
provisions for income taxes. In the course of preparing our tax
provisions and returns, we must make calculations where the
ultimate tax determination may be uncertain. Our tax returns are
subject to examination by the Internal Revenue Service
(“IRS”) and state tax authorities. There can be
no assurance as to the outcome of these examinations. If the
ultimate determination of taxes owed is for an amount in excess of
amounts previously accrued, our operating results, cash flows, and
financial condition could be adversely
affected.
We face competition from companies with greater financial,
technical, sales, marketing and other resources, and, if we are
unable to compete effectively with these competitors, our market
share may decline and our business could be
harmed.
We
face competition from other established companies. A number of our
competitors have longer operating histories, larger customer bases,
significantly greater financial, technological, sales, marketing
and other resources than we do. As a result, our competitors
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or client requirements, more
quickly develop new products or devote greater resources to the
promotion and sale of their products and services than we
can. Likewise, their greater capabilities in these areas may
enable them to better withstand periodic downturns in the identity
management solutions industry and compete more effectively on the
basis of price and production. In addition, new companies may
enter the markets in which we compete, further increasing
competition in the identity management solutions
industry.
We
believe that our ability to compete successfully depends on a
number of factors, including the type and quality of our products
and the strength of our brand names, as well as many factors beyond
our control. We may not be able to compete successfully against
current or future competitors, and increased competition may result
in price reductions, reduced profit margins, loss of market share
and an inability to generate cash flows that are sufficient to
maintain or expand the development and marketing of new products,
any of which would adversely impact our results of operations and
financial condition.
Risks Related to Our Securities
Our Common Stock
is subject to “penny stock” rules.
Our
Common Stock is currently defined as a “penny stock”
under Rule 3a51-1 promulgated under the Exchange Act which are
subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose
additional sales practice requirements on broker-dealers that sell
penny stocks to persons other than established customers and
institutional accredited investors. Among other things, for
transactions covered by these rules, a broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction
prior to sale. Consequently, these rules may affect the ability of
broker-dealers to sell our Common Stock and affect the ability of
holders to sell their shares of our Common Stock in the secondary
market. To the extent our Common Stock is subject to the penny
stock regulations, the market liquidity for our shares will be
adversely affected.
Our stock price
has been volatile, and your investment in our Common Stock could
suffer a decline in value.
There
has been significant volatility in the market price and trading
volume of equity securities, which is unrelated to the financial
performance of the companies issuing the securities. These broad
market fluctuations may negatively affect the market price of our
Common Stock. You may not be able to resell your shares at or above
the price you pay for those shares due to fluctuations in the
market price of our Common Stock caused by changes in our operating
performance or prospects and other factors.
Some
specific factors that may have a significant effect on our Common
Stock market price include:
●
actual or anticipated fluctuations in our operating results or
future prospects;
●
our announcements or our competitors’ announcements of new
products;
●
the public’s reaction to our press releases, our other public
announcements and our filings with the SEC;
●
strategic actions by us or our competitors, such as acquisitions or
restructurings;
●
new laws or regulations or new interpretations of existing laws or
regulations applicable to our business;
●
changes in accounting standards, policies, guidance,
interpretations or principles;
●
changes in our growth rates or our competitors’ growth
rates;
●
developments regarding our patents or proprietary rights or those
of our competitors;
●
our inability to raise additional capital as needed;
●
substantial sales of Common Stock underlying warrants and preferred
stock;
●
concern as to the efficacy of our products;
●
changes in financial markets or general economic
conditions;
●
sales of Common Stock by us or members of our management team;
and
●
changes in stock market analyst recommendations or earnings
estimates regarding our Common Stock, other comparable companies or
our industry generally.
Our future sales
of our Common Stock could adversely affect its price and our future
capital-raising activities could involve the issuance of equity
securities, which would dilute shareholders’ investments and
could result in a decline in the trading price of our Common
Stock.
We
may sell securities in the public or private equity markets if and
when conditions are favorable, even if we do not have an immediate
need for additional capital at that time. Sales of substantial
amounts of our Common Stock, or the perception that such sales
could occur, could adversely affect the prevailing market price of
our Common Stock and our ability to raise capital. We may issue
additional Common Stock in future financing transactions or as
incentive compensation for our executive management and other key
personnel, consultants and advisors. Issuing any equity securities
would be dilutive to the equity interests represented by our
then-outstanding shares of Common Stock. The market price for our
Common Stock could decrease as the market takes into account the
dilutive effect of any of these issuances. Furthermore, we may
enter into financing transactions at prices that represent a
substantial discount to the market price of our Common Stock. A
negative reaction by investors and securities analysts to any
discounted sale of our equity securities could result in a decline
in the trading price of our Common Stock.
The holders of our
preferred stock have certain rights and privileges that are senior
to our Common Stock, and we may issue additional shares of
preferred stock without stockholder approval that could have a
material adverse effect on the market value of the Common
Stock.
Our
Board of Directors has the authority to issue a total of up to four
million shares of preferred stock and to fix the rights,
preferences, privileges, and restrictions, including voting rights,
of the preferred stock, which typically are senior to the rights of
the Common Stock, without any further vote or action by the holders
of our Common Stock. The rights of the holders of our Common Stock
will be subject to, and may be adversely affected by, the rights of
the holders of the preferred stock that have been issued or might
be issued in the future. Preferred stock also could have the effect
of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. This could delay, defer, or
prevent a change in control. Furthermore, holders of our preferred
stock may have other rights, including economic rights, senior to
the Common Stock. As a result, their existence and issuance could
have a material adverse effect on the market value of the Common
Stock. We have in the past issued and may from time to time in the
future issue, preferred stock for financing or other purposes with
rights, preferences, or privileges senior to the Common Stock. As
of May 15, 2020, we had three series of preferred stock
outstanding, the Series A Preferred, Series B Preferred and Series
C Preferred.
The
provisions of our Series A Preferred prohibit the payment of
dividends on our Common Stock unless the dividends on our preferred
shares are first paid. In addition, upon a liquidation, dissolution
or sale of our business, the holders of our Series A Preferred will
be entitled to receive, in preference to any distribution to the
holders of Common Stock, initial distributions of $1,000 per share,
plus all accrued but unpaid dividends. As of December 31, 2019 and
2018, we had no cumulative undeclared dividends on our Series A
Preferred.
The
provisions of our Series B Preferred prohibit the payment of
dividends on our Common Stock unless the dividends on our preferred
shares are first paid. In addition, upon a liquidation, dissolution
or sale of our business, the holders of our Series B Preferred will
be entitled to receive, in preference to any distribution to the
holders of Common Stock, initial distributions of $2.50 per share,
plus all accrued but unpaid dividends. As of December 31, 2019 and
2018, we had cumulative undeclared dividends on our Series B
Preferred of approximately $8,000.
The
provisions of our Series C Preferred prohibit the payment of
dividends on our Common Stock unless the dividends on our preferred
shares are first paid. In addition, upon a liquidation, dissolution
or sale of our business, the holders of our Series C Preferred will
be entitled to receive, in preference to any distribution to the
holders of Common Stock, initial distributions of $10,000 per
share, plus all accrued but unpaid dividends. As of December 31,
2018, there were no shares of Series C Preferred outstanding. As of
December 31, 2019, we had no cumulative undeclared dividends on our
Series C Preferred.
Upon the occurrence of certain events, we may be required to redeem
all or a portion of our Series C Preferred.
On September 10, 2018, we filed the Series C COD
with the Secretary of State of the State of Delaware, pursuant to
which Holders of the Series C Preferred may require us to redeem
all or any portion of such Holder’s shares of Series C
Preferred at a price per share equal to the Stated Value plus all
accrued and unpaid dividends at any time from and after the third
anniversary of the issuance date or in the event of the
consummation of a Change of Control (as such term is defined in the
Series C COD). We cannot
assure you that we will maintain sufficient cash reserves or that
our business will generate cash flow from operations at levels
sufficient to permit us to redeem our shares of Series C Preferred
if and when required to do so. In the event we have insufficient
cash available or do not have access to additional third-party
financings on commercially reasonable terms or at all to complete
such redemption, our business, results of operations, and financial
condition may be materially adversely affected.
Certain large shareholders may have certain personal interests that
may affect the Company.
As a result of the securities issued to Goldman
Capital Management and related entities controlled by Neal Goldman,
a member of our Board of Directors (together,
“Goldman”), Goldman beneficially owns, in the
aggregate, approximately 24% of the Company’s outstanding
voting securities as of May 12, 2020. As a result,
Goldman has the potential ability to exert influence over both the
actions of the Board of Directors and the outcome of issues
requiring approval by the Company’s shareholders. This
concentration of ownership may have effects such as delaying or
preventing a change in control of the Company that may be favored
by other shareholders or preventing transactions in which
shareholders might otherwise recover a premium for their shares
over current market prices.
Our corporate
documents and Delaware law contain provisions that could
discourage, delay or prevent a change in control of the
Company.
Provisions
in our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition involving us that our
stockholders may consider favorable. For example, our certificate
of incorporation authorizes preferred stock, which carries special
rights, including voting and dividend rights. With these rights,
preferred stockholders could make it more difficult for a third
party to acquire us.
We
are also subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. Under these provisions, if
anyone becomes an “interested stockholder”, we may not
enter into a “business combination” with that person
for three years without special approval, which could discourage a
third party from making a takeover offer and could delay or prevent
a change of control. For purposes of Section 203, “interested
stockholder” means, generally, someone owning 15% or more of
our outstanding voting stock or an affiliate of ours that owned 15%
or more of our outstanding voting stock during the past three
years, subject to certain exceptions as described in Section
203.
We do not expect
to pay cash dividends on our Common Stock for the foreseeable
future.
We
have never paid cash dividends on our Common Stock and do not
anticipate that any cash dividends will be paid on the Common Stock
for the foreseeable future. The payment of any cash dividend by us
will be at the discretion of our Board of Directors and will depend
on, among other things, our earnings, capital, regulatory
requirements and financial condition. Furthermore, the terms of our
Series A Preferred, Series B Preferred and Series C Preferred
directly limit our ability to pay cash dividends on our Common
Stock.
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
None.
Our
corporate headquarters are located in San Diego, California, where
we occupy 8,511 square feet of office space. The lease for such
office space commenced on November 1, 2018 and terminates on April
30, 2025. Annual base rent over the lease term approximates
$361,000 per year. Prior to November 1, 2018, we leased 9,927
square feet of office space in San Diego, California for
approximately $30,000 per month pursuant to a lease agreement that
expired in October 2018.
In
addition to our corporate headquarters, we also occupied the
following spaces at December 31, 2019:
●
1,508
square feet in Ottawa, Province of Ontario, Canada, at a cost of
approximately $3,000 per month until the expiration of the lease on
March 31, 2021;
●
9,720 square feet in Portland, Oregon, at a cost
of approximately $22,000 per month until the expiration of the
lease on February 28, 2023; and
●
183
square feet of office space in Mexico City, Mexico, at a cost of
approximately $2,000 per month until September 30,
2020.
ITEM
3.
|
LEGAL PROCEEDINGS
|
There is currently no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the
knowledge of the executive officers of the Company or any of our
subsidiaries, threatened against or affecting the Company, our
Common Stock, any of our subsidiaries or of the Company’s or
our subsidiaries’ officers or directors in their capacities
as such, in which an adverse decision could have a material adverse
effect.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
N/A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
1. DESCRIPTION OF BUSINESS AND OPERATIONS
Overview
As
used in this Report, “we”, “us”,
“our”, “ImageWare”, “ImageWare
Systems” or the “Company” refers to ImageWare
Systems, Inc. and all of its subsidiaries. ImageWare Systems, Inc.
is incorporated in the state of Delaware. The Company is a pioneer
and leader in the emerging market for biometrically enabled
software-based identity management solutions. Using those human
characteristics that are unique to us all, the Company creates
software that provides a highly reliable indication of a
person’s identity. The Company’s “flagship”
product is the patented IWS Biometric Engine®. The
Company’s products are used to manage and issue secure
credentials, including national IDs, passports, driver licenses and
access control credentials. The Company’s products also
provide law enforcement with integrated mug shot, fingerprint
LiveScan and investigative capabilities. The Company also provides
comprehensive authentication security software using biometrics to
secure physical and logical access to facilities or computer
networks or internet sites. Biometric technology is now an integral
part of all markets the Company addresses, and all the products are
integrated into the IWS Biometric Engine.
Liquidity, Going Concern and Management’s Plan
Historically, our principal sources of cash have
included customer payments from the sale of our products, proceeds
from the issuance of common and preferred stock and proceeds from
the issuance of debt. Our principal uses of cash have included cash
used in operations, product development, and payments relating to
purchases of property and equipment. We expect that our principal
uses of cash in the future will be for product development,
including customization of identity management products for
enterprise and consumer applications, further development of
intellectual property, development of Software-as-a-Service
(“SaaS”) capabilities for existing products as
well as general working capital and capital expenditure
requirements. Management expects that, as our revenue grows, our
sales and marketing and research and development expense will
continue to grow, albeit at a slower rate and, as a result, we will
need to generate significant net revenue to achieve and sustain
positive cash flows from operations.
At
December 31, 2019, we had negative working capital of approximately
$1,653,000. Our principal sources of liquidity at December 31, 2019
consisted of cash and cash equivalents of $1,030,000.
Related Party Financings
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and were due no later than 21 days after
February 12, 2020. As of May 15, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members.
2020
Common Stock
Financings
On February 20, 2020, the Company entered into a
securities purchase agreement (the “Triton Purchase
Agreement”) with Triton Funds LP, (a Delaware limited
partnership ("Triton" or the "Investor"). The Triton Purchase Agreement provides the
Company the right to sell to Triton, and Triton is obligated to
purchase, up to $2.0 million worth of shares of the Company's
common stock, par value $0.01 per share ("Common
Stock"), under the Triton
Purchase Agreement ( the ”Offering”). Pursuant to the terms and conditions set
forth in the Triton Purchase Agreement, the purchase price of the
Common Stock will be based on the number of shares of Common Stock
equal to the amount in U.S. Dollars that the Company intends to
sell to the Investor to be set forth in each written notice sent to
the Investor by the Company (the "Purchase
Notice") and delivered to the
Investor (the "Purchase Notice
Amount"), divided by the lowest
daily volume weighted average price of the Company's Common stock
listed on the OTC Markets during the five business days prior to
closing (the "Purchased
Shares"). The Closing of the
purchase of the Purchased Shares as set forth in the Purchase
Notice will occur no later than three business days following
receipt of the Purchased Shares by the
Investor.
The Offering was made pursuant to an effective
registration statement on Form S-3 (Registration Statement Number
333-225935), as previously filed with the Securities and Exchange
Commission (the "SEC") on July 10, 2018, and a related prospectus
supplement filed on February 21, 2020. The Offering will terminate
upon the earlier date of either (i) that date which the Investor
has purchased an aggregate of $2.0 million in Purchased Shares
pursuant to the Triton Purchase Agreement; or (i) March 31, 2020.
The Company intends to use the proceeds from the Offering for
general working capital purposes.
On
April 29, 2020, the Company closed on the offer and sale to Triton
of 6.0 million shares of Common Stock resulting in gross proceeds
to the Company of $765,000, or a per share purchase price of $0.13
per share. The offering follows the offer and sale to Triton of 4.0
million shares of Common Stock for $0.16 per share, which offering
closed on March 10, 2020, resulting in gross proceeds to the
Company of $640,000. Aggregate net proceeds from this financing
approximated $1,389,000 after recognition of direct offering
costs.
On April 28, 2020 (the "Execution
Date"), the "Company" entered
into a purchase agreement, dated as of the Execution Date (the
"Purchase
Agreement"), and a registration
rights agreement, dated as of the Execution Date (the
"Registration Rights
Agreement"), with Lincoln Park
Capital Fund, LLC ("Lincoln
Park"), pursuant to which
Lincoln Park has committed to purchase up to $10,250,000 of the
Company's common stock, $0.01 par value per share (the
"Common
Stock").
Under the terms and subject to the conditions of
the Purchase Agreement, including stockholder approval of an
amendment to the Company’s Certificate of Incorporation to
increase the number of shares of the Company’s common stock
to 345 million shares, the Company has the right, but not the
obligation, to sell to Lincoln Park, and Lincoln Park is obligated
to purchase up to $10,250,000 worth of shares of Common Stock. Such
sales of Common Stock by the Company, if any, will be subject to
certain limitations, and may occur from time to time, at the
Company's sole discretion, over the 24-month period commencing on
the date that a registration statement covering the resale of
shares of Common Stock that have been and may be issued under the
Purchase Agreement, which the Company agreed to file with the SEC
pursuant to the Registration Rights Agreement, is declared
effective by the SEC and a final prospectus in connection therewith
is filed and the other conditions set forth in the Purchase
Agreement are satisfied, all of which are outside the control of
Lincoln Park (such date on which all of such conditions are
satisfied, the "Commencement
Date"). The Company has 30
business days to file the registration statement from the Execution
Date.
Under the Purchase Agreement, on any business day
over the term of the Purchase Agreement, the Company has the right,
in its sole discretion, to present Lincoln Park with a purchase
notice (each, a "Purchase
Notice") directing Lincoln Park
to purchase up to 125,000 shares of Common Stock per business day,
which increases to up to 425,000 shares in the event the price of
the Company’s Common Stock is not below $0.55 per share (the
"Regular
Purchase") (subject to
adjustment for any reorganization, recapitalization, non-cash
dividend, stock split, reverse stock split or other similar
transaction as provided in the Purchase Agreement). In each case,
Lincoln Park's maximum commitment in any single Regular Purchase
may not exceed $500,000. The Purchase Agreement provides for a
purchase price per Purchase Share (the "Purchase
Price") equal to the lesser
of:
●
the
lowest sale price of the Company's Common Stock on the purchase
date; and
●
the
average of the three lowest closing sale prices for the Company's
Common Stock during the fifteen consecutive
business days ending on the business day immediately preceding the
purchase date of such shares.
In
addition, the Purchase Agreement also provides for accelerated
purchases and other terms and conditions as more fully described in
Note 18.
Actual
sales of shares of Common Stock to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by
the Company from time to time, including, among others, market
conditions, the trading price of the Common Stock and
determinations by the Company as to the appropriate sources of
funding for the Company and its operations. Lincoln Park has no
right to require any sales by the Company but is obligated to make
purchases from the Company as it directs in accordance with the
Purchase Agreement. Lincoln Park has covenanted not to cause or
engage in any manner whatsoever, any direct or indirect short
selling or hedging of the Company's shares.
In April 2020, in connection with the execution of
the Purchase Agreement, the Company sold, and Lincoln Park
purchased, 1.0 million shares of Common Stock for a purchase price
of $100,000 (“Original
Purchase”). Due to the
terms of the Purchase Agreement as described above, management is
not currently expecting the related proceeds from this agreement to
be sufficient to sustain operations for an extended period of
time.
CARES Act Financing
On March 27,
2020, President Trump signed into law the “Coronavirus Aid,
Relief and Economic Security Act (“CARES Act”). On May 4, 2020, the Company entered into
a loan agreement (“PPP Loan”)
with Comerica Bank (“Comerica”) under the Paycheck Protection Program
(the “PPP”), which is part of the CARES Act
administered by the United States Small Business Administration
(“SBA”). As part of the application for these
funds, the Company in good faith, has certified that the current
economic uncertainty made the loan request necessary to support the
ongoing operations of the Company. This certification further
requires the Company to take into account our current business
activity and our ability to access other sources of liquidity
sufficient to support ongoing operations in a manner that is not
significantly detrimental to the business. Under the PPP, the
Company received proceeds of approximately $1,571,000, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use proceeds from
the PPP Loan primarily for payroll costs, rent and
utilities. The PPP Loan has a 1.00% interest rate per
annum, matures on May 4, 2022 and is subject to the terms and
conditions applicable to loans administered by the SBA under
the PPP. Under the terms of PPP, all or certain amounts
of the PPP Loan may be forgiven if they are used for
qualifying expenses as described in the CARES Act, which the
Company continues to evaluate.
On
March 11, 2020, the World Health Organization declared
the COVID-19 outbreak a pandemic.
The COVID-19 pandemic is affecting the United States and
global economies and may affect the Company's operations and those
of third parties on which the Company relies. Additionally, as the
duration of the COVID-19 pandemic is difficult to assess
or predict, the impact of the COVID-19 pandemic on the
financial markets may reduce our ability to access capital, which
could negatively impact the Company's short-term and long-term
liquidity. These effects could have a material impact on the
Company's liquidity, capital resources, operations and business and
those of the third parties on which the Company
relies.
Considering
the financings consummated in 2020, as well as our projected cash
requirements, and assuming we are unable to generate incremental
revenue, our available cash will be insufficient to satisfy our
cash requirements for the next twelve months from the date of this
filing. At May 6, 2020, cash on hand approximated $2,012,000 of
which approximately $1,571,000 was the PPP loan and is to be used
primarily for payroll costs, rent and utilities. Based on the
Company’s rate of cash consumption in the first quarter of
2020 and the last quarter of 2019, the Company estimates it will
need additional capital in the third quarter of 2020 and its
prospects for obtaining that capital are uncertain. As a result of
the Company’s historical losses and financial condition,
there is substantial doubt about the Company’s ability to
continue as a going concern.
To
address our working capital requirements, management has begun
instituting several cost cutting measures and may utilize cash
proceeds available under the Lincoln Park facility. Additionally,
management may seek additional equity and/or debt financing through
the issuance of additional debt and/or equity securities or may
seek strategic or other transactions intended to increase
shareholder value. There are currently no financing arrangements to
support our projected cash shortfall, including commitments to
purchase additional debt and/or equity securities, or other
agreements, and no assurances can be given that we will be
successful in raising additional debt and/or equity securities, or
entering into any other transaction that addresses our ability to
continue as a going concern.
In view of the matters described in the preceding
paragraph, recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheet is
dependent upon continued operations of the Company, which, in turn,
is dependent upon the Company’s ability to continue to raise
capital and generate positive cash flows from operations. However,
the Company operates in markets that are emerging and highly
competitive. There is no assurance that the Company will be able to
obtain additional capital, operate at a profit or generate positive
cash flows in the future. Therefore, management’s plans do
not alleviate the substantial doubt of the Company’s ability
to continue as a going concern.
The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts and classifications of liabilities that might be necessary
should the Company be unable to continue as a going
concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The financial statements are prepared under the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 105-10, Generally Accepted Accounting
Principles, in accordance with
accounting principles generally accepted in the U.S.
(“GAAP”).
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The Company’s
wholly-owned subsidiaries are: XImage Corporation, a California
Corporation; ImageWare Systems ID Group, Inc., a Delaware
corporation (formerly Imaging Technology Corporation); I.W. Systems
Canada Company, a Nova Scotia unlimited liability company;
ImageWare Digital Photography Systems, LLC, a Nevada limited
liability company (formerly Castleworks LLC); Digital Imaging
International GmbH, a company formed under German laws; and Image
Ware Mexico S de RL de CV, a company formed under Mexican laws. All
significant intercompany transactions and balances have been
eliminated.
Operating Cycle
Assets
and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying
consolidated balance sheets, although they will be liquidated in
the normal course of contract completion which may take more than
one operating cycle.
Use of Estimates
The
preparation of the consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of
revenue and expense during the reporting period. Significant
estimates include the evaluation of our ability to continue as a
going concern, the allowance for doubtful accounts receivable,
deferred tax asset valuation allowances, recoverability of
goodwill, assumptions used in the Black-Scholes model to calculate
the fair value of share based payments, fair value of financial
instruments issued with and affected by the Series C Preferred
Financing (defined below), fair value of Series A Preferred
(defined below), assumptions used in the application of revenue
recognition policies, assumptions used in the derivation of the
Company’s incremental borrowing rate used in the computation
of the Company’s operating lease liabilities and assumptions
used in the application of fair value methodologies to calculate
the fair value of pension assets and obligations. Actual results
could differ from estimates.
Accounts Receivable
In
the normal course of business, the Company extends credit without
collateral requirements to its customers that satisfy pre-defined
credit criteria. Accounts receivable are recorded net of an
allowance for doubtful accounts. Accounts receivable are considered
delinquent when the due date on the invoice has passed. The Company
records its allowance for doubtful accounts based upon its
assessment of various factors. The Company considers historical
experience, the age of the accounts receivable balances, the credit
quality of its customers, current economic conditions and other
factors that may affect customers’ ability to pay to
determine the level of allowance required. Accounts receivable
are written off against the allowance for doubtful accounts when
all collection efforts by the Company have been
unsuccessful.
Inventories
Finished
goods inventories are stated at the lower of cost, determined using
the average cost method, or net realizable value. See Note
6.
Property, Equipment and Leasehold Improvements
Property
and equipment, consisting of furniture and equipment, are stated at
cost and are being depreciated on a straight-line basis over the
estimated useful lives of the assets, which generally range from
three to five years. Maintenance and repairs are charged to expense
as incurred. Major renewals or improvements are capitalized. When
assets are sold or abandoned, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain
or loss is recognized. Expenditures for leasehold improvements are
capitalized. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining
lease term or the estimated useful lives of the
improvements.
Revenue
Recognition. Effective
January 1, 2018, we adopted Accounting Standards Codification
(“ASC”), Topic 606, Revenue from Contracts with
Customers (“ASC 606”), using the modified retrospective
transition method.
In
accordance with ASC 606, revenue is recognized when control of the
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services.
The
core principle of the standard is that we should recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which we expect to
be entitled in exchange for those goods or services. To achieve
that core principle, we apply the following five step
model:
1.
Identify
the contract with the customer;
2.
Identify
the performance obligation in the contract;
3.
Determine
the transaction price;
4.
Allocate
the transaction price to the performance obligations in the
contract; and
5.
Recognize
revenue when (or as) each performance obligation is
satisfied.
At
contract inception, we assess the goods and services promised in a
contract with a customer and identify as a performance obligation
each promise to transfer to the customer either: (i) a good or
service (or a bundle of goods or services) that is distinct or (ii)
a series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the customer. We
recognize revenue only when we satisfy a performance obligation by
transferring a promised good or service to a customer.
Determining
the timing of the satisfaction of performance obligations as well
as the transaction price and the amounts allocated to performance
obligations requires judgement.
We
disclose disaggregation of our customer revenue by classes of
similar products and services as follows:
●
Software
licensing and royalties;
●
Computer
hardware and identification media;
●
Post-contract
customer support.
Software licensing and royalties
Software
licenses consist of revenue from the sale of software for identity
management applications. Our software licenses are functional
intellectual property and typically provide customers with the
right to use our software in perpetuity as it exists when made
available to the customer. We recognize revenue from software
licensing at a point in time upon delivery, provided all other
revenue recognition criteria are met.
Royalties
consist of revenue from usage-based arrangements and guaranteed
minimum-based arrangements. We recognize revenue for royalty
arrangements at the later of (i) when the related sales occur, or
(ii) when the performance obligation to which some or all of the
royalty has been allocated has been satisfied.
Computer hardware and identification media
We
generate revenue from the sale of computer hardware and
identification media. Revenue for these items is recognized upon
delivery of these products to the customer, provided all other
revenue recognition criteria are met.
Services
Services
revenue is comprised primarily of software customization services,
software integration services, system installation services and
customer training. Revenue is generally recognized upon completion
of services and customer acceptance provided all other revenue
recognition criteria are met.
Post-contract customer support (“PCS”)
Post contract customer support consists of
maintenance on software and hardware for our identity management
solutions. We recognize PCS revenue from periodic maintenance
agreements. Revenue is generally recognized ratably over the
respective maintenance periods provided no significant obligations
remain. Costs related to such contracts are expensed as
incurred.
Arrangements with multiple performance obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer. In addition to selling
software licenses, hardware and identification media, services and
post-contract customer support on a standalone basis, certain
contracts include multiple performance obligations. For such
arrangements, we allocate revenue to each performance obligation
based on our best estimate of the relative standalone selling
price. The standalone selling price for a performance obligation is
the price at which we would sell a promised good or service
separately to a customer. The primary methods used to estimate
standalone selling price are as follows: (i) the expected cost-plus
margin approach, under which we forecast our expected costs of
satisfying a performance obligation and then add an appropriate
margin for that distinct good or service and (ii) the percent
discount off of list price approach.
Contract costs
We
recognize an asset for the incremental costs of obtaining a
contract with a customer if we expect the benefit of those costs to
be longer than one year. We apply a practical expedient to expense
costs as incurred for costs to obtain a contract when the
amortization period is one year or less. At December 31, 2018, we
had recorded approximately $147,000 in contract costs relating to
capitalized commissions. During the year ended December 31, 2019,
we recognized approximately $29,000 of capitalized contract costs
as expense. Such expense is included as a component of operating
expense and is included under the caption “Sales and
marketing” in our consolidated statement of operations for
the year ended December 31, 2019. We recorded no additional
contract costs in the year ended December 31, 2019. We recognized
approximately $132,000 of revenue during the year ended December
31, 2019 that was related to contract costs at the beginning of the
period.
Other items
We
do not offer rights of return for our products and services in the
normal course of business.
Sales
tax collected from customers is excluded from revenue.
The
adoption of ASC 606 as of January 1, 2018 resulted in a cumulative
positive adjustment to beginning accumulated deficit and accounts
receivable of approximately $96,000. The following table sets forth
our disaggregated revenue for the years ended December 31, 2019 and
2018:
|
|
Net
Revenue
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$489
|
$1,334
|
Hardware and
consumables
|
96
|
133
|
Services
|
338
|
294
|
Maintenance
|
2,583
|
2,643
|
Total net
revenue
|
$3,506
|
$4,404
|
Fair Value of Financial Instruments
For
certain of the Company’s financial instruments, including
accounts receivable, accounts payable, accrued expense, and
deferred revenue, the carrying amounts approximate fair value due
to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use
Assets
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under Accounting
Standards Codification (“ASC”) Topic 842 – Leases
(“ASC 842”). In
accordance with ASC 842, the Company has determined that such
arrangements are operating leases and accordingly the Company has,
as of January 1, 2019, recorded operating lease right-of-use assets
and related lease liability for the present value of the lease
payments over the lease terms using the Company’s estimated
weighted-average incremental borrowing rate of approximately 14.5%.
The Company has utilized the practical expedient regarding lease
and nonlease components and has combined such items into a single
combined component. The Company has also utilized the practical
expedient regarding leases of twelve months or less and has
excluded such leases from its computation of lease liability and
related right-of-use assets. The Company has also elected the
optional transition package of practical expedients which
include:
A
package of practical expedient to not reassess:
●
Whether
a contract is or contains a lease
Goodwill
The Company annually, or more frequently if events or circumstances
indicate a need, tests the carrying amount
of goodwill for impairment. The Company performs its
annual impairment test in the fourth quarter of each year. In
December 2018, the Company adopted the provisions of ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.” The
provisions of ASU 2017-04 eliminate the requirement to calculate
the implied fair value of goodwill to measure
a goodwill impairment charge. Instead, entities will record an
impairment charge based on the excess of a reporting unit’s
carrying amount over its fair value. Entities that have reporting
units with zero or negative carrying amounts, will no longer be
required to perform a qualitative assessment assuming they pass the
simplified impairment test. The Company continues to have only
one reporting unit, Identity Management, which at December 31,
2019, had a negative carrying amount of approximately $8,762,000.
Based on the results of the Company’s impairment testing, the
Company determined that its goodwill was not impaired as
of December 31, 2019 and December 31, 2018.
Intangible and Long-Lived Assets
Intangible
assets are carried at their cost less any accumulated
amortization. Any costs incurred to renew or extend the
life of an intangible or long-lived asset are reviewed for
capitalization. The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate
their net book value may not be recoverable. When such factors and
circumstances exist, the Company compares the projected
undiscounted future cash flows associated with the related asset or
group of assets over their estimated useful lives against their
respective carrying amount. Impairment, if any, is based on the
excess of the carrying amount over the fair value, based on market
value when available, or discounted expected cash flows, of those
assets and is recorded in the period in which the determination is
made. As of December 31, 2019, and through the date of this Annual
Report, the Company’s management believes there is no
impairment of its long-lived assets. There can be no assurance,
however, that market conditions will not change or demand for the
Company’s products under development will continue. Either of
these could result in future impairment of long-lived
assets.
Derivative Liabilities
The Company accounts
for its derivative instruments under the provisions of ASC
815, “Derivatives
and Hedging”. Under the
provisions of ASC 815, the Company identified embedded features
within the Series C Preferred host contract that
qualify
as derivative instruments and require
bifurcation.
The
Company determined that the conversion option, redemption option
and participating dividend feature contained in the Series C
Preferred host instrument required bifurcation. The Company valued
the bifurcatable features at fair value. Such liabilities
aggregated approximately $833,000 at inception and are classified
as current liabilities on the Company’s consolidated balance
sheets under the caption “Derivative liabilities”. The
Company will revalue these features at each balance sheet date and
record any change in fair value in the determination of period net
income or loss. Such amounts are recorded in the caption
“Change in fair value of derivative liabilities” in the
Company’s consolidated statements of operations. During the
twelve months ended December 31, 2019, the Company recorded a
decrease to these derivative liabilities using fair value
methodologies of approximately $696,000. As a result of this
decrease, such liabilities aggregated approximately $369,000 at
December 31, 2019. During the twelve months ended December 31,
2018, the Company recorded an increase to these derivative
liabilities using fair value methodologies of approximately
$232,000 which resulted in a December 31, 2018 aggregated balance
of approximately $1,065,000
Concentration of Credit Risk
Financial
instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high quality financial
institutions and at times during the years ended December 31, 2019
and 2018, exceeded the FDIC insurance limits of $250,000. Sales are
typically made on credit and the Company generally does not require
collateral. The Company performs ongoing credit evaluations of its
customers’ financial condition and maintains an allowance for
doubtful accounts. The Company considers historical experience, the
age of the accounts receivable balances, the credit quality of its
customers, current economic conditions and other factors that may
affect customers’ ability to pay to determine the level of
allowance required. Accounts receivable are presented net of an
allowance for doubtful accounts of approximately $7,000 and $0 at
December 31, 2019 and 2018, respectively.
For
the year ended December 31, 2019, two customers accounted for
approximately 37% or $1,301,000 of total revenue and had trade
receivables of approximately $161,000 as of the end of the
year. For the year ended December 31, 2018, one
customer accounted for approximately 36% or $1,573,000 of total
revenue and had trade receivables of approximately $0 as of the end
of the year.
Stock-Based
Compensation
At December 31, 2019, the Company had one
stock-based compensation plan for employees and nonemployee
directors, which authorizes the granting of various equity-based
incentives including stock options and restricted
stock.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “Compensation – Stock
Compensation”. The fair
value of stock options granted is recognized to expense over the
requisite service period. Stock-based compensation expense for all
share-based payment awards is recognized using the straight-line
single-option method. Stock-based compensation expense is reported
in operating expense based upon the departments to which
substantially all of the associated employees report and credited
to additional paid-in-capital. Stock-based compensation expense
related to equity options was approximately $643,000 and $1,272,000
for the years ended December 31, 2019 and 2018,
respectively.
ASC
718 requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the
Black-Scholes option-pricing model, which incorporates various
assumptions including volatility, expected life, and interest
rates. The Company is required to make various assumptions in the
application of the Black-Scholes option-pricing model. The Company
has determined that the best measure of expected volatility is
based on the historical weekly volatility of the Company’s
Common Stock. Historical volatility factors utilized in the
Company’s Black-Scholes computations for options granted
during the years ended December 31, 2019 and 2018 ranged from 64%
to 57%. The Company has elected to estimate the expected life of an
award based upon the SEC approved “simplified method”
noted under the provisions of Staff Accounting Bulletin Topic 14.
The expected term used by the Company during the years ended
December 31, 2019 and 2018 was 5.17 years. The difference between
the actual historical expected life and the simplified method was
immaterial. The interest rate used is the risk-free interest rate
and is based upon U.S. Treasury rates appropriate for the expected
term. Interest rates used in the Company’s Black-Scholes
calculations for the years ended December 31, 2019 and 2018
averaged 2.58%. Dividend yield is zero as the Company does not
expect to declare any dividends on the Company’s common
shares in the foreseeable future.
In
addition to the key assumptions used in the Black-Scholes model,
the estimated forfeiture rate at the time of valuation is a
critical assumption. The Company has adopted the provisions of ASU
2016-09 and will continue to use an estimated annualized forfeiture
rate of approximately 0% for corporate officers, 4.1% for members
of the Board of Directors and 6.0% for all other employees. The
Company reviews the expected forfeiture rate annually to determine
if that percent is still reasonable based on historical
experience.
Restricted
stock units are recorded at the grant date fair value with
corresponding compensation expense recorded ratably over the
requisite service period.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income
Taxes, (ASC
740).Current income tax expense
or benefit is the amount of income taxes expected to be payable or
refundable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences
between the financial reporting and tax bases of assets and
liabilities and for the expected future tax benefit to be derived
from tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
ASC
740 requires a company to first determine whether it is
more-likely-than-not (defined as a likelihood of more than fifty
percent) that a tax position will be sustained based on its
technical merits as of the reporting date, assuming that taxing
authorities will examine the position and have full knowledge of
all relevant information. A tax position that meets this
more-likely-than-not threshold is then measured and recognized at
the largest amount of benefit that is greater than fifty percent
likely to be realized upon effective settlement with a taxing
authority. The amount accrued for uncertain tax
positions was $0 at December 31, 2019 and 2018.
The
Company’s uncertain tax position relative to unrecognized tax
benefits and any potential increase in these liabilities relates
primarily to the allocations of revenue and costs among the
Company’s global operations and the impact of tax rulings
made during the period affecting its tax positions. The
Company’s existing tax positions could result in liabilities
for unrecognized tax benefits. The Company recognizes interest
and/or penalties related to uncertain tax positions in income tax
expense. The amount of interest and penalties accrued as of
December 31, 2019 and 2018 was $0.
Significant
judgment is required in evaluating the Company’s uncertain
tax positions and determining the Company’s provision for
income taxes. No assurance can be given that the final tax outcome
of these matters will not be different from that which is reflected
in the Company’s historical income tax provisions and
accruals. The Company adjusts these items in light of changing
facts and circumstances. To the extent that the final tax outcome
of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the
period in which such determination is made.
Foreign Currency Translation
The
financial position and results of operations of the Company’s
foreign subsidiaries are measured using the foreign
subsidiary’s local currency as the functional currency.
Revenue and expense of such subsidiaries have been translated into
U.S. dollars at weighted-average exchange rates prevailing
during the period. Assets and liabilities have been translated at
the rates of exchange on the balance sheet date. The resulting
translation gain and loss adjustments are recorded directly as a
separate component of shareholders’ equity, unless there is a
sale or complete liquidation of the underlying foreign investments.
The Company translates foreign currencies of its German, Canadian
and Mexican subsidiaries. The cumulative translation adjustment,
which is recorded in accumulated other comprehensive loss,
decreased approximately $1,000 for the year ended December 31,
2019, and increased approximately $27,000 for the year ended
December 31, 2018.
Comprehensive Loss
Comprehensive loss consists of net gains and
losses affecting shareholders’ deficit that, under generally
accepted accounting principles, are excluded from net loss. For the
Company, the only items are the cumulative translation adjustment
and the additional minimum liability related to the Company’s
defined benefit pension plan, recognized pursuant to ASC 715-30,
“Compensation - Retirement
Benefits - Defined Benefit Plans – Pension”.
Advertising Costs
The
Company expenses advertising costs as incurred. The Company
incurred approximately $5,000 in advertising expense during the
years ended December 31, 2019 and December 31, 2018.
Loss Per Share
Basic
loss per common share is calculated by dividing net loss available
to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted loss
per common share is calculated by dividing net loss available to
common shareholders for the period by the weighted-average number
of common shares outstanding during the period, adjusted to
include, if dilutive, potential dilutive shares consisting of
convertible preferred stock, convertible lines of credit, stock
options and warrants, calculated using the treasury stock and
if-converted methods. For diluted loss per share
calculation purposes, the net loss available to common shareholders
is adjusted to add back any preferred stock dividends in the
consolidated statements of operations for the respective
periods.
(Amounts in thousands, except share and per share
amounts)
|
|
|
|
|
Numerator
for basic and diluted loss per share:
|
|
|
Net
loss
|
$(11,581)
|
$(12,550)
|
Preferred
dividends, deemed dividends and accretion
|
(5,670)
|
(3,913)
|
Net
loss available to common shareholders
|
$(17,251)
|
$(16,463)
|
|
|
|
Denominator
for basic and diluted loss per share — weighted-average
shares outstanding
|
104,372,048
|
95,210,572
|
|
|
|
Basic and diluted loss per share:
|
|
|
Net
loss available to common shareholders
|
$(0.17)
|
$(0.17)
|
The
following potential dilutive securities have been excluded from the
computations of diluted weighted-average shares outstanding as
their effect would have been antidilutive:
Potential Dilutive Securities:
|
Common Share Equivalents at December 31, 2019
|
Common Share Equivalents at December 31, 2018
|
Convertible
redeemable preferred stock – Series A
|
32,580,000
|
32,580,000
|
Convertible
redeemable preferred stock – Series B
|
46,029
|
46,029
|
Convertible
redeemable preferred stock – Series C
|
10,000,000
|
10,000,000
|
Stock
options
|
7,204,672
|
7,227,248
|
Warrants
|
1,733,856
|
1,813,856
|
Total
Potential Dilutive Securities
|
51,564,557
|
51,667,133
|
Recently Issued Accounting Standards
From
time to time, new accounting pronouncements are issued by the FASB
or other standard setting bodies, which are adopted by us as of the
specified effective date. Unless otherwise discussed, the
Company’s management believes the impact of recently issued
standards not yet effective will not have a material impact on the
Company’s consolidated financial statements upon
adoption.
FASB ASU No.
2016-13. In June 2016, the FASB
issued Accounting Standard Update (“ASU No. 2016-13”), Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. ASU No. 2016-13 changes the impairment model
for most financial assets and certain other instruments. For trade
and other receivables, held-to-maturity debt securities, loans and
other instruments, entities will be required to use a new
forward-looking “expected loss” model that will replace
today’s “incurred loss” model and generally will
result in the earlier recognition of allowances for losses. For
available-for-sale debt securities with unrealized losses, entities
will measure credit losses in a manner similar to current practice,
except that the losses will be recognized as an allowance. This
guidance is effective for fiscal years beginning after December 15,
2019 including interim periods within those fiscal years. The
adoption of this standard will not have a material impact on the
Company’s consolidated financial
statements.
FASB ASU No.
2018-13. In August 2018, the
FASB issued ASU 2018-13, “Fair Value Measurement
(Topic 820) —Disclosure Framework —Changes to the
Disclosure Requirements for Fair Value
Measurement” (“ASU 2018-13”). The amendments in this update improve
the effectiveness of fair value measurement disclosures. ASU
2018-13 is effective for fiscal years ending after December 15,
2019. Early adoption is permitted. The adoption of this standard
should be applied to all periods presented. The adoption of this
standard will not have a material impact on the Company’s
consolidated financial statements.
FASB ASU No.
2018-14. In August 2018, the
FASB issued ASU 2018-14, “Compensation
—Retirement Benefits —Defined Benefit Plans
—General (Subtopic 715-20) —Disclosure Framework
—Changes to the Disclosure Requirements for Defined Benefit
Plans” (“ASU 2018-14”). The amendments in this update remove
defined benefit plan disclosures that are no longer considered
cost-beneficial, clarify the specific requirements of disclosures,
and add disclosure requirements identified as relevant. ASU 2018-14
is effective for fiscal years ending after December 15, 2020. Early
adoption is permitted. The adoption of this standard should be
applied to all periods presented. The adoption of this standard
will not have a material impact on the Company’s consolidated
financial statements.
FASB ASU No.
2018-15. In August 2018, the
FASB issued ASU 2018-15, “Intangibles
—Goodwill and Other —Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service
Contract” (“ASU 2018-15”). The amendments in this update align the
requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software (and hosting arrangements
that include an internal-use software license). ASU 2018-15 is
effective for fiscal years ending after December 15, 2019. Early
adoption is permitted. The adoption of this standard did not have a
material impact on the Company’s consolidated financial
statements.
FASB ASU No.
2018-18. In November 2018, the
FASB issued ASU No. 2018-18, “Collaborative Arrangements
(Topic 808): Clarifying the Interaction Between Topic 808 and Topic
606”. The ASU
provides more comparability in the presentation of revenue for
certain transactions between collaborative arrangement participants
and only allows a company to present units of account in
collaborative arrangements that are within the scope of the revenue
recognition standard together with revenue accounted for under the
revenue recognition standard. The parts of the collaborative
arrangement that are not in the scope of the revenue recognition
standard should be presented separately from revenue accounted for
under the revenue recognition standard. The amendments in ASU
No. 2018-18 are effective for fiscal years beginning after December
15, 2019, and interim periods within those fiscal
years. The adoption of this standard will not have a
material impact on the Company’s consolidated financial
statements.
FASB ASU No.
2019-12. In December 2019, the
FASB issued ASU No. 2019-12, “Income Taxes (Topic
740). The amendments in
this update simplify the accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The
amendments also improve consistent application of and simplify GAAP
for other areas of Topic 740 by clarifying and amending existing
guidance. Early adoption of the amendments is
permitted. For public business entities, the amendments in
this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020.
The adoption of this standard will not have a material impact on
the Company’s consolidated financial
statements.
3. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “Fair Value Measurements and
Disclosures”, which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other
than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
Fair Value at December 31, 2019
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$1,713
|
$—
|
$—
|
$1,713
|
Totals
|
$1,713
|
$—
|
$—
|
$1,713
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$369
|
$—
|
$—
|
$369
|
Totals
|
$369
|
$—
|
$—
|
$369
|
|
Fair Value at December 31, 2018
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$1,734
|
$—
|
$—
|
$1,734
|
Totals
|
$1,734
|
$—
|
$—
|
$1,734
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$1,065
|
$—
|
$—
|
$1,065
|
Totals
|
$1,065
|
$—
|
$—
|
$1,065
|
The
Company’s German pension plan is funded by insurance contract
policies whereby the insurance company guarantees a fixed minimum
return. The Company has determined that the pension assets are
appropriately classified within Level 3 of the fair value hierarchy
because they are valued using actuarial valuation methodologies
which approximate cash surrender value that cannot be corroborated
with observable market data. All plan assets are managed in a
policyholder pool in Germany by outside investment managers. The
investment manager is responsible for the investment strategy of
the insurance premiums that Company submits and does not hold
individual assets per participating employer. The German Federal
Financial Supervisory oversees and supervises the insurance
contracts.
As of December 31, 2019, the Company had embedded
features contained in the Series C Preferred host instrument
(issued in September 2018) that qualified
for derivative liability treatment. The
recorded fair market value of these features was approximately
$369,000 and $1,065,000 at December 31, 2019 and 2018,
respectively, and are classified as a current liability in the
consolidated balance sheets as of December 31, 2019 and 2018. The
fair value of the Company’s derivative liabilities
are classified within Level 3 of the fair value hierarchy because
they are valued using pricing models that incorporate management
assumptions that cannot be corroborated with observable market
data. The Company uses the lattice framework,
Monte-Carlo simulations and other fair value methodologies in the
determination of the fair value of derivative liabilities.
As
more fully described in Note 14 to these Consolidated Financial
Statements, on September 10, 2018, the Company’s Board of
directors declared a Dividend Warrant for Holders of Series A
Preferred. The Company evaluated this warrant issuance in
conjunction with the Series A Preferred becoming junior to the
Series C Preferred in liquidation preference and determined such
warrants and changes in liquidation preference to be in effect a
modification of the Series A Preferred. To determine the effect of
this modification, the Company, using fair value methodologies,
determined the value of the Series A Preferred both pre and post
warrant issuance. The valuation indicated an increase in the fair
value of the Series A Preferred post issuance of approximately
$92,000. The Company recorded this incremental increase as a deemed
dividend.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events. Significant assumptions used in the fair value
methodologies during 2019 and 2018 are a risk-free rate of 2.47% to
1.57%, equity volatility of 75.0% to 57%, effective life of 4.69
years to 1.69 years , and a preferred stock dividend rate of
10.0%.Additionally, management has made certain estimates regarding
the timing of potential change of control events.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
The
reconciliations of Level 3 pension assets measured at fair value in
2019 and 2018 are presented below:
($
in thousands)
|
|
|
|
|
|
Pension
assets:
|
|
|
Fair
value at beginning of year
|
$1,734
|
$1,806
|
Return
on plan assets
|
80
|
82
|
Company
contributions and benefits paid, net
|
(68)
|
(70)
|
Effect
of rate changes
|
(33)
|
(84)
|
Fair
value at end of year
|
$1,713
|
$1,734
|
The
reconciliations of Level 3 derivative liabilities measured at fair
value in 2019 and 2018 are presented below:
($
in thousands)
|
|
|
|
|
|
Derivative
liabilities
|
|
|
Fair
value at beginning of year
|
$1,065
|
$-
|
Issuances
from Series C Preferred Financing
|
-
|
833
|
Change
in fair value included in earnings
|
(696)
|
232
|
Fair
value at end of year
|
$369
|
$1,065
|
4. INTANGIBLE ASSETS AND GOODWILL
The
carrying amounts of the Company’s patent intangible assets
were $70,000 and $82,000 as of December 31, 2019 and 2018,
respectively, which includes accumulated amortization of $589,000
and $577,000 as of December 31, 2019 and 2018,
respectively. Amortization expense for patent intangible
assets was $12,000 for the years ended December 31, 2019 and 2018.
Patent intangible assets are being amortized on a straight-line
basis over their remaining life of approximately 6.5 years. There
was no impairment of the Company’s intangible assets during
the years ended December 31, 2019 and 2018.
The Company annually,
or more frequently if events or circumstances indicate a need,
tests the carrying amount of goodwill for impairment. The
Company performs its annual impairment test in the fourth quarter
of each year. In December 2019, the Company adopted the provisions
of ASU 2017-04, "Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment". The provisions of
ASU 2017-04 eliminate the requirement to calculate the implied fair
value of goodwill to measure a goodwill impairment
charge. Instead, entities will record an impairment charge based on
the excess of a reporting unit's carrying amount over its fair
value. Entities that have reporting units with zero or negative
carrying amounts, will no longer be required to perform a
qualitative assessment assuming they pass the simplified impairment
test. The Company continues to have only one reporting unit,
Identity Management which, at December 31, 2019, had a negative
carrying amount of approximately $8,762,000. Based on the results
of the Company's impairment testing, the Company determined that
its goodwill was not impaired during the years ended
December 31, 2019 and 2018.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
Fiscal Year Ended December 31,
|
Estimated Amortization
Expense
($ in thousands)
|
2020
|
$12
|
2021
|
12
|
2022
|
12
|
2023
|
12
|
2024
|
12
|
Thereafter
|
10
|
Totals
|
$70
|
5. RELATED PARTIES
Convertible Lines of Credit
At
January 1, 2018, the Company had certain convertible Lines of
Credit borrowing facilities with two members of the Company’s
Board of Directors. Before their termination, (described more fully
below), these convertible Lines of Credit bore interest at 8% per
annum and were convertible into that number of shares of the
Company’s common stock equal to the quotient obtained by
dividing the outstanding balance by $1.25. These convertible Lines
of Credit had a maturity date of December 31, 2018.
The
Company evaluated the Lines of Credit and determined that the
instruments contained a contingent beneficial conversion feature,
i.e. an embedded conversion right that enabled the holder to obtain
the underlying Common Stock at a price below market value. The
beneficial conversion feature was contingent, as the terms of the
conversion did not permit the Company to compute the number of
shares that the holder would receive if the contingent event
occurred (i.e. future borrowings under the Line of Credit). The
Company has considered the accounting for this contingent
beneficial conversion feature using the guidance in ASC 470, Debt.
The guidance in ASC 470 states that a contingent beneficial
conversion feature in an instrument shall not be recognized in
earnings until the contingency is resolved. The beneficial
conversion features of borrowings under the Line of
Credit were to be measured using the intrinsic value
calculated at the date the contingency is resolved using the
conversion price and trading value of the Company’s Common
Stock at the date the Lines of Credit were issued (commitment
date).
For the years ended December 31, 2019 and 2018,
the Company recorded approximately $0 and $30,000,
respectively, in debt discount
attributable to beneficial conversion feature and accreted
approximately $0 and $162,000, respectively, of debt
discount. Such expense is
recorded as a component of interest expense in the Company’s
consolidated statements of operations.
On
September 10, 2018, the Company entered into an agreement with the
board members, pursuant to which they agreed to exchange
approximately $6.3 million and $0.6 million, respectively, of
outstanding debt (including accrued and unpaid interest) owed under
the terms of their respective Lines of Credit for an aggregate of
6,896 shares of the Company’s Series A Preferred. As a result
of this exchange, all indebtedness, liabilities and other
obligations arising under the Lines of Credit were terminated,
cancelled and deemed satisfied in full. Because the holders of
the Lines of Credit are members of the Company’s Board of
Directors and shareholders of the Company, they are considered
related parties and the exchange transaction is considered a
capital transaction and is recorded within the equity accounts of
the Company.
Notes Payable
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount is to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and are due no later than 21 days after
February 12, 2020. As of May 15, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members.
Professional Services Agreement
During
the year ended December 31, 2018, the Company entered into
professional services agreement with a firm whose managing director
is also a member of the Company’s Board of Directors. During
the year ended December 31, 2018, the Company recorded and paid
one-half of the aggregate fee of $50,000 with the remaining payment
being made during the year ended December 31, 2019.
6. INVENTORY
Inventories of
$615,000 as of December 31, 2019
were comprised of work in process of $608,000, representing direct
labor costs on in-process projects and finished goods of
$7,000 net of reserves for
obsolete and slow-moving items of $3,000.
Inventories of
$29,000 as of December 31, 2018
were comprised of work in process of $21,000 representing direct
labor costs on in-process projects and finished goods of
$8,000 net of reserves for
obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive
levels, deterioration and other factors in evaluating net
realizable value and required reserve levels.
7. PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2019 and 2018, consisted
of:
($ in thousands)
|
|
|
|
|
|
Equipment
|
$996
|
$967
|
Leasehold
improvements
|
77
|
77
|
Furniture
|
257
|
255
|
|
1,330
|
1,299
|
Less
accumulated depreciation
|
(1,114)
|
(1,055)
|
|
$216
|
$244
|
Total
depreciation expense for the years ended December 31, 2019 and 2018
was approximately $59,000 and $39,000, respectively.
8. ACCRUED EXPENSE
Principal
components of accrued expense consist of:
($ in thousands)
|
|
|
|
|
|
Compensated
absences
|
$385
|
$352
|
Wages,
payroll taxes and sales commissions
|
6
|
44
|
Customer
deposits
|
18
|
30
|
Rent
|
—
|
14
|
Royalties
|
72
|
72
|
Pension
and employee benefit plans
|
58
|
48
|
Accrued
financing fees
|
500
|
100
|
Professional
services
|
121
|
45
|
Income
and sales taxes
|
50
|
79
|
Dividends
|
40
|
42
|
Other
|
62
|
62
|
|
$1,312
|
$888
|
9. INCOME TAXES
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income
Taxes, (ASC
740). Deferred income taxes are
recognized for the tax consequences related to temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for tax
purposes at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is
established when necessary based on the weight of available
evidence, if it is considered more likely than not that all or some
portion of the deferred tax assets will not be realized. Income tax
expense is the sum of current income tax plus the change in
deferred tax assets and liabilities. The Company has
established a valuation allowance against its deferred tax asset
due to the uncertainty surrounding the realization of such
asset.
The
significant components of the income tax provision are as
follows:
($ in thousands)
|
|
Current
|
|
|
Federal
|
$—
|
$—
|
State
|
—
|
—
|
Foreign
|
10
|
11
|
|
|
|
Deferred
|
|
|
Federal
|
—
|
—
|
State
|
—
|
—
|
Foreign
|
—
|
—
|
|
|
|
|
$10
|
$11
|
The
following is a schedule of the deferred tax assets and liabilities
as of December 31, 2019 and 2018:
($ in thousands)
|
|
|
Deferred tax
assets:
|
|
|
Net
operating loss carryforwards
|
$21,981
|
$19,881
|
Stock
based compensation
|
1,678
|
2,318
|
Reserves
and accrued expense
|
118
|
45
|
Gross
deferred tax assets
|
23,777
|
22,244
|
Valuation
allowance
|
(23,643)
|
(22,159)
|
Gross deferred tax assets after valuation
allowance
|
134
|
85
|
Deferred
tax liability - Intangible and fixed assets
|
(134)
|
(85)
|
|
|
|
Net
deferred tax liabilities
|
$—
|
$—
|
A
reconciliation of the provision for income taxes to the amount
computed by applying the statutory income tax rates to loss before
income taxes is as follows:
|
|
|
|
|
|
Amounts
computed at statutory rates
|
$(2,432)
|
$(2,636)
|
State
income tax, net of federal benefit
|
(579)
|
(1,051)
|
Change
in net operating loss carryforwards
|
879
|
(3,012)
|
Equity
compensation
|
617
|
—
|
Non-deductible
interest
|
(146)
|
36
|
Foreign
tax rate differential
|
184
|
210
|
Other
|
3
|
3
|
Net
change in valuation allowance on deferred tax assets
|
1,484
|
6,461
|
|
|
|
|
$10
|
$11
|
The
Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of
such assets.
At
December 31, 2019, the Company had federal net operating loss
carryforwards of approximately $63,216,000, that begin to expire in
2023. The Company has federal net operating losses of approximately
$23,753,000 that arose after the 2017 tax year and will
carryforward indefinitely, the utilization of which is limited to
80% of taxable income in any given year. The Company has net
operating loss carryforwards of approximately for the state of
California that will begin to expire in 2035.
The Internal Revenue
Code (the “Revenue
Code”) limits the
availability of certain tax credits and net operating losses that
arose prior to certain cumulative changes in a corporation’s
ownership resulting in a change of control of the Company. The
Company’s use of its net operating loss carryforwards and tax
credit carryforwards will be significantly limited because the
Company believes it underwent “ownership changes”, as
defined under Section 382 of the Revenue Code, in several years,
though the Company has not performed a study to determine the
limitation. The Company continues to disclose the tax effect of the
net operating loss carryforwards at their original amount in the
table above as the actual limitation has not yet been quantified.
The Company has also established a full valuation allowance for
substantially all deferred tax assets due to uncertainties
surrounding its ability to generate future taxable income to
realize these assets. Since substantially all deferred tax assets
are fully reserved, future changes in tax benefits will not impact
the effective tax rate. Management periodically evaluates the
recoverability of the deferred tax assets. If it is determined at
some time in the future that it is more likely than not that
deferred tax assets will be realized, the valuation allowance would
be reduced accordingly at that time.
Tax
returns for the years 2015 through 2019 are subject to examination
by taxing authorities. The Company and its subsidiaries are subject
to U.S. federal and state income tax, and in the normal course of
business, its income tax returns are subject to examination by the
relevant taxing authorities. As of December, 31, 2019, the 2015
– 2019 tax years remain subject to examination in the U.S.
federal tax state and foreign jurisdictions. However, to the extent
allowed by law, the taxing authorities may have the right to
examine the period from 2000 through 2019 where net operating
losses and income tax credits were generated and carried forward
and make adjustments to the amount of the net operating loss and
income tax credit carryforward amount. The Company is not currently
under examination by federal, state, or foreign
jurisdictions.
10. LEASES
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under ASC 842 –
Leases. In accordance with ASC 842, the Company has determined that
such arrangements are operating leases and accordingly the Company
has, as of January 1, 2019, recorded operating lease right-of-use
assets and related lease liability for the present value of the
lease payments over the lease terms using the Company’s
estimated weighted-average incremental borrowing rate of
approximately 14.5% as the discount rates implicit in the
Company’s leases cannot be readily determined. Such assets
and liabilities aggregated approximately $2,265,000 and $2,280,000
as of January 1, 2019, respectively. The Company determined that it
had no arrangements representing finance leases.
The
Company’s operating leasing arrangements are summarized
below:
●
The
Company’s corporate headquarters is located in San Diego,
California, where it occupies 8,511 square feet of office space at
an average cost of approximately $28,000 per month. This
facility’s lease was entered into by the Company in July
2018. This lease commenced on November 1, 2018 and terminates on
April 30, 2025;
●
1,508
square feet in Ottawa, Province of Ontario, Canada, at a cost of
approximately $3,000 per month until the expiration of the lease on
March 31, 2021;
●
9,720
square feet in Portland, Oregon, at a cost of approximately $23,000
per month until the expiration of the lease on February 28, 2023;
and
●
183
square feet of office space in Mexico City, Mexico, at a cost of
approximately $2,000 per month until September 30,
2020.
The
above leases contain no residual value guarantees provided by the
Company and there are no options to either extend or terminate the
leases. The Company is not a party to any subleasing
arrangements.
For the
twelve months ended December 31, 2019, the Company recorded
approximately $673,000 in lease expense using the straight-line
method. For the twelve months ended December 31, 2018, prior to the
adoption of ASC 842, the Company recorded approximately $672,000 in
operating lease expense. Under the provisions of ASC 842, lease
expense is comprised of the total lease payments under the lease
plus any initial direct costs incurred less any lease incentives
received by the lessor amortized ratably using the straight-line
method over the lease term. The weighted-average remaining lease
term of the Company’s operating leases as of December 31,
2019 is 4.52 years. Cash payments under operating leases aggregated
approximately $481,000 for the twelve months ended December 31,
2019 and are included in operating cash flows.
The
Company’s lease liability was computed using the present
value of future lease payments. The Company has utilized the
practical expedient regarding lease and non-lease components and
combined such components into a single combined component in the
determination of the lease liability. The Company has excluded the
lease of its office space in Mexico City, Mexico in the
determination of the lease liability as of January 1, 2019 as its
term is less than 12 months.
At
December 31, 2019, future minimum undiscounted lease payments are
as follows:
($ in
thousands)
|
|
2020
|
671
|
2021
|
642
|
2022
|
652
|
2023
|
425
|
2024
|
387
|
Thereafter
|
130
|
Total
|
2,907
|
Short-term
leases not included in lease liability
|
(22)
|
Present
Value effect on future minimum undiscounted lease payments at
December 31, 2019
|
(796)
|
Lease
liability at December 31, 2019
|
$2,089
|
Less
current portion
|
(373)
|
Non-current
lease liability at December 31, 2019
|
$1,716
|
11. CONTINGENT LIABILITIES
Employment Agreements
The
Company has employment agreements with its Chief Executive Officer
and its Chief Technical Officer. The Company may terminate the
agreements with or without cause. Subject to the conditions and
other limitations set forth in each respective employment
agreement, each executive will be entitled to the following
severance benefits if the Company terminates the executive’s
employment without cause or in the event of an involuntary
termination (as defined in the employment agreements) by the
Company or by the executive:
Under
the terms of the agreement, the Chief Executive Officer will be
entitled to the following severance benefits if we terminate his
employment without cause or in the event of an involuntary
termination: (i) a lump sum cash payment equal to twenty-four
months’ base salary; (ii) continuation of fringe benefits and
medical insurance for a period of three years; and (iii) immediate
vesting of 50% of outstanding stock options and restricted stock
awards. In the event that the Chief Executive Officer’s
employment is terminated within six months prior to or thirteen
months following a change of control (as defined in the employment
agreements), the Chief Executive Officer is entitled to the
severance benefits described above, except that 100% of the Chief
Executive Officer’s outstanding stock options and restricted
stock awards will immediately vest.
Under
the terms of the employment agreement with our Chief Technical
Officer, this executive will be entitled to the following severance
benefits if we terminate his employment without cause or in the
event of an involuntary termination: (i) a lump sum cash payment
equal to six months of base salary; and (ii) continuation of their
fringe benefits and medical insurance for a period of six months.
In the event that his employment is terminated within six months
prior to or thirteen months following a change of control (as
defined in the employment agreements), he is entitled to the
severance benefits described above, except that 100% of his
outstanding stock options and restricted stock awards will
immediately vest.
Effective
September 15, 2017, the employment agreements for the
Company’s Chief Executive Officer and Chief Technical Officer
were amended to extend the term of each executive officer’s
employment agreement until December 31, 2018, and on January 30,
2019, both agreements were amended again to further extend the term
of each executive officer’s employment agreement until
December 31, 2019. Such employment agreements were not renewed and
expired on December 31, 2019.
Litigation
There
is no action, suit, proceeding, inquiry or investigation before or
by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the executive
officers of the Company or any of our subsidiaries, threatened
against or affecting the Company, our Common Stock, any of our
subsidiaries or of the Company’s or our subsidiaries’
officers or directors in their capacities as such, in which an
adverse decision could have a material adverse effect.
12. MEZZANINE EQUITY
Series C Convertible Redeemable Preferred Stock
On September 10, 2018, the Company filed the
Certificate of Designations, Preferences, and Rights of Series C
Convertible Redeemable Preferred stock (the
“Series C
COD”) with the Secretary
of State for the State of Delaware – Division of
Corporations, designating 1,000 shares of the Company’s
preferred stock, par value $0.01 per share, as Series C Preferred,
each share with a stated value of $10,000 per share (the
“Stated
Value”). Shares of Series
C Preferred accrue dividends
cumulatively and are payable quarterly at a rate of 8% per annum if
paid in cash, or 10% per annum if paid by the issuance of shares of
Common Stock. Each share of Series C Preferred has a liquidation
preference equal to the
greater of (i) the Stated Value plus all accrued and unpaid
dividends, and (ii) such amount per share as would have been
payable had each share been converted into Common Stock immediately
prior to the occurrence of a Liquidation Event or Deemed
Liquidation Event. Each share of Series C Preferred is convertible
into that number of shares of the Company’s Common Stock
(“Conversion
Shares”) equal to the
Stated Value, divided by $1.00, which conversion rate is subject to
adjustment in accordance with the terms of the Series C COD.
Holders of Series C Preferred may elect to convert shares of Series
C Preferred into Conversion Shares at any time. Holders of the
Series C Preferred may also require the Company to redeem all or
any portion of such holder’s shares of Series C Preferred at
any time from and after the third anniversary of the issuance date
or in the event of the consummation of a Change of Control (as such
term is defined in the Series C COD). Subject to the terms and
conditions set forth in the Series C COD, in the event the
volume-weighted average price of the Company’s Common Stock
is at least $3.00 per share (subject to adjustment in accordance
with the terms of the Series C COD) for at least 20 consecutive
trading days, the Company may convert all, but not less than all,
issued and outstanding shares of Series C Preferred into Conversion
Shares. In addition, in the event of a Change of Control, the
Company will have the option to redeem all, but not less than all,
issued and outstanding shares of Series C Preferred for 115% of the
Liquidation Preference Amount per share. Holders of Series C
Preferred will have the right to vote, on an as-converted basis,
with the holders of the Company’s Common Stock on any matter
presented to the Company’s stockholders for their action or
consideration. Shares of Series C Preferred rank senior to the
Company’s Common Stock and Series A Preferred, and junior to
the Company’s Series B Preferred.
On
September 10, 2018, the Company offered and sold a total of 890
shares of Series C Preferred at a purchase price of $10,000 per
share, and on September 21, 2018, the Company offered and sold an
additional 110 shares of Series C Preferred at a purchase price of
$10,000 per share. The total gross proceeds to the Company from the
Series C Financing were $10,000,000. Issuance costs incurred in
conjunction with the Series C Financing were approximately
$1,211,000. Such costs have been recorded as a discount on the
Series C Preferred Stock and will be accreted to the point of
earliest redemption which is the third anniversary of the Series C
Financing or September 10, 2021 using the effective interest rate
method. The accretion of these costs is recorded as a deemed
dividend.
The Company had 1,000 shares of Series C Preferred
outstanding as of September 30, 2018. The Company issued the
holders of Series C Preferred 55,736 shares of Common Stock
on September 30, 2018, as payment of dividends due on that date and
on December 31, 2018, the Company issued the holders of Series C
Preferred 298,896 shares of Common Stock as payment of dividends
due on that date.
There were no issuances or conversions of Series C Preferred during
the year ended December 31, 2019. The Company issued the holders of
Series C Preferred an aggregate of 1,857,438 shares of Common Stock
during the year ended December 31, 2019 as dividends. Such shares
of Common Stock were paid as dividends on the following
dates:
●
157,945 shares of Common Stock on March 31, 2019,
●
266,793 shares of Common Stock on June 30, 2019,
●
495,688 shares of Common Stock on September 30, 2019
and
●
937,012 shares of Common Stock on December 31, 2019.
Guidance for
accounting for freestanding financial instruments that contain
characteristics of both liabilities and equity are contained in ASC
480, Distinguishing Liabilities
From Equity and Accounting
Series Release 268 (“ASR 268”) Redeemable Preferred
Stocks. The Company evaluated
the provisions of the Series C Preferred and determined that the
provisions of the Series C Preferred grant the holders of the
Series C Preferred a redemption right whereby the holders of the
Series C Preferred may, at any time after the third anniversary of
the Series C Preferred issuance, require the Company to redeem in
cash any or all of the holder’s outstanding Series C
Preferred at an amount equal to the Liquidation Preference Amount
(“Liquidation Preference
Amount”). The Liquidation
Preference Amount is defined as the greater of the stated value of
the Series C Preferred plus any accrued unpaid interest or such
amount per share as would have been payable had each such share
been converted into Common Stock. In the event of a Change of
Control, the holders of Series C Preferred shall have the right to
require the Company to redeem in cash all or any portion of such
holder’s shares at the Liquidation Preference Amount. The
Company has concluded that because the redemption features of the
Series C Preferred are outside of the control of the Company, the
instrument is to be recorded as temporary or mezzanine equity in
accordance with the provisions of ASR 268.
The
Company noted that the Series C Preferred Stock instrument was a
hybrid instrument that contains several embedded features. In
November 2014, the FASB issued ASU 2014-16 to amend ASC 815,
“Derivatives and
Hedging”, (“ASC
815”) and require the use of the whole instrument
approach (described below) to determine whether the nature of the
host contract in a hybrid instrument issued in the form of a share
is more akin to debt or to equity. ASU 2014-16 is effective for
public business entities for fiscal years, and interim periods
within those years, beginning after December 15, 2015.
The whole
instrument approach requires an issuer or investor to consider the
economic characteristics and risks of the entire hybrid instrument,
including all of its stated and implied substantive terms and
features. Under this approach, all stated and implied features,
including the embedded feature being evaluated for bifurcation,
must be considered. Each term and feature should be weighed based
on the relevant facts and circumstances to determine the nature of
the host contract. This approach results in a single, consistent
determination of the nature of the host contract, which is then
used to evaluate each embedded feature for bifurcation. That is,
the host contract does not change as each feature is
evaluated.
The
revised guidance further clarifies that the existence or omission
of any single feature, including an investor-held, fixed-price,
noncontingent redemption option, does not determine the economic
characteristics and risks of the host contract. Instead, an entity
must base that determination on an evaluation of the entire hybrid
instrument, including all substantive terms and
features.
However, an
individual term or feature may be weighed more heavily in the
evaluation based on facts and circumstances. An evaluation of all
relevant terms and features, including the circumstances
surrounding the issuance or acquisition of the equity share, as
well as the likelihood that an issuer or investor is expected to
exercise any options within the host contract, to determine the
nature of the host contract, requires judgement.
Using
the whole instrument approach, the Company concluded that the host
instrument is more akin to debt than equity as the majority of
identified features contain more characteristics of
debt.
The
Company evaluated the identified embedded features of the Series C
Preferred host instrument and determined that certain features meet
the definition of and contained the characteristics of derivative
financial instruments requiring bifurcation at fair value from the
host instrument.
Accordingly, the
Company has bifurcated from the Series C Preferred host instrument
the conversion options, redemption option and participating
dividend feature in accordance with the guidance in ASC 815. These
bifurcated features aggregated approximately $833,000 at issuance
and have been recorded as a discount to the Series C Preferred.
Such amount will be accreted to the
point of earliest redemption which is the third anniversary of the
Series C Financing or September 10, 2021 using the effective
interest rate method. The accretion of these features is recorded
as a deemed dividend.
For the
twelve months ended December 31, 2019 and 2018, the Company
recorded the accretion of the Series C discount of approximately
$728,000 and $200,000, respectively, using the effective interest
rate method.
The
Company reflected the following in Mezzanine Equity for the Series
C Preferred Stock as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in
thousands, except share amounts)
|
|
|
|
|
|
Issuance of Series
C Preferred Stock
|
1,000
|
$10,000
|
|
|
|
Discount -
transaction costs
|
—
|
$(1,211)
|
|
|
|
Net
Proceeds
|
—
|
$8,789
|
|
|
|
Discount -
bifurcated derivative
|
—
|
$(833)
|
|
|
|
Accretion of
discount - deemed dividend
|
—
|
$200
|
|
|
|
Total Series C
Preferred Stock – December 31, 2018
|
1,000
|
$8,156
|
Accretion of
discount – deemed dividend for the twelve months ended
December 31, 2019
|
—
|
$728
|
|
|
|
Total Series C
Preferred Stock – December 31, 2019
|
1,000
|
$8,884
|
13. EQUITY
The
Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated
“Common Stock” and “Preferred Stock”. The
Preferred Stock may be divided into such number of series and with
the rights, preferences, privileges and restrictions as the Board
of Directors may determine.
Series A Convertible Preferred Stock
On September 15, 2017, the Company filed the
Certificate of Designations of the Series A Preferred with the
Delaware Secretary of State, designating 31,021 shares of the
Company’s preferred stock, par value $0.01 per share, as
Series A Preferred. Shares of Series A Preferred accrue dividends
at a rate of 8% per annum if the Company chooses to pay accrued
dividends in cash, and 10% per annum if the Company chooses to pay
accrued dividends in shares of Common Stock. Each share of Series A
Preferred has a liquidation preference of $1,000 per share and is
convertible, at the option of the holder, into that number of
shares of the Company’s Common Stock equal to the Liquidation
Preference, divided by $1.15 (“Conversion
Shares”). Each holder of
the Series A Preferred is entitled to vote on all matters, together
with the holders of Common Stock, on an as converted
basis.
Holders of Series A Preferred may elect to convert
shares of Series A Preferred into Conversion Shares at any time. In
the event the volume-weighted average price
(“VWAP”) of the Company’s Common Stock is at
least $2.15 per share for at least 20 consecutive trading days, the
Company may elect to convert one-half of the shares of Series A
Preferred issued and outstanding, on a pro-rata basis, into
Conversion Shares, or, if the VWAP of the Company’s Common
Stock is at least $2.15 for 80 consecutive trading days, the
Company may convert all issued and outstanding shares of Series A
Preferred into Conversion Shares. In addition, in the event of a
Change of Control, the Company will have the option to redeem all
issued and outstanding shares of Series A Preferred for 115% of the
Liquidation Preference per share.
On
September 10, 2018, the Company filed an Amendment to the
Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock with the Delaware Division of
Corporations to increase the number of shares of Series A Preferred
authorized for issuance thereunder to 38,000 shares.
On
September 10, 2018, the Company entered into exchange agreements
with two members of the Company's Board of Directors, Messrs.
Goldman and Crocker, pursuant to which Goldman and Crocker agreed
to exchange approximately $6.3 million and $0.6 million,
respectively, of outstanding debt (including accrued and unpaid
interest) owed under the terms of their respective Lines of Credit
for an aggregate of 6,896 shares of Series A Preferred. See
Note 5. - Related Parties for a further description of the Lines of
Credit.
On September 10, 2018 the Company’s Board of
Directors also declared a Special Dividend for Holders of the
Series A Preferred, pursuant to which each Holder received a
Dividend Warrant to purchase 39.87 shares of Common Stock for every
share of Series A Preferred held, which resulted in the issuance of
Dividend Warrants to the Holders as a group to purchase an
aggregate of 1,493,856 shares of Common Stock. Each Dividend
Warrant has an exercise price of $0.01 per share, and is
exercisable immediately upon issuance; provided,
however, that a Dividend
Warrant may only be exercised concurrently with the conversion
of shares of Series A Preferred held by a Holder into shares of
Common Stock. In addition, each Dividend Warrant held by a Holder
shall expire on the earliest to occur of (i) the conversion of all
Series A Preferred held by such Holder into Common Stock, (ii) the
redemption by the Company of all outstanding shares of Series A
Preferred held by such Holder, (iii) the Dividend Warrant no longer
representing the right to purchase any shares of Common Stock, and
(iv) the tenth anniversary of the date of
issuance.
The
Company evaluated this warrant issuance in conjunction with the
Series A Preferred becoming junior to the Series C Preferred in
liquidation preference and determined such warrants and changes in
liquidation preference to be in effect a modification of the Series
A Preferred. To determine the effect of this modification, the
Company, using fair value methodologies, determined the value of
the Series A Preferred both pre and post warrant issuance. The
valuation indicated an increase in the fair value of the Series A
Preferred post issuance of approximately $92,000. The Company
recorded this increase as a deemed dividend.
The Company had 37,467 shares of Series A
Preferred outstanding as of December 31, 2019 and 2018,
respectively. At December 31, 2019 and 2018, the Company had
cumulative undeclared dividends of $0. There were no
conversions of Series A Preferred into Common Stock during the year
ended December 31, 2019. During the year ended December 31, 2018,
certain holders of Series A Preferred converted 450 shares of
Series A Preferred into 391,304 shares of the Company’s
Common Stock. The Company issued the
holders of Series A Preferred an aggregate of 6,959,523
shares of
Common Stock during the year ended December 31, 2019 as payment of
dividends due during the 2019 year and issued an aggregate
of 3,074,008 shares of Common Stock
during the year ended December 31, 2018 as payment of dividends due
during the 2018 year.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B
Convertible Preferred stock, par value $0.01 per share
(“Series B
Preferred”), outstanding
as of December 31, 2019 and 2018. At December 31, 2019 and 2018,
the Company had cumulative undeclared dividends of approximately
and $8,000. There were no conversions of Series B Preferred into
Common Stock during the year ended December 31, 2019 and 2018. The
Company paid dividends of approximately $51,000 to the holders of
our Series B Preferred during the twelve months ended December 31,
2019 and December 31, 2018.
Common Stock
On
February 8, 2018, the Company filed with the Secretary of the State
of Delaware a Certificate of Amendment to its Certificate of
Incorporation, as amended, to increase the authorized number of
shares of its Common Stock to from 150,000,000 shares to
175,000,000 shares.
The
following table summarizes outstanding Common Stock activity for
the following periods:
|
|
Shares
outstanding at December 31, 2017
|
94,167,836
|
Shares issued pursuant to payment of stock dividend on Series A
Preferred
|
3,074,008
|
Shares
issued as payment of stock dividend on Series C
Preferred
|
354,632
|
Shares
issued pursuant to conversion of Series A Preferred
|
391,304
|
Shares issued pursuant to option exercises
|
235,852
|
Shares
outstanding at December 31, 2018
|
98,223,632
|
Shares issued pursuant to payment of stock dividend on Series A
Preferred
|
6,959,523
|
Shares
issued as payment of stock dividend on Series C
Preferred
|
1,857,438
|
Shares
issued for cash
|
5,954,545
|
Shares issued pursuant to option exercises
|
351,334
|
Shares
outstanding at December 31, 2019
|
113,346,472
|
Warrants
As of December 31, 2019, warrants to purchase
1,733,856 shares
of Common Stock at prices ranging from $0.01 to $1.46 were
outstanding. All warrants are exercisable as of December 31, 2019
and expire as of July 29, 2020, except for an aggregate of
1,643,856 warrants, which become exercisable only upon the
attainment of specified events. Such warrants expire at various
dates through September 2028.The intrinsic value of warrants
outstanding at December 31, 2019 was $0. The Company has excluded
from this computation any intrinsic value of the 1,493,856 warrants
issued to the Series A Preferred stockholders due to the conversion
exercise contingency more fully described
above.
During
the year ended December 31, 2018, the Company issued an aggregate
of 40,000 warrants to certain members of the Company’s
advisory board. The Company determined the grant date fair value of
these warrants using the Black-Scholes option valuation model and
recorded approximately $9,000 in expense for the year ended
December 31, 2018. The Company used the following assumptions in
the application of the Black-Scholes option valuation model: an
exercise price ranging between $1.09 and $1.17, a term of 2.0
years, a risk-free interest rate of 2.58%, a dividend yield of 0%
and volatility of 59%. Such expense is recorded in the
Company’s consolidated statement of operations as a component
of general and administrative expense. The Company also issued,
during the year ended December 31, 2018, an aggregate of 50,000
warrants to a certain professional services provider firm. The
Company determined the grant date fair value of these warrants
using the Black-Scholes option valuation model and recorded
approximately $17,000 in expense for the year ended December 31,
2018. The Company used the following assumptions in the application
of the Black-Scholes option valuation model: an exercise price of
$1.14, a term of 2.0 years, a risk-free interest rate of 2.58%, a
dividend yield of 0% and volatility of 51%. Such expense is
recorded in the Company’s consolidated statement of
operations as a component of general and administrative
expense.
The
following table summarizes warrant activity for the following
periods:
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
Balance
at December 31, 2017
|
230,000
|
$0.91
|
Granted
|
1,583,856
|
$0.08
|
Expired
/ Canceled
|
—
|
$—
|
Exercised
|
—
|
$—
|
Balance
at December 31, 2018
|
1,813,856
|
$0.19
|
Granted
|
—
|
|
Expired
/ Canceled
|
(80,000)
|
$1.13
|
Exercised
|
—
|
|
Balance
at December 31, 2019
|
1,733,856
|
$0.14
|
There
were no warrants issued or exercised during the twelve months ended
December 31, 2019 and 80,000 warrants expired unexercised during
the 2019 year.
14. STOCK-BASED COMPENSATION
Stock Options
As of December 31, 2019, the Company had one
active stock-based compensation plan: the 1999 Stock Option Plan
(the “1999 Plan”).
1999 Plan
The Company’s 1999 Stock Award Plan (the
“1999
Plan”) was adopted by the
Company’s Board of Directors on December 17, 1999. Under the
terms of the 1999 Plan, the Company could, originally, issue up to
350,000 non-qualified or incentive stock options to purchase Common
Stock of the Company. During the year ended December 31, 2014, the
Company subsequently amended and restated the 1999 Plan, whereby it
increased the share reserve for issuance to approximately 7.0
million shares of the Company’s Common Stock. Subsequently,
in February 2018, the Company amended and restated the 1999 Plan,
whereby it increased the share reserve for issuance by an
additional 2.0 million shares. The 1999 Plan prohibits the
grant of stock option or stock appreciation right awards with an
exercise price less than fair market value of Common Stock on the
date of grant. The 1999 Plan also generally prohibits the
“re-pricing” of stock options or stock appreciation
rights, although awards may be bought-out for a payment in cash or
the Company’s stock. The 1999 Plan permits the grant of
stock-based awards other than stock options, including the grant of
“full value” awards such as restricted stock, stock
units and performance shares. The 1999 Plan permits the
qualification of awards under the plan (payable in either stock or
cash) as “performance-based compensation” within the
meaning of Section 162(m) of the Revenue Code. The number of
options issued and outstanding and the number of options remaining
available for future issuance are shown in the table below. The
number of authorized shares available for issuance under the plan
at December 31, 2019 was 401,919.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “Compensation – Stock
Compensation”. The fair
value of stock options granted is recognized to expense over the
requisite service period. Stock-based compensation expense for all
share-based payment awards is recognized using the straight-line
single-option method. Stock-based compensation expense is reported
in operating expense based upon the departments to which
substantially all the associated employees report and credited to
additional paid-in-capital. Stock-based compensation expense
related to equity options was approximately $643,000 and $1,272,000
for the years ended December 31, 2019 and 2018,
respectively.
ASC
718 requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the
Black-Scholes option-pricing model, which incorporates various
assumptions including volatility, expected life, and interest
rates. The Company is required to make various assumptions in the
application of the Black-Scholes option-pricing model. The Company
has determined that the best measure of expected volatility is
based on the historical weekly volatility of the Company’s
Common Stock. Historical volatility factors utilized in the
Company’s Black-Scholes computations for options granted
during the years ended December 31, 2019 and 2018 ranged from 64%
to 57%. The Company has elected to estimate the expected life of an
award based upon the SEC approved “simplified method”
noted under the provisions of Staff Accounting Bulletin Topic 14.
The expected term used by the Company during the years ended
December 31, 2019 and 2018 was 5.17 years. The difference between
the actual historical expected life and the simplified method was
immaterial. The interest rate used is the risk-free interest rate
and is based upon U.S. Treasury rates appropriate for the expected
term. Interest rates used in the Company’s Black-Scholes
calculations for the years ended December 31, 2019 and 2018
averaged 2.58%. Dividend yield is zero as the Company does not
expect to declare any dividends on the Company’s common
shares in the foreseeable future.
In
addition to the key assumptions used in the Black-Scholes model,
the estimated forfeiture rate at the time of valuation is a
critical assumption. The Company has adopted the provisions of ASU
2016-09 and will continue to use an estimated annualized forfeiture
rate of approximately 0% for corporate officers, 4.1% for members
of the Board of Directors and 6.0% for all other employees. The
Company reviews the expected forfeiture rate annually to determine
if that percent is still reasonable based on historical
experience.
A
summary of the activity under the Company’s stock option
plans is as follows:
|
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
Balance
at December 31, 2017
|
6,093,512
|
$1.23
|
5.8
|
Granted
|
1,545,500
|
$1.67
|
—
|
Expired/Cancelled
|
(175,912)
|
$1.33
|
—
|
Exercised
|
(235,852)
|
$0.70
|
—
|
Balance
at December 31, 2018
|
7,227,248
|
$1.4
|
5.8
|
Granted
|
750,000
|
$0.89
|
--
|
Expired/Cancelled
|
(421,242)
|
$1.52
|
--
|
Exercised
|
(351,334)
|
$0.47
|
--
|
Balance
at December 31, 2019
|
7,204,672
|
$1.32
|
5.3
|
At
December 31, 2019, a total of 7,204,672 options were outstanding,
of which 6,004,187 were exercisable at a weighted average price of
$1.35 per share with a remaining weighted average contractual term
of 4.6 years. The Company expects that, in addition to
the 6,004,187 options that were exercisable as of December 31,
2019, another 1,200,485 will ultimately vest resulting in a
combined total of 7,204,672. Those 7,204,672 shares have
a weighted average exercise price of $1.32 and an aggregate
intrinsic value of approximately $1,000 as of December 31, 2019.
Stock-based compensation expense related to equity options was
approximately $643,000 and $1,272,000 for the years ended December
31, 2019 and 2018, respectively.
The weighted-average
grant-date fair value per share of options granted to employees
during the years ended December 31, 2019 and 2018 was
$0.47 and $0.94,
respectively. At December 31, 2019, the total remaining
unrecognized compensation cost related to unvested stock options
amounted to approximately $683,000, which will be
amortized over the weighted-average remaining requisite service
period of 1.7 years.
During
the year ended December 31, 2019, there were 351,334 options
exercised for cash resulting in the issuance of 351,334 shares of
the Company’s Common Stock and proceeds of approximately
$166,000. During the year ended December 31, 2018, there were
235,852 options exercised for cash resulting in the issuance of
235,852 shares of the Company’s Common Stock and proceeds of
approximately $164,000.
The intrinsic value of options exercised during
the years ended December 31, 2019 and 2018 was approximately
$222,000 and $175,000, respectively. The intrinsic value of options
exercisable at December 31, 2019 and 2018 was approximately
$0 and $248,000,
respectively. The intrinsic value of options that vested
during 2019 was approximately $0. The aggregate intrinsic value for
all options outstanding as of December 31, 2019 and 2018 was
approximately $1,000 and $248,000,
respectively.
In
January 2018, the Company issued an aggregate of 324,000 options to
purchase shares of the Company’s Common Stock to certain
members of the Company’s Board of Directors in return for
their service on the Board from January 1, 2018 through December
31, 2018. Such options vest at the rate of 27,000 options per month
on the last day of each month during the 2018 year. The options
have an exercise price of $1.75 per share and a term of 10 years.
Pursuant to this issuance, the Company recorded compensation
expense of approximately $320,000 during the year ended December
31, 2018 based on the grant-date fair value of the options
determined using the Black-Scholes option-valuation
model.
Stock-based Compensation
Stock-based
compensation related to equity options has been classified as
follows in the accompanying consolidated statements of operations
(in thousands):
|
|
|
|
|
Cost
of revenue
|
$13
|
$19
|
General
and administrative
|
347
|
840
|
Sales
and marketing
|
148
|
216
|
Research
and development
|
135
|
197
|
|
|
|
Total
|
$643
|
$1,272
|
Common Stock Reserved for Future Issuance
The
following table summarizes the Common Stock reserved for future
issuance as of December 31, 2019:
|
|
Convertible
preferred stock – Series A, Series B and Series
C
|
42,626,029
|
Stock options
outstanding
|
7,204,672
|
Warrants
outstanding
|
1,733,856
|
Authorized for
future grant under stock option plans
|
401,919
|
15. EMPLOYEE BENEFIT PLAN
During 1995, the Company adopted a defined
contribution 401(k) retirement plan (the “Plan”). All U.S. based employees aged 21 years
and older are eligible to become participants after the completion
of 60 day's employment. The Plan provides for annual contributions
by the Company of 50% of employee contributions not to exceed 8% of
employee compensation. Effective April 1, 2009, the Plan
was amended to provide for Company contributions on a discretionary
basis. Participants may contribute up to 100% of the annual
contribution limitations determined by the Internal Revenue
Service.
Employees
are fully vested in their share of the Company’s
contributions after the completion of five years of
service. In 2018, the Company authorized contributions of
approximately $166,000 for the 2018 plan year of which $128,000
were paid prior to December 31, 2018. In 2019, the Company
authorized contributions of approximately $184,000 for the 2019
plan year of which $138,000 were paid prior to December 31,
2019.
16. PENSION PLAN
One
of the Company’s dormant foreign subsidiaries maintains a
defined benefit pension plan that provides benefits based on length
of service and final average earnings. The following table sets
forth the benefit obligation, fair value of plan assets, and the
funded status of the Company’s plan; amounts recognized in
the Company’s consolidated financial statements; and the
assumptions used in determining the actuarial present value of the
benefit obligations as of December 31:
($ in thousands)
|
|
|
Change in benefit obligation:
|
|
|
Benefit
obligation at beginning of year
|
$3,610
|
$3,830
|
Service
cost
|
—
|
—
|
Interest
cost
|
70
|
72
|
Actuarial
(gain) loss
|
436
|
(34)
|
Effect
of exchange rate changes
|
(67)
|
(174)
|
Effect
of curtailment
|
—
|
—
|
Benefits
paid
|
(80)
|
(84)
|
Benefit
obligation at end of year
|
3,969
|
3,610
|
|
|
|
Change in plan assets:
|
|
|
Fair
value of plan assets at beginning of year
|
1,734
|
1,806
|
Actual
return of plan assets
|
80
|
82
|
Company
contributions
|
12
|
13
|
Benefits
paid
|
(80)
|
(84)
|
Effect
of exchange rate changes
|
(33)
|
(83)
|
Fair
value of plan assets at end of year
|
1,713
|
1,734
|
Funded
status
|
(2,256)
|
(1,876)
|
Unrecognized
actuarial loss (gain)
|
1,778
|
1,542
|
Unrecognized
prior service (benefit) cost
|
—
|
—
|
Additional
minimum liability
|
(1,778)
|
(1,542)
|
Unrecognized
transition (asset) liability
|
—
|
—
|
Net
amount recognized
|
$(2,256)
|
$(1,876)
|
|
|
|
Components of net periodic benefit cost are as
follows:
|
|
|
Service
cost
|
$—
|
$—
|
Interest
cost on projected benefit obligations
|
70
|
72
|
Expected
return on plan assets
|
(53)
|
(56)
|
Amortization
of prior service costs
|
—
|
—
|
Amortization
of actuarial loss
|
92
|
102
|
Net
periodic benefit costs
|
$109
|
$118
|
|
|
|
The weighted average assumptions used to determine net periodic
benefit cost for the years ended December 31, were
|
|
|
Discount
rate
|
1.3%
|
2.0%
|
Expected
return on plan assets
|
3.2%
|
3.2%
|
Rate
of pension increases
|
2.0%
|
2.0%
|
Rate
of compensation increase
|
N/A
|
N/A
|
|
|
|
The following discloses information about the Company’s
defined benefit pension plan that had an accumulated benefit
obligation in excess of plan assets as of December 31,
|
|
|
Projected
benefit obligation
|
$3,969
|
$3,610
|
Accumulated
benefit obligation
|
$3,969
|
$3,610
|
Fair
value of plan assets
|
$1,713
|
$1,734
|
As
of December 31, 2019, the following benefit payments are expected
to be paid as follows (in thousands):
2020
|
$81
|
2021
|
$95
|
2022
|
$97
|
2023
|
$103
|
2024
|
$122
|
2025
— 2029
|
$687
|
The
Company made contributions to the plan of approximately $12,000
during the year ended December 31, 2019, and $13,000 during the
year ended December 31, 2018. The company anticipates making
contributions at similar levels during the next fiscal
year.
In
accordance with the Company’s adoption of ASU 2017-07, the
components of net periodic pension expense is shown in the
Company’s Consolidated Statement of Operations for the years
ended December 31, 2019 and 2018 under “Other components of
net periodic pension expense”.
The
measurement date used to determine the benefit information of the
plan was January 1, 2020.
17. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is the
combination of the additional minimum liability related to the
Company’s defined benefit pension plan, recognized pursuant
to ASC 715-30, “Compensation - Retirement
Benefits - Defined Benefit Plans – Pension” and the accumulated gains or losses from
foreign currency translation adjustments. The Company translates
foreign currencies of its German, Canadian and Mexican subsidiaries
into U.S. dollars using the period end exchange rate. Revenue and
expense were translated using the weighted-average exchange rates
for the reporting period. All items are shown net of
tax.
As
of December 31, 2019 and 2018, the components of accumulated other
comprehensive loss were as follows:
($ in thousands)
|
|
|
|
|
|
Additional
minimum pension liability
|
$(1,456)
|
$(1,144)
|
Foreign
currency translation adjustment
|
(285)
|
(284)
|
Ending
balance
|
$(1,741)
|
$(1,428)
|
18. SUBSEQUENT EVENTS
CARES Act
On
March 27, 2020, President Trump signed the CARES Act which, among
other things, includes provisions relating to refundable payroll
tax credits, deferment of employer side social security payments,
net operating loss carryback periods, alternative minimum tax
credit refunds, modifications to the net interest deduction
limitations, increased limitations on qualified charitable
contributions and technical corrections to tax depreciation methods
for qualified improvement property.
The
Company continues to examine the impact that the CARES Act may have
on our business. Currently the Company is unable to determine the
impact that the CARES Act will have on our financial condition,
results of operation or liquidity.
Financing and liquidity developments
On
February 12, 2020, the Company entered into a factoring agreement
with a member of the Company’s Board of Directors for
$350,000. Such amount was to be repaid with the proceeds from
certain of the Company’s trade accounts receivable
approximating $500,000 and was due no later than 21 days after
February 12, 2020. As of May 15, 2020, despite collection of the
Company’s trade accounts receivable, $315,000 of such amounts
have not been repaid and the Company is seeking an extension from
the Board member.
In
April 2020, the Company received an aggregate amount of $550,000
from two members of the Company’s Board of Directors. Terms
of repayment are currently being negotiated between the Company and
Board Members.
On February 20, 2020, the Company entered into a
securities purchase agreement (the “Triton Purchase
Agreement”) with Triton
Funds LP, (a Delaware limited partnership ("Triton" or the "Investor"), which Triton Purchase Agreement provides the
Company the right to sell to Triton, and Triton is obligated to
purchase, up to $2.0 million worth of shares of the Company's
Common Stock under the Triton Purchase Agreement ( the
“Offering”). Pursuant to the terms and conditions set
forth in the Triton Purchase Agreement, the purchase price of the
Common Stock will be based on the number of shares of Common Stock
equal to the amount in U.S. Dollars that the Company intends to
sell to the Investor to be set forth in each written notice sent to
the Investor by the Company (the "Purchase
Notice") and delivered to the
Investor (the "Purchase Notice
Amount"), divided by the lowest
daily volume weighted average price of the Company's Common stock
listed on the OTC Markets during the five business days prior to
closing (the "Purchased
Shares"). The Closing of the
purchase of the Purchased Shares as set forth in the Purchase
Notice will occur no later than three business days following
receipt of the Purchased Shares
by the Investor.
The
Offering was made pursuant to an effective registration statement
on Form S-3, as previously filed with the SEC on July 10, 2018, and
a related prospectus supplement filed on February 21, 2020. The
Offering will terminate upon the earlier date of either (i) that
date which the Investor has purchased an aggregate of $2.0 million
in Purchased Shares pursuant to the Purchase Agreement; or (i)
March 31, 2020. The Company intends to use the proceeds from the
Offering for general working capital purposes.
On
April 29, 2020, the Company closed on the offer and sale to Triton
of 6.0 million shares of Common Stock resulting in gross proceeds
to the Company of $765,000, or a per share purchase price of $0.13
per share. The offering follows the offer and sale to Triton of 4.0
million shares of Common Stock for $0.16 per share, which offering
closed on March 10, 2020, resulting in gross proceeds to the
Company of $640,000.
On April 28, 2020 (the "Execution
Date"), the "Company" entered
into a purchase agreement, dated as of the Execution Date (the
"Purchase
Agreement"), and a registration
rights agreement, dated as of the Execution Date (the
"Registration Rights
Agreement"), with Lincoln Park
Capital Fund, LLC ("Lincoln
Park"), pursuant to which
Lincoln Park has committed to purchase up to $10,250,000 of the
Company's Common Stock.
Under the terms and subject to the conditions of
the Purchase Agreement, including stockholder approval of an
amendment to the Company’s Certificate of Incorporation to
increase the number of shares of the Company’s capital stock
to 350 million shares, the Company has the right, but not the
obligation, to sell to Lincoln Park, and Lincoln Park is obligated
to purchase up to $10,250,000 worth of shares of Common Stock. Such
sales of Common Stock by the Company, if any, will be subject to
certain limitations, and may occur from time to time, at the
Company's sole discretion, over the 24-month period commencing on
the date that a registration statement covering the resale of
shares of Common Stock that have been and may be issued under the
Purchase Agreement, which the Company agreed to file with the
Securities and Exchange Commission (the "SEC") pursuant to the Registration Rights Agreement,
is declared effective by the SEC and a final prospectus in
connection therewith is filed and the other conditions set forth in
the Purchase Agreement are satisfied, all of which are outside the
control of Lincoln Park (such date on which all of such conditions
are satisfied, the "Commencement
Date"). The Company has 30
business days to file the registration statement from the Execution
Date.
Under the Purchase Agreement, on any business day
over the term of the Purchase Agreement, the Company has the right,
in its sole discretion, to present Lincoln Park with a purchase
notice (each, a "Purchase
Notice") directing Lincoln Park
to purchase up to 125,000 shares of Common Stock per business day,
which increases to up to 425,000 shares in the event the price of
the Company’s Common Stock is not below $0.55 per share (the
"Regular
Purchase") (subject to
adjustment for any reorganization, recapitalization, non-cash
dividend, stock split, reverse stock split or other similar
transaction as provided in the Purchase Agreement). In each case,
Lincoln Park's maximum commitment in any single Regular Purchase
may not exceed $500,000. The Purchase Agreement provides for a
purchase price per Purchase Share (the "Purchase
Price") equal to the lesser
of:
●
the
lowest sale price of the Company's Common Stock on the purchase
date; and
●
the
average of the three lowest closing sale prices for the Company's
Common Stock during the fifteen consecutive
business days ending on the business day immediately preceding the
purchase date of such shares.
In addition, on any date on which the Company
submits a Purchase Notice to Lincoln Park, the Company also has the
right, in its sole discretion, to present Lincoln Park with an
accelerated purchase notice (each, an "Accelerated Purchase
Notice") directing Lincoln Park
to purchase an amount of stock (the "Accelerated
Purchase") equal to up to the
lesser of (i) three times the number of shares of Common Stock
purchased pursuant to such Regular Purchase; and (ii) 30% of the
aggregate shares of the Company's Common Stock traded during all
or, if certain trading volume or market price thresholds specified
in the Purchase Agreement are crossed on the applicable Accelerated
Purchase Date, the portion of the normal trading hours on the
applicable Accelerated Purchase Date prior to such time that any
one of such thresholds is crossed (such period of time on the
applicable Accelerated Purchase Date, the "Accelerated Purchase
Measurement Period"), provided
that Lincoln Park will not be required to buy shares of Common
Stock pursuant to an Accelerated Purchase Notice that was received
by Lincoln Park on any business day on which the last closing trade
price of the Company's Common Stock on the OTC Markets (or
alternative national exchange in accordance with the Purchase
Agreement) is below $0.25 per share. The purchase price per share
of Common Stock for each such Accelerated Purchase will be equal to
the lesser of:
●
95% of
the volume weighted average price of the Company's Common Stock
during the applicable Accelerated
Purchase Measurement Period on the applicable Accelerated Purchase
Date; and
●
the
closing sale price of the Company's Common Stock on the applicable
Accelerated Purchase Date.
The Company may also direct Lincoln Park on any
business day on which an Accelerated Purchase has been completed
and all of the shares to be purchased thereunder have been properly
delivered to Lincoln Park in accordance with the Purchase
Agreement, to purchase an amount of stock (the "Additional Accelerated
Purchase") equal to up to the
lesser of (i) three times the number of shares purchased pursuant
to such Regular Purchase; and (ii) 30% of the aggregate number of
shares of the Company's Common Stock traded during a certain
portion of the normal trading hours on the applicable Additional
Accelerated Purchase date as determined in accordance with the
Purchase Agreement (such period of time on the applicable
Additional Accelerated Purchase date, the "Additional Accelerated
Purchase Measurement Period"),
provided that the closing price of the Company's Common Stock on
the business day immediately preceding such business day is not
below $0.25 (subject to adjustment for any reorganization,
recapitalization, non-cash dividend, stock split, reverse stock
split or other similar transaction as provided in the Purchase
Agreement). Additional Accelerated Purchases will be equal to the
lower of:
●
95%
of the volume weighted average price of the Company's Common Stock
during the applicable Additional Accelerated Purchase Measurement
Period on the applicable Additional Accelerated Purchase date;
and
●
the
closing sale price of the Company's Common Stock on the applicable
Additional Accelerated Purchase date.
The
aggregate number of shares that the Company can sell to Lincoln
Park under the Purchase Agreement may in no case exceed that number
which, together with Lincoln Park’s then current holdings of
Common Stock, exceed 4.99% of the Common Stock outstanding
immediately prior to the delivery of the Purchase
Notice.
Lincoln
Park has no right to require the Company to sell any shares of
Common Stock to Lincoln Park, but Lincoln Park is obligated to make
purchases as the Company directs, subject to certain conditions.
There are no upper limits on the price per share that Lincoln Park
must pay for shares of Common Stock.
The
Company has agreed with Lincoln Park that it will not enter into
any "variable rate" transactions with any third party for a period
defined in the Purchase Agreement.
The
Company issued to Lincoln Park 2,500,000 shares of Common Stock as
commitment shares in consideration for entering into the Purchase
Agreement on the Execution Date.
The
Purchase Agreement and the Registration Rights Agreement contain
customary representations, warranties, agreements and conditions to
completing future sale transactions, indemnification rights and
obligations of the parties. The Company has the right to terminate
the Purchase Agreement at any time, at no cost or penalty, subject
to the survival of certain provisions set forth in the Purchase
Agreement. During any "event of default" under the Purchase
Agreement, all of which are outside of Lincoln Park's control,
Lincoln Park does not have the right to terminate the Purchase
Agreement; however, the Company may not initiate any regular or
other purchase of shares by Lincoln Park, until such event of
default is cured. In addition, in the event of bankruptcy
proceedings by or against the Company, the Purchase Agreement will
automatically terminate.
Actual
sales of shares of Common Stock to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by
the Company from time to time, including, among others, market
conditions, the trading price of the Common Stock and
determinations by the Company as to the appropriate sources of
funding for the Company and its operations. Lincoln Park has no
right to require any sales by the Company but is obligated to make
purchases from the Company as it directs in accordance with the
Purchase Agreement. Lincoln Park has covenanted not to cause or
engage in any manner whatsoever, any direct or indirect short
selling or hedging of the Company's shares.
In connection with the execution of the Purchase
Agreement, the Company sold, and Lincoln Park purchased, 1.0
million shares of Common Stock for a purchase price of $100,000
(“Original
Purchase”).
On May 4, 2020, the Company entered into a loan
agreement (“PPP Loan”)
with Comerica Bank (“Comerica”) under the Paycheck Protection Program
(the “PPP”), which is part of the CARES Act
administered by the United States Small Business Administration
(“SBA”). As part of the application for these
funds, the Company in good faith, has certified that the current
economic uncertainty made the loan request necessary to support the
ongoing operations of the Company. This certification further
requires the Company to take into account our current business
activity and our ability to access other sources of liquidity
sufficient to support ongoing operations in a manner that is not
significantly detrimental to the business. Under this program, the
Company received proceeds of approximately $1,571,000, from
the PPP Loan. In accordance with the requirements of
the PPP, the Company intends to use proceeds from
the PPP Loan primarily for payroll costs, rent and
utilities. The PPP Loan has a 1.00% interest rate per
annum, matures on May 4, 2022 and is subject to the terms and
conditions applicable to loans administered by the SBA under
the PPP. Under the terms of PPP, all or certain amounts
of the PPP Loan may be forgiven if they are used for
qualifying expenses as described in the CARES Act, which the
Company continues to evaluate.
Organizational Developments
On
February 26, 2020, the Company announced the appointment of Kristin
Taylor as President and Chief Executive Officer of the Company,
effective March 2, 2020. Ms. Taylor replaced S. James Miller, Jr.
who resigned as Chief Executive Officer of the Company effective
March 2, 2020 but will remain as Executive Chair of the Board of
Directors.
The
Company and Ms. Taylor entered into an employment agreement
effective April 20, 2020. A copy of the employment contract that
sets forth Ms. Taylor’s base compensation, equity
compensation and termination provisions was filed with the SEC on
April 15, 2020 on Form 8-K.
On
April 1, 2020, John Cronin resigned from his position as a member
of the Board of Directors of the Company. Mr. Cronin indicated that
his resignation from the Board of Directors was not the result of
any disagreements with respect to the Company’s operations,
policies, or practices. Mr. Cronin will continue his work with the
Company on intellectual property matters, including intellectual
property monetization.
The
Company announced the appointment of Jonathan D. Morris as Senior
Vice President and Chief Financial Officer effective May 1, 2020. A
copy of the press release announcing Mr. Morris’ appointment
was filed with the SEC on May 6, 2020 on Form 8-K.
In
April 2020, the Company issued 506,250 shares of its Common Stock
to certain terminated employees as part of such employees’
severance in exchange for 1,012,500 outstanding options held by
such employees. Such shares of stock vested
immediately.
COVID–19
In
March 2020, the World Health Organization declared COVID-19 a
global pandemic. This contagious disease outbreak, which has
continued to spread, has adversely affected workforces, customers,
economies, and financial markets globally. It has also
disrupted the normal operations of many businesses. This outbreak
could decrease spending, adversely affect demand for the
Company’s products, and harm the Company’s business and
results of operations. It is not possible for the Company to
predict the duration or magnitude of the adverse results of the
outbreak and its effects on the Company’s business or results
of operations, financial condition, or liquidity, at this
time.