Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2020
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from [____] to [____]
Commission file number 001-15757
IMAGEWARE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
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33-0224167
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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11440 West Bernardo Court, Suite 300
San Diego, CA 92127
(Address of principal executive offices)
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(858) 673-8600
(Registrant’s Telephone Number, Including Area
Code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock, par value $0.01 per share
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IWSY
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OTCQB
Marketplace
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such a shorter period that the
registrant was required to submit such files). Yes [X]
No [ ]
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.:
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non–Accelerated filer
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☒
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Small reporting company
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☒
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Emerging growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act Rule 12b-2). Yes
[ ] No [X]
The aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant as of June 30, 2020, the
last business day of the registrant’s most recently completed
second fiscal quarter, as reported on the OTCQB marketplace was
$33,822,224. This number excludes shares of common stock held
by affiliates, executive officers and
directors.
As of March 26, 2021, there were 274,919,339 shares of the registrant’s common stock
outstanding.
IMAGEWARE SYSTEMS,
INC.
Form 10-K
For the Year Ended December 31, 2020
Table of Contents
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (this “Annual Report”)
contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words
such as “expects”, “anticipates”,
“intends”, “plans”, “believes”,
“seeks”, “estimates” and similar
expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Annual Report.
Additionally, statements concerning future matters such as the
development of new products, sales levels, expense levels and other
statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Annual Report reflect
the good faith judgment of our management, such statements can only
be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and
uncertainties and actual results and outcomes may differ materially
from the results and outcomes discussed in or anticipated by the
forward-looking statements. Factors that could cause or contribute
to such differences in results and outcomes include without
limitation those discussed under the heading “Risk
Factors” in Item 1A, as well as those discussed elsewhere in
this Annual Report. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the
date of this Annual Report. We undertake no obligation to revise or
update any forward-looking statements in order to reflect any event
or circumstance that may arise after the date of this Annual
Report. Readers are urged to carefully review and consider the
various disclosures made in this Annual Report, which attempt to
advise interested parties of the risks and factors that may affect
our business, financial condition, results of operations and
prospects.
PART I
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ITEM 1.
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BUSINESS
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ImageWare Systems,
Inc., a Delaware corporation, has its principal place of business
at 11440 West Bernardo Court, Suite 300, San Diego, California
92127. 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
ImageWare Systems,
Inc. (“ImageWare,” the
“Company,”
“we,”
“our”) provides
defense-grade biometric identification and authentication solutions
to safeguard your data, products, services or facilities. We are
experts in biometric authentication and considered
a preeminent patent holder of multimodal biometrics IP, having
many of the most-cited patents in the industry. Our patented IWS
Biometric Engine® is one
of the most accurate and fastest biometrics matching engines in the
industry, capable of our patented biometrics fusion. Part of our
heritage is in law enforcement, having built the first statewide
digital booking platform for United States local law enforcement in
the late 1990’s – and having more than three decades of
experience in the challenging government sector creating biometric
smart cards and logical access for millions of individuals. We
are a “biometrics first” company, leveraging unique
human characteristics to provide unparalleled accuracy for
identification while protecting your identity.
The
Company’s products also provide law enforcement and public
safety sector with integrated biographic, mugshot, SMT, and
fingerprint capture for booking, in addition to investigative
capabilities. The Company also provides comprehensive
authentication security software using biometrics to secure
physical and logical access to facilities, computer networks or
Internet sites. Biometric technology is now an integral part of all
markets that the Company addresses, and every product leverages our
patented IWS Biometric Engine®.
The IWS 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. 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”), enabling developers and system
integrators to implement biometric solutions or integrate biometric
capabilities, into existing applications.
Our
secure credential solutions empower customers to design and create
smart digital identification wristbands and badges for access
control systems. We develop, sell and support software and design
systems that utilize digital imaging and biometrics for 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 badges and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
and governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine®.
