UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to _________
Commission file number
| IMAGEWARE SYSTEMS, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
(Address of Principal Executive Offices)
(
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-12 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act: None
The number of shares of common stock, par value $0.01 per share, outstanding on May 20, 2022 was
INDEX
| Page | ||
| ITEM 1. |
||
| Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021 |
1 | |
| 2 | ||
| 3 | ||
| 4 | ||
| 6 | ||
| Notes to unaudited Condensed Consolidated Financial Statements |
7 | |
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
| ITEM 3. |
31 | |
| ITEM 4. |
32 | |
| ITEM 1. |
33 | |
| ITEM1A. |
33 | |
| ITEM 2. |
44 | |
| ITEM 3. |
44 | |
| ITEM 4. |
44 | |
| ITEM 5. |
44 | |
| ITEM 6. |
44 | |
| 45 | ||
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements. The words or phrases “would be," “will allow," “intends to," “will likely result," “are expected to," “will continue," “is anticipated," “estimate," “project," or similar expressions are intended to identify “forward-looking statements." Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including those risks factors contained in our Annual Report on Form 10-K for the year ended December 31, 2021, previously filed with the Securities and Exchange Commission (“SEC”) on April 15, 2022 is incorporated herein by reference. Statements made herein are as of the date of the filing of this Report with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events, or circumstances after the date of such statement.
ITEM 1. FINANCIAL STATEMENTS
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except for share and per share data)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ at March 31, 2022 and December 31, 2021. | ||||||||
| Inventory, net | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Deferred revenue | ||||||||
| Accrued expense | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Derivative liabilities | ||||||||
| Note payable, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Other long-term liabilities: | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Pension obligation | ||||||||
| Total Liabilities | ||||||||
| Mezzanine Equity: | ||||||||
| Series D Convertible Redeemable Preferred Stock, $ par value, shares designated; and issued at March 31, 2022 (unaudited) and December 31, 2021, respectively, and and shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively; liquidation preference of $ and $ at March 31, 2022 (unaudited) and December 31, 2021, respectively. | ||||||||
| Shareholders’ Deficit: | ||||||||
| Preferred stock, authorized shares: | ||||||||
| Series B Convertible Redeemable Preferred Stock, $ par value, shares designated; shares issued and shares outstanding at March 31, 2022 (unaudited) and December 31, 2021; liquidation preference $ and $ at March 31, 2022 (unaudited) and December 31, 2021, respectively. | ||||||||
| Common Stock, $ par value, shares authorized; and shares issued at March 31, 2022 (unaudited) and December 31, 2021, respectively, and and shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities, Mezzanine Equity and Shareholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In Thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended March 31 |
||||||||
| 2022 |
2021 |
|||||||
| Revenue: |
||||||||
| Product |
$ | $ | ||||||
| Maintenance |
||||||||
| Cost of revenue: |
||||||||
| Product |
||||||||
| Maintenance |
||||||||
| Gross profit |
||||||||
| Operating expense: |
||||||||
| General and administrative |
||||||||
| Sales and marketing |
||||||||
| Research and development |
||||||||
| Depreciation and amortization |
||||||||
| Loss from operations |
( |
) |
( |
) |
||||
| Interest expense, net |
||||||||
| (Gain) loss on change in fair value of derivative liabilities |
( |
) |
||||||
| Loss on extinguishment of derivative liabilities |
||||||||
| Other (income) expense, net |
( |
) |
||||||
| Other components of net periodic pension expense |
||||||||
| Loss before income taxes |
( |
) |
( |
) |
||||
| Income tax expense (income) |
||||||||
| Net loss |
( |
) |
( |
) |
||||
| Preferred dividends, preferred stock discount accretion and deemed dividends from preferred stock exchange |
( |
) |
( |
) |
||||
| Net loss available to common shareholders |
$ | ( |
) |
$ | ( |
) |
||
| Basic and diluted loss per common share – see Note 3: |
||||||||
| Basic and diluted loss per share available to common shareholders |
$ | ( |
) |
$ | ( |
) |
||
| Basic and diluted weighted-average shares outstanding |
||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Net loss |
$ | ( |
) |
$ | ( |
) |
||
| Other comprehensive income (loss): |
||||||||
| Foreign currency translation adjustment |
||||||||
| Comprehensive loss |
$ | ( |
) |
$ | ( |
) |
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In Thousands, except share amounts)
(Unaudited)
| Series A |
Series A-1 |
Series B |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible, |
Convertible, |
Convertible, |
Accumulated |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable |
Redeemable |
Redeemable |
Additional |
Other |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred |
Preferred |
Preferred |
Common Stock |
Treasury Stock |
Paid-In |
Comprehensive |
Accumulated |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Loss |
Deficit |
Total |
|||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
| Accretion of Preferred Stock discount |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series D Preferred stock, $(10.90)/share |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||||||||||||||||||
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In Thousands, except share amounts)
(Unaudited)
| Series A Convertible, Redeemable Preferred |
Series A-1 Convertible, Redeemable Preferred |
Series B Convertible, Redeemable Preferred |
Common Stock |
Treasury Stock |
Additional Paid-In |
Accumulated Other Comprehensive |
Accumulated |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Loss |
Deficit |
Total |
|||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
|||||||||||||||||||||||||||||||||||||
| Accretion of Preferred Stock discount |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to warrant exercise |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred to Common Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A-1 Preferred to Common Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series D Preferred to Common Stock |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series A preferred stock, $(10.50)/share |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series A-1 preferred stock, $(9.75)/share |
( |
) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on Series D Preferred stock, $(90.90)/share |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||||||||||||||||
| Net loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
|||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | ( |
) |
$ | ( |
) |
||
| Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Amortization of debt discount |
||||||||
| Loss on disposal of fixed assets |
||||||||
| Stock-based compensation |
||||||||
| Issuance of common stock as compensation in lieu of cash |
||||||||
| Loss on extinguishment of derivative liability, net |
||||||||
| Change in fair value of derivative liabilities |
( |
) |
||||||
| Change in assets and liabilities: |
||||||||
| Accounts receivable |
||||||||
| Inventory |
( |
) |
||||||
| Other assets |
( |
) |
||||||
| Operating lease right-of-use assets |
( |
) |
( |
) |
||||
| Accounts payable |
( |
) |
||||||
| Deferred revenue |
( |
) |
( |
) |
||||
| Accrued expense |
( |
) |
||||||
| Pension obligation |
( |
) |
( |
) |
||||
| Total adjustments |
( |
) |
||||||
| Net cash used in operating activities |
( |
) |
( |
) |
||||
| Cash flows from investing activities |
||||||||
| Purchase of property and equipment |
( |
) |
||||||
| Net cash used in investing activities |
( |
) |
||||||
| Cash flows from financing activities |
||||||||
| Proceeds from issuance of notes payable |
||||||||
| Net cash provided by financing activities |
||||||||
| Effect of exchange rate changes on cash and cash equivalents |
||||||||
| Net decrease in cash and cash equivalents |
( |
) |
( |
) |
||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Summary of non-cash investing and financing activities: |
||||||||
| Stock dividends on Series A Convertible Redeemable Preferred Stock |
$ | $ | ||||||
| Stock dividends on Series A-1 Convertible Redeemable Preferred Stock |
$ | $ | ||||||
| Stock dividends on Series D Convertible Redeemable Preferred Stock |
$ | |||||||
| Accretion of discount on Series D Convertible Redeemable Preferred Stock |
$ | $ | ||||||
| Conversion of Series A Convertible Redeemable Preferred Stock into Common Stock |
$ | |||||||
| Conversion of Series A-1 Convertible Redeemable Preferred Stock into Common Stock |
$ | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND OPERATIONS
Overview
As used in this Report, “we”, “us”, “our”, “Imageware”, “Imageware Systems” or the “Company” refers to Imageware Systems, Inc. and all of its subsidiaries. Imageware Systems, Inc. is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is our patented Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses, and all the products are integrated into our Biometric Engine.
The Company's common stock, par value $
Liquidity, Going Concern and Management’s Plans
At March 31, 2022 and December 31, 2021, we had negative working capital of $
Historically, our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically, the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern.
To address our working capital requirements, management is actively seeking additional financing, of which no assurances can be given that we will be successful. In addition, the Company has instituted several cost cutting measures and has utilized cash proceeds available under the Credit Facility (defined below) with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (collectively, the “Lenders”), and under the purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to satisfy its working capital requirements (“LPC Purchase Agreement”).
During 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. In the event the Company is unable to consummate one or more of the above transactions, the Company will not be able to continue as a going concern. The Company continues to evaluate indications of interest as well as options to address its projected working capital requirements, and those discussions are ongoing, including discussions with the Company’s largest shareholder with whom the Company has entered a Term Loan and Security Agreement to provide up to $
To date, the Board of Directors (“Board”) has not entered into any financing or other arrangements, other than the Credit Facility and the LPC Purchase Agreement, and no assurances can be given that we will be successful in raising additional capital through the issuance of debt and/or equity securities or entering into any other transaction that addresses our ability to continue as a going concern. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders and may result in the loss of your entire investment.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying condensed consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital and generate positive cash flows from operations. However, the Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will be able to obtain additional capital, operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2022, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2021 as filed with the SEC on April 15, 2022.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other future periods.
Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly-owned subsidiaries are: XImage Corporation, a California Corporation; Imageware Systems ID Group, Inc., a Delaware corporation (formerly Imaging Technology Corporation); I.W. Systems Canada Company, a Nova Scotia unlimited liability company; Imageware Digital Photography Systems, LLC, a Nevada limited liability company (formerly Castleworks LLC); Digital Imaging International GmbH, a company formed under German laws; and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
Accounts Receivable
In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivables are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivables are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.
Inventories
Finished goods inventories are stated at the lower of cost, determined using the average cost method, or net realizable value. See Note 4.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, and deferred revenue, the carrying amounts approximate fair value due to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use Assets
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately
The Company evaluates its operating lease right-of-use assets for impairment. Impairment is based on the excess of the carrying amount over the fair value, based on market value when available, or expected future economic benefits to the company from the operating lease right-of-use asset and is recorded in the period in which the determination is made. The Company recorded
Revenue Recognition
In accordance with ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The core principle of ASC 606 is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:
| 1. | Identify the contract with the customer; |
| 2. | Identify the performance obligation in the contract; |
| 3. | Determine the transaction price; |
| 4. | Allocate the transaction price to the performance obligations in the contract; and |
| 5. | Recognize revenue when (or as) each performance obligation is satisfied. |
At contract inception, we assess the goods and services promised in a contract with a customer and identify as a performance obligation each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) that is distinct, or (ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. We recognize revenue only when we satisfy a performance obligation by transferring a promised good or service to a customer.
Determining the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations requires judgement.
We disclose disaggregation of our customer revenue by classes of similar products and services as follows:
| • | Software licensing and royalties; |
| • | Sales of computer hardware and identification media; |
| • | Services; and |
| • | Post-contract customer support. |
Software Licensing and Royalties
Software licenses consist of revenue from the sale of software for identity management applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer. We recognize revenue from software licensing at a point in time upon delivery, provided all other revenue recognition criteria are met.
Royalties consist of revenue from usage-based arrangements and guaranteed minimum-based arrangements. We recognize revenue for royalty arrangements at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied.
Computer Hardware and Identification Media
We generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer, provided all other revenue recognition criteria are met.
Services
Services revenue is comprised primarily of software customization services, software integration services, system installation services and customer training. Revenue is generally recognized upon completion of services and customer acceptance provided all other revenue recognition criteria are met.
Post-Contract Customer Support
Post-contract customer support (“PCS”) consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and PCS on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service; and (ii) the percent discount off of list price approach.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. At March 31, 2022 and December 31, 2021, we had capitalized incremental costs of obtaining a contract with a customer of $
Other Items
We do not offer rights of return for our products and services in the normal course of business.
Sales tax collected from customers is excluded from revenue.
The following table sets forth our disaggregated revenue for the three months ended March 31, 2022 and 2021:
| Net Revenue | Three Months Ended March 31, | |||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Software and royalties | $ | $ | ||||||
| Hardware and consumables | ||||||||
| Services | ||||||||
| Maintenance | ||||||||
| Total revenue | $ | $ | ||||||
Customer Concentration
For the three months ended March 31, 2022, two customers accounted for approximately
For the three months ended March 31, 2021, two customers accounted for approximately
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06"). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas. ASU 2020-06 is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
NOTE 3. NET LOSS PER COMMON SHARE
Basic loss per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period, adjusted to include, if dilutive, potential dilutive shares consisting of convertible preferred stock, stock options and warrants, calculated using the treasury stock and if-converted methods. For diluted loss per share calculation purposes, the net loss available to common shareholders is adjusted to add back any preferred stock dividends and any interest on convertible debt reflected in the condensed consolidated statement of loss for the respective periods.
The table below presents the computation of basic and diluted loss per share:
| (Amounts in thousands except share and per share amounts) | Three Months Ended March 31, | |||||||
| 2022 | 2021 | |||||||
| Numerator for basic and diluted loss per share: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Preferred dividends and preferred stock discount accretion | ( | ) | ( | ) | ||||
| Net loss available to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Denominator for basic loss per share – weighted-average shares outstanding | ||||||||
| Basic and diluted loss per share available to common shareholders | $ | ( | ) | $ | ( | ) | ||
The following potential dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding, as their effect would have been antidilutive:
| Potential Dilutive Securities: | Common Share Equivalents at March 31, 2022 | Common Share Equivalents at December 31, 2021 | ||||||
| Convertible redeemable preferred stock – Series A | ||||||||
| Convertible redeemable preferred stock – Series A-1 | ||||||||
| Convertible redeemable preferred stock – Series B | ||||||||
| Convertible redeemable preferred stock – Series D | ||||||||
| Stock options | ||||||||
| Restricted stock units (“RSUs”) | ||||||||
| Warrants | ||||||||
| Total Potential Dilutive Securities | ||||||||
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $
Inventories of $
Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value and required reserve levels.
Goodwill
The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The provisions of ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only reporting unit, Identity Management, which, at March 31, 2022, had a negative carrying amount of approximately $
Other Assets
In conjunction with the LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2021,
NOTE 5. LEASES
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 – Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately
Our corporate headquarters is located in San Diego, California, where we now occupy approximately
Prior to entering into our current lease agreement in January 2021 and moving our corporate headquarters to a new location, we occupied
The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases.
For the three months ended March 31, 2022 and 2021, the Company recorded approximately $
The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as its term is less than 12 months.
At March 31, 2022, future minimum undiscounted lease payments are as follows:
| ($ in thousands) | ||||
| 2022 (nine months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | ||||
| Present Value effect on future minimum undiscounted lease payments at March 31, 2022 | ( | ) | ||
| Lease liability at March 31, 2022 | ||||
| Less current portion | ( | ) | ||
| Non-current lease liability at March 31, 2022 | $ |
NOTE 6. MEZZANINE EQUITY
Series D Convertible Redeemable Preferred Stock
On November 12, 2020, the Company filed the Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock (the “Series D Certificate”) with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred (described below in Note 9), and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities and are to be paid at the rate of
The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into Common Stock at any time that is at least ninety days following the issuance date, at the conversion price calculated by dividing the Stated Value by the conversion price of $
If, on any date that is at least five (5) years following the Issuance Date (as defined in the Series D Certificate), (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common Stock issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common Stock will be either (A) covered by an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), which is then available for the immediate resale of such Common Stock by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.
On the fourth anniversary of the Issuance Date, or in the event of the consummation of a change of control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.
On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of
During the year ended December 31, 2021, the Company issued an aggregate of
During the three months ended March 31, 2022, the Company issued
Guidance for accounting for freestanding financial instruments that contain characteristics of both liabilities and equity are contained in ASC 480, Distinguishing Liabilities From Equity and Accounting Series Release 268 Redeemable Preferred Stocks (“ASR 268”). The Company evaluated the provisions of the Series D Preferred and determined that the provisions of the Series D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series D Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control (as defined in the Series D Certificate), the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.
The Company noted that the Series D Preferred instruments were hybrid instruments that contain several embedded features. In November 2014, the FASB issued ASU 2014-16 to amend ASC 815, “Derivatives and Hedging”, (“ASC 815”) and require the use of the whole instrument approach (described below) to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity.
The whole instrument approach requires an issuer or investor to consider the economic characteristics and risks of the entire hybrid instrument, including all of its stated and implied substantive terms and features. Under this approach, all stated and implied features, including the embedded feature being evaluated for bifurcation, must be considered. Each term and feature should be weighed based on the relevant facts and circumstances to determine the nature of the host contract. This approach results in a single, consistent determination of the nature of the host contract, which is then used to evaluate each embedded feature for bifurcation. That is, the host contract does not change as each feature is evaluated.
The revised guidance further clarifies that the existence or omission of any single feature, including an investor-held, fixed-price, noncontingent redemption option, does not determine the economic characteristics and risks of the host contract. Instead, an entity must base that determination on an evaluation of the entire hybrid instrument, including all substantive terms and features.
However, an individual term or feature may be weighed more heavily in the evaluation based on facts and circumstances. An evaluation of all relevant terms and features, including the circumstances surrounding the issuance or acquisition of the equity share, as well as the likelihood that an issuer or investor is expected to exercise any options within the host contract, to determine the nature of the host contract, requires judgement.
Using the whole instrument approach, the Company concluded that the host instrument of the Series D Preferred were more akin to debt than equity as the majority of identified features contain more characteristics of debt.
The Company evaluated the identified embedded features of the Series D Preferred host instrument and determined that certain features meet the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument.
The Company has bifurcated from the Series D Preferred host instrument the conversion option, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $
The following table summarizes the share activity of Series D Preferred for the three months ended March 31, 2022:
| Series D Convertible Redeemable Preferred | ||||
| Total shares of Series D Preferred Stock - December 31, 2021 | ||||
| Conversion of Series D Preferred into Common Stock | ||||
| Issuance of Series D Preferred as payment of dividends due | ||||
| Total shares of Series D Preferred Stock - March 31, 2022 | ||||
The carrying value of the Company’s Series D Preferred was approximately $
NOTE 7. DERIVATIVE LIABILITIES
The Company accounts for its derivative instruments under the provisions of ASC 815, “Derivatives and Hedging”. Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contracts that qualify as derivative instruments and require bifurcation.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series D Preferred host instrument required bifurcation. The Company valued these bifurcatable features at fair value. Such liabilities aggregated approximately $
The change in fair value of such amounts is recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. For the three months ended March 31, 2022, the Company recorded an increase to its derivative liabilities using fair value methodologies of approximately $
NOTE 8. LINE OF CREDIT
December 2021 Credit Facility with Nantahala Capital Management
On December 29, 2021, the Company entered into a Term Loan and Security Agreement with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $
On the Closing Date, the Company received in initial draw-down on the Credit Facility of $
For a more detailed description of this related party credit facility, see Note 12, Related Parties.
NOTE 9. EQUITY
The Company’s Certificate of Incorporation, as amended, authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board may determine.
On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of
As of March 31, 2022, we had
Our Board has designated five series of Preferred Stock; (i) Series A Preferred, (ii) Series A-1 Preferred, (iii) Series B Preferred, (iv) Series C Preferred and (v) Series D Preferred. As of March 31, 2022, there were
Series B Convertible Redeemable Preferred Stock
The Company had
Common Stock
The following table summarizes outstanding Common Stock activity during the three months ended March 31, 2022:
| Common Stock | ||||
| Shares outstanding at December 31, 2021 | ||||
| Shares issued pursuant to option exchange and RSU vesting | ||||
| Shares outstanding at March 31, 2022 | ||||
Warrants
As of March 31, 2022, warrants to purchase
During the three months ended March 31, 2022, there were
NOTE 10. STOCK-BASED COMPENSATION
Stock Options
As of March 31, 2022, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Plan. Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Internal Revenue Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Stock Award Plan (the “1999 Plan”) and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan. The Company amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to
The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”). The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.
ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14.
In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has adopted the provisions of ASU 2016-09 and will continue to use an estimated annualized forfeiture rate. The Company utilized estimated forfeiture rate of
A summary of the activity under the Company’s stock option plans is as follows:
| Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | ||||||||||
| Balance at December 31, 2021 | $ | |||||||||||
| Granted | $ | |||||||||||
| Expired/Cancelled | $ | |||||||||||
| Exercised | ||||||||||||
| Balance at March 31, 2022 | $ | |||||||||||
There were options granted during the three months ended March 31, 2022.
During the three months ended March 31, 2022, there were
At March 31, 2022, a total of
The intrinsic value of options exercisable and outstanding at March 31, 2021 was The aggregate intrinsic value for all options outstanding as of March 31, 2021 was There were
The Company periodically issues Restricted Stock Units (“RSUs”) to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.
A summary of the activity related to RSUs is as follows:
| RSU’s | Weighted-Average Issuance Price | |||||||
| Balance at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Expired/Cancelled | ( | ) | $ | |||||
| Vested | ( | ) | $ | |||||
| Balance at March 31, 2022 | $ | |||||||
There were RSUs granted during the three months ended March 31, 2022.
During the three months ended March 31, 2022, the Company recorded compensation expense of approximately $
Stock-Based Compensation
Stock-based compensation related to equity options, RSUs and warrants has been classified as follows in the accompanying consolidated statements of income (loss) (in thousands):
| Three months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cost of revenue | $ | $ | ||||||
| General and administrative | ||||||||
| Sales and marketing | ||||||||
| Research and development | ||||||||
| Total | $ | $ | ||||||
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | |
| Level 2 | Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. | |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| Fair Value at March 31, 2022 | ||||||||||||||||
| ($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | ||||||||||||||||
| Pension assets | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | ||||||||||||||
| Totals | $ | $ | ||||||||||||||
| Fair Value at December 31, 2021 | ||||||||||||||||
| ($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | ||||||||||||||||
| Pension assets | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
The Company’s German pension plan is funded by insurance contract policies whereby the insurance company guarantees a fixed minimum return. The Company has determined that the pension assets are appropriately classified within Level 3 of the fair value hierarchy because they are valued using actuarial valuation methodologies which approximate cash surrender value that cannot be corroborated with observable market data. All plan assets are managed in a policyholder pool in Germany by outside investment managers. The investment manager is responsible for the investment strategy of the insurance premiums that the Company submits and does not hold individual assets per participating employer. The German Federal Financial Supervisory oversees and supervises the insurance contracts.
As of March 31, 2022 and December 31, 2021, the Company had embedded features contained in the Series D Preferred host instrument (issued in November 2020) that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $
Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events. Significant assumptions used in the fair value methodologies during the three months ended March 31, 2022 are a risk-free rate of
The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.
The reconciliations of Level 3 pension assets measured at fair value during the three months ended March 31, 2022 and 2021 are presented below:
| ($ in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||
| Pension assets: | ||||||||
| Fair value at beginning of period | $ | $ | ||||||
| Return on plan assets | ||||||||
| Company contributions and benefits paid, net | ( | ) | ||||||
| Effect of exchange rate changes | ( | ) | ( | ) | ||||
| Fair value at end of period | $ | $ | ||||||
The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three months ended March 31, 2022 is presented below:
| ($ in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||
| Derivative liabilities: | ||||||||
| Fair value at beginning of period | $ | $ | ||||||
| Derivative liability from issuance of Preferred Series D | ||||||||
| Decrease in derivative liability from conversions of Preferred Series D | ( | ) | ||||||
| Change in fair value included in earnings | ( | ) | ||||||
| Fair value at end of period | $ | $ | ||||||
NOTE 12. RELATED PARTY TRANSACTIONS
December 2021 Credit Facility with Nantahala Capital Management
On December 29, 2021 (the “Closing Date”), the Company entered into a Term Loan and Security Agreement (the “Agreement”) with certain funds and separate accounts managed by Nantahala Capital Management, LLC (collectively, “Nantahala”), as lenders, and other lenders set forth on the signature pages thereto (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $
All loans (each a “Loan”, and collectively, the “Loans”) under the Credit Facility will bear interest at a rate of
The Company may prepay amounts borrowed under the Credit Facility in whole or in part, at a price equal to
Consulting Agreement
On March 1, 2022, the Company entered into a consulting agreement with a member of the Company’s Board of Directors (the “Consulting Agreement”). The Consulting Agreement provides for the provision of certain strategic financing and corporate development activities . The term of the agreement is for a period of three months and expires June 1, 2022. The maximum consulting fee is $
NOTE 13. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024 (the “Employment Agreement”). The Company may terminate the Employment Agreement with or without cause. Subject to the conditions and other limitations set forth in the Employment Agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the Employment Agreement) by the Company or by the executive:
Under the terms of the Employment Agreement, if employment is terminated by the Company without cause or there is a change of control, then the executive shall be entitled to severance payments equal to the executive’s annual salary and shall remain enrolled in the Company’s health, dental, and life insurance plans for the lesser of twelve (12) months or the remaining period prior to expiration of the Employment Period (as defined in the Employment Agreement) plus the executive shall be entitled to any bonus due as of the effective date of such termination.
Litigation
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
NOTE 14. SUBSEQUENT EVENTS
During the period from April 1, 2022 through May 23, 2022, the Company issued
During the period from April 1, 2022 through May 23, 2022, the Company borrowed an additional $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All forward-looking statements included in this report are based on information available to us as of the date hereof and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known or unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those items discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and in Item 1A of Part II of this Quarterly Report.
The following discussion of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements included elsewhere within this Quarterly Report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for our products, such as the timing of new product introductions by us and by our competitors and our customers’ political and budgetary constraints. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. As used in this Quarterly Report, “we”, “us”, “our”, “Imageware”, “Imageware Systems”, “IWS", or the “Company” refers to Imageware Systems, Inc., a Delaware corporation, and all of its subsidiaries.
Overview
Imageware Systems, Inc. (“Imageware,” the “Company,” “we,” “our”) provides biometric solutions to identify, verify, and authenticate people based on their true identity, rather than on what keys and codes they have. A pioneer in the field, Imageware was the first multimodal biometric solution provider in history and holds dozens of patents, including some of the most cited patents in the industry. Our Cloud-based and on-premises solutions provide faster, more accurate identification to better secure communities, data, and assets. In fact, governments, law enforcement agencies, and public and private enterprises worldwide trust Imageware with critical identity solutions which manage millions of identities every day.
Our patented Imageware Biometric Engine® is one of the most accurate and fastest biometrics matching engines in the industry, capable of our patented biometrics fusion. We are a “biometrics first” company, leveraging unique human characteristics to provide unparalleled accuracy for identification while protecting your identity.
Our product portfolio, called the Imageware Identity Platform, is built around three key areas: Enroll & Identify, Badge & Credential, and Authenticate. All of these areas are built on top of the Imageware Biometric Engine. The Platform is a fully-modular, customizable, and pre-integrated portfolio of capabilities to support state and local law enforcement, Federal agencies, and enterprises alike.
Enroll & Identify
The Enroll & Identify area includes four key modules: Imageware Proof, Imageware Capture, Imageware Identify, and Imageware Investigate.
Imageware Proof enables an entity to prove someone’s identity from their biometrics, government issued ID, and 3rd party databases (such as credit bureau data). Imageware Capture enables the fastest capture of biographic and biometric detail (such as face, fingerprint, palm print, iris, and SMT’s) in the industry. Imageware Identify enables a user to identify someone from their biometrics in seconds. Imageware Investigate enables an officer to create digital lineups very quickly.
Badge & Credential
The Badge & Credential area includes two key modules: Imageware Credential (formerly EPI Suite) and Imageware Digital ID. Imageware Credential enables a user to design, build, and print badges for access control systems. This includes tickets, smart badges, wristbands, Personal Identity Verification (“PIV”) cards, and more. Imageware Digital ID is a decentralized identity service that enables self-sovereign identity underpinned by blockchain technology tied to biometrics.
Authenticate
The Authenticate area includes Imageware Authenticate, which enables users to leverage multimodal biometrics hosted in a central server or cloud to log in to services and applications from any device. Imageware Authenticate is easily integrated into existing solutions leveraging OpenID Connect (“OIDC”), Security Assertion Mark-up Language (“SAML”), or OAuth2 protocols, and includes a software development kit (“SDK”) for partners and customers to easily embed into their existing applications.
Imageware Biometric Engine
The Imageware Biometric Engine® is a patented biometric identity and authentication database built for multi-biometric enrollment, management and authentication. It is hardware agnostic and can utilize different types of biometric algorithms from any vendor. It allows different types of biometrics to be operated at the same time on a seamlessly integrated platform. It is also offered as an SDK, enabling developers and system integrators to implement biometric solutions or integrate biometric capabilities, into existing applications.
Imageware Law Enforcement
Our modules are leveraged across many industries and use cases with minimal customization needed. One of the key areas includes our Law Enforcement 2.0 solution which enables state, local and Federal agencies to quickly capture, archive, search, retrieve, and share digital images, fingerprints and other biometrics, as well as criminal history records on a stand-alone, networked, wireless or browser-based platform. Our Imageware Law Enforcement 2.0 solution includes Imageware Capture, Imageware Identify, Imageware Investigate, Imageware Credential, and Imageware Authenticate. Other modules can also be easily leveraged as needed.
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the consolidated financial statements and the reported amounts of revenue and expense during a fiscal period. The Securities and Exchange Commission (“SEC”) considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations.
Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended March 31, 2022 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2021.
Results of Operations
This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes contained elsewhere in this Quarterly Report.
Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020
| Three Months Ended March 31, |
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| Net Product Revenue |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| (dollars in thousands) |
||||||||||||||||
| Software and royalties |
$ | 141 | $ | 39 | $ | 102 | 262 | % |
||||||||
| Percentage of total net product revenue |
67 | % |
70 | % |
||||||||||||
| Hardware and consumables |
$ | 43 | $ | 13 | $ | 30 | 231 | % |
||||||||
| Percentage of total net product revenue |
21 | % |
23 | % |
||||||||||||
| Services |
$ | 26 | $ | 4 | $ | 22 | 550 | % |
||||||||
| Percentage of total net product revenue |
12 | % |
7 | % |
||||||||||||
| Total net product revenue |
$ | 210 | $ | 56 | $ | 154 | 275 | % |
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Software and royalty revenue increased approximately $102,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021. This increase is attributable to higher identification project related revenue of approximately $87,000, higher law enforcement software revenue of approximately $30,000, higher sales of boxed identity management software sold through our distribution channel of approximately $3,000 offset by lower identification royalties of approximately $18,000.
Revenue from the sale of hardware and consumables increased approximately $30,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to an increase in both hardware and consumables procurement by our law enforcement customers.
Services revenue is comprised primarily of software integration services, system installation services and customer training. Such revenue increased approximately $22,000 during the three months ended March 31, 2022 as compared to the corresponding period of 2021 due to an increase in the service element of project related work completed during the three months ended March 31, 2022.
We believe that the period-to-period fluctuations of identity management software revenue in project-oriented solutions are largely due to the timing of government procurement with respect to the various programs we are pursuing. Although no assurances can be given, based on management’s current visibility into the timing of potential government procurements, potential partnerships and current pilot programs, we believe that we will see an increase in government procurement and implementations with respect to identity management initiatives; however, government procurement initiatives, implementations and pilots are frequently delayed and extended and we cannot predict the timing of such initiatives.
As discussed more fully elsewhere in this Quarterly Report, the full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.
During the three months ended March 31, 2022, we have focused on strategically modernizing our modules within the Imageware Identity Platform, prioritized by market opportunities. We relaunched Imageware Authenticate (formerly GoVerify ID®) in February 2021. This relaunch includes a new container and microservices-based architecture along with refreshed mobile and desktop clients. We believe these updates will result in additional customers implementing our Imageware Authenticate solution. Additionally, we launched Imageware Capture, our first module of the Law Enforcement 2.0 solution in October 2021 and Imageware Investigate in December 2021. These are the first of many modules that we plan to build and modernize throughout 2022 and beyond. Prior to releasing Imageware Investigate, we closed our largest software-as-a-service (SaaS) deal in the Company’s history with Imageware Investigate. Management believes that these initiatives will result in the expansion of our solutions into state & local law enforcement, federal government, and enterprises alike.
| Maintenance Revenue |
Three Months Ended March 31, |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Total maintenance revenue |
$ | 635 | $ | 677 | $ | (42 | ) |
(6 | )% |
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