The Company is also a
developer of a biometric based multi-factor authentication
(“MFA”)
Cloud-based service. ImageWare Authenticate (formerly, GoVerify
ID®) brings together Cloud and mobile technologies to offer
biometric multi-factor authentication for the enterprise, and
across industries. ImageWare Authenticate consists of mobile and
desktop clients, and the backend system which is a Cloud-based
Software-as-a-Service (“SaaS”)
servicing Cloud-based biometric template matching requests.
ImageWare Authenticate comes in two offerings, Workforce and
Customer. ImageWare Authenticate Customer is leveraged by product
developers to enable biometric authentication for their consumers.
For the enterprise, ImageWare Authenticate Workforce provides
turnkey integration with Microsoft Windows, Microsoft Active
Directory, CA SSO, IBM Security Access Manager
(“ISAM”),
SAP Cloud Platform, Fujitsu's RunMyProcess, Palo Alto
Networks VPN 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/scars, marks, and
tattoos (SMT), as well as 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 platform 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 multiple biometrics.
Recent Developments
New Products
In July
2020, we introduced BioIntellic™, our standalone, highly scalable
anti-spoofing detection feature (embedded in the IWS
Biometric Engine®) to
ensure secure onboarding. BioIntellic™ bolsters our
joint offering with our existing proofing partner in the African
market, Contactable, and also supports our existing MTN business as
well as drives new business in the African region and
beyond.
In
October 2021, we completed a new QuickCapture Mobile software
product that resides on the Laxton Chameleon 5 and 8 devices.
QuickCapture Mobile will be an inherent part of our newest
generation law enforcement platform, called LE 2.0. This powerful
solution allows officers, public safety and military personnel in
the field to have dynamic data on a perpetrator in the palm of
their hands.
In
December 2020, we reached code completion of our GoVerifyID
product, now renamed to Imageware Authenticate, which introduced a
new administration portal for easier management and usability of
the product along with compatibility with many other 3rd party identity and Cloud services,
through the inclusion of identity protocols SAML and
OIDC.
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. As
of March 2021, the global outbreak of COVID-19 continues to rapidly
evolve, and the extent to which COVID-19 may impact our business
and markets we serve will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, such as
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 both in the United States and other countries. We are
continuing to vigilantly monitor the situation with our primary
focus on health and safety of our employees and
clients.
The Series D Financing
On
November 12, 2020 and December 23, 2020, the Company consummated
private placements of 12,060 shares of its Series D Convertible
Preferred Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds include approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Purchase Agreement"), by and between
the Company and certain accredited investors (the "Purchasers"), for the sale of the
Series D Preferred at a purchase price of $1,000 per share of
Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities, and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of shares of Series D
Preferred.
On the
fourth anniversary of the Issuance Date (as defined in the Series D
Certificate), or in the event of the consummation of a Change of
Control (as defined in the Series D Certificate), 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.
In connection with the sale of the Series D
Preferred, we granted certain registration rights to the Investors
with respect to the Conversion Shares and Dividend Shares, pursuant
to a Registration Rights Agreement by and among us and the
Investors. The registration statement registering the Conversion
Shares and Dividend Shares was declared effective by the United
States Securities and Exchange Commission (the
“SEC”) on February 12,
2021.
Solutions and
Products
We are
a "biometrics first" security company who brings the highest level
of security to systems, data and places, by identifying and
authenticating people through biometrics. Our solutions are focused
on biometrics and secure credentials providing complete,
cross-functional interoperable systems and an open
architecture.
IWS Biometric Engine. This is a
biometric identity and authentication database 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), and N:N (database integrity). IWS Biometric
Engine is biometric agnostic, enabling the use of biometric devices
and algorithms from any vendor, and with current support of the
following biometric types: finger, face, iris, palm, and voice. We
leverage the IWS Biometric Engine® to create products that
provide government, law enforcement, public safety, border
management and enterprise businesses, with a wide variety of
solutions that address specific problems, mandates and technology
standards.
ImageWare Authenticate. The
Company introduced GoVerify ID®, now known as ImageWare
Authenticate, a multi-factor biometric authentication, MFA product,
for the enterprise markets on November 14, 2016. ImageWare
Authenticate supports multimodal biometric Cloud-based matching and
authentication including, but not limited to, face, voice,
fingerprint, iris, palm, and more. All the biometrics can be
combined with 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. ImageWare Authenticate provides multimodal
biometric identity authentication that can be used in place of
passwords or as a strong second factor authentication method.
ImageWare Authenticate is provided as a Cloud-based SaaS solution,
thereby, eliminating complex IT deployment of biometric software
and eliminating startup costs. ImageWare Authenticate works with
existing mobile devices, eliminating the need for specialized
biometric scanning devices typically used with most biometric
solutions. We enhanced the product and completed this work on
December 31, 2020. We relaunched ImageWare Authenticate on February
1, 2021.
IWS EPI Suite. This is an ID software
solution for producing, issuing, and managing secure credentials
and personal identification cards, also called biometric smart
badges. It is used by many human resource departments, along with
other corporate groups, to enroll employees and print physical
badges which may be used later for physical access. 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, schools, 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. We intend to
update the EPI Suite and Builder platforms in late 2021 and offer
these products in the Cloud.
IWS Law Enforcement. IWS Law
Enforcement is a digital booking, identification and investigative
platform that enables users to digitally capture, store, search and
retrieve images and demographic data, including mugshots and line
ups, fingerprints and scars, marks and tattoos (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 or electric mug books, and
production of identification cards and credentials. IWS Law
Enforcement also uses off-the-shelf, biometric 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 or handheld to larger, integrated systems. 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. We intend to update the Law Enforcement
platform in first half of 2021 and offer the full suite in the
Cloud as a SaaS offering.
The IWS Law Enforcement platform contains the
following components:
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.
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. Quick Capture 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.
BioIntellic. BioIntellic is a facial
matching and anti-spoofing product integrated into ImageWare
Authenticate. It is designed to prevent presentation attacks, by
ensuring the captured biometric image is that of a live individual,
not a picture of 3D mask. BioIntellic is also available as a
standalone product, enabling companies to quickly integrate facial
matching and liveness detection into their offerings.
Maintenance and Customer Support
Maintenance and support enrollment entitles software license
customers to technical support services, including telephone and
email support, problem resolution services, and the right to
receive unspecified product upgrades, maintenance releases and
patches released during the term of the support period. Maintenance
and support service fees are an important source of recurring
revenue, and we invest continuing resources into 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 and Canada,
but we also have clients outside of North America. For the year ended December 31, 2020, two
customers accounted for approximately 61% or $2,921,000 of total
revenue and had trade receivables of approximately $250,000 as of
the end of the year. 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.
Our Strategy
Our
strategy is to be a “biometric first” cybersecurity
company bringing the highest level of security to systems, data and
places by identifying and authenticating people through biometrics.
We sell to governments, law enforcement and public safety, as well
as enterprises, through key partners and large systems integrators
and with 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 seen in the coming years, many
problems have been immediately realized by corporations and
government agencies, who are diligently looking for solutions to
operate in a new business environment.
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. ImageWare
Authenticate 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 ImageWare Authenticate as a solution for
protecting corporate data to the most relevant business verticals
during this time of increased susceptibility to broad cyberattacks,
such as malware, viruses, trojans, ransomware infections and
phishing attacks.
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 and
touchless authentication for health, retail, finance/banking,
government services, higher education 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.
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, QuickCapture Mobile. Quick Capture
Mobile streamlines the process of capturing biometrics from
perpetrators on a mobile, PC-based device, in the field. The law
enforcement market will immediately benefit from this product. We
believe we can develop the Quick Capture product to service other
verticals such as; corporate, telecommunications, academia,
hospitality and entertainment.
We
believe the increasing demand for biometric technology will drive
demand for our solutions. In the coming year, we will work to
develop an Identity Platform, which combines all of our products
onto one end-to-end, Cloud-based platform, allowing large clients
to do enrollments (Enroll, Verify, Credential and Authenticate).
The building blocks of the Identity Platform consist of upgrades to
our current standalone products (IWS LE, EPI Builder, and ImageWare
Authenticate) as well as a new identity proofing product, to be
developed to verify the authenticity of government issued IDs. The
Enroll, Verify, Credential and Authenticate workflow, is
foundational to the majority of governments and corporate
opportunities we compete for, and therefore, a key to the Identity
Platform. This single platform which allows a customer to create a
digital identity fully vetted against a government issued ID, use
it thereafter for a reliable biometric authentication and manage
that identity through its life cycle is compelling. We are
scheduling the Identity Platform to be completed in late
2021.
Sales and Marketing
We
market and sell our products in most major world markets directly
through our salesforce and indirectly through channel partners,
including resellers, distributors and systems integrators. Our
sales force includes both field, and 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. We are headquartered in San Diego, California
with a remote office in Ottawa, Canada. Our main business
operations are based in San Diego, California. 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
The
bulk of our revenue presently is generated from new subscription
and historical maintenance payments for our software solutions for
Law Enforcement, Badging, Identity Management, and Multi-factor
Access, MFA. We currently have four primary revenue
sources:
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Annual Maintenance of our Law Enforcement Solution;
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Perpetual license revenue of our Badging Solution;
- Term
Subscriptions of our ImageWare Authenticate solution; and
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Professional Services fees associated with implementation and
training for our customers.
We are
actively engaged in simplifying our revenue sources, migrating our
existing customers Annual Maintenance, and perpetual license
agreements to more consistent and sustainable subscription
models.
Software as a Service Business Model
We also provide an on-demand SaaS offering for ImageWare
Authenticate. SaaS offerings will be offered on a
subscription term-limited basis. We are exploring offering
additional products as SaaS offerings on a subscription
term-limited basis.
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), 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, palm and
voice
Our
multifactor-biometric product faces competition from Duo, HYPR,
Daon 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.
Credential Market
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 1000 corporations and large
government agencies;
●
the ease of
integrating our technology into other complex
applications;
●
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; and
●
traditional NFC
access control systems are easily hacked
Our
software faces competition from a number of companies, like HID
Global, ASSA ABLOY, Gemalto, 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;
●
the responsiveness,
availability and reliability of our customer support;
and
●
hardware agnostic
across many biometric vendors.
Our law enforcement
product line faces competition from other companies such as
DataWorks Plus, Idemia, Gemalto and NEC. 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 of patents related to multi-modal biometrics and
currently are a worldwide leader in multi-modal biometric patents,
with 27 issued patents worldwide and 14 pending or allowed patent
applications worldwide as well. The Company’s patents are as
follows:
US
Issued Patents - 17
US
Allowed Patents - 1
US
Patent Applications - 3
International
Issued Patents - 10
International
Patent Applications - 10
Total
Worldwide Issued Patents - 27
Total
Worldwide Allowed Patents - 1
Total
Worldwide Patent Applications - 14
Employees
We
had a total of 44 full-time employees as of December 31, 2020. In
2020, we had 40 employees based in the United States, three
employees based in Canada and one employee based in Mexico. 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 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.
|
ITEM 1A.
|
RISK
FACTORS
|
Our
business is subject to significant risks. You should carefully
consider the risks described below and the other information in
this 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.
RISKS RELATED TO OUR BUSINESS AND
INDUSTRY
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, 2020 and 2019, we had negative
working capital of $19,349,000 and $1,653,000, respectively. Our
principal source of liquidity at December 31, 2020 and 2019
consisted of cash and cash equivalents of $8,345,000 and
$1,030,000, respectively. 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. 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 $213.2 million at December 31, 2020 and $203.2 million
and December 31, 2019, and these losses may continue in the
future.
As of December 31, 2020 and 2019, we had an
accumulated deficit of approximately $213.2 million and $203.2 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 loan under the Paycheck Protection Program may not be forgiven
or may subject us to challenges and investigations regarding
qualification for the loan.
We have received loan proceeds in the amount of
approximately $1.57 million under the Payroll Protection Program
(“PPP
Loan”), which was
established under the CARES Act and is administered by the SBA
(“PPP”). Under the terms of the CARES Act, PPP
Loan recipients can apply for loan forgiveness. The potential loan
forgiveness for all or a portion of PPP Loan is determined, subject
to limitations, based on the use of loan proceeds over the 24 weeks
after the loan proceeds are disbursed for payment of payroll costs
and any payments of mortgage interest, rent, and utilities. The
amount of loan forgiveness will be reduced if PPP Loan recipients
terminate employees or reduce salaries during the covered period.
The unforgiven portion of our PPP Loan, if any, is payable over two
years at an interest rate of 1%, with a deferral of payments for
the first six months. We have utilized all the proceeds from the
PPP Loan for purposes consistent with the PPP. While we currently
believe that our use of the loan proceeds will meet the conditions
for forgiveness of the PPP Loan, the Series D Financing may affect
the Company's ability to have the PPP Loan forgiven under the PPP
and there can be no assurance that forgiveness for any portion of
the PPP Loan will be obtained.
Additionally,
the Company is evaluating whether the Series D Financing will
prevent the Company from qualifying for loan forgiveness. In the
event the SBA determines that the Series D Financing disqualifies
the Company for loan forgiveness under the PPP, the Company will be
required to repay all $1.57 million of the PPP Loan by May 4, 2022,
with interest accruing at 1%.
Our operating results have fluctuated in the past and are likely to
fluctuate in the future.
Our
operating results have fluctuated in the past. These
fluctuations in operating results are the consequence of the
following, amongst other things:
●
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 several million dollars and we may fail to achieve one or
more large system sales in the future.
Historically,
we have derived a substantial portion of our revenue from a small
number of sales of large, relatively expensive systems, typically
ranging in price from $100,000 to $2,000,000. If we fail to receive
orders for these large systems in a given sales cycle on a
consistent basis, our business could be significantly harmed.
Further, our quarterly results are difficult to predict because we
cannot predict in which quarter, if any, large system sales will
occur in a given year. As a result, we believe that
quarter-to-quarter comparisons of our results of operations are not
a good indication of our future performance. In some future
quarters, our operating results may be below the expectations of
securities analysts and investors, in which case the market price
of our Common Stock may decrease significantly.
Our lengthy sales
cycle may cause us to expend significant resources for one year or
more in anticipation of a sale to certain customers, yet we still
may fail to complete the sale.
When
considering the purchase of a large identity management product,
potential customers may take as long as eighteen months to evaluate
different solutions and obtain approval for the purchase. Under
these circumstances, if we fail to complete a sale, we will have
expended significant resources and received no revenue in return.
Generally, customers consider a wide range of issues before
committing to purchase our products, including product benefits,
ability to operate with their current systems, product reliability
and their own budgetary constraints. While potential customers are
evaluating our products, we may incur substantial selling costs and
expend significant management resources in an effort to accomplish
potential sales that may never occur. In times of economic
recession, our potential customers may be unwilling or unable to
commit resources to the purchase of new and costly
systems.
A number of our
customers and potential customers are local, state, and federal
government agencies that are subject to unique political and
budgetary constraints and have special contracting requirements,
which may affect our ability to obtain new and retain current
government customers.
A
significant number of our customers are government agencies. These
agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend from
quarter-to-quarter or year-to-year. In addition, these agencies
experience political pressure that may dictate the manner in which
they spend money. Due to political and budgetary processes and
other scheduling delays that may frequently occur relating to the
contract or bidding process, some government agency orders may be
canceled or substantially delayed, and the receipt of revenue or
payments from these agencies may be substantially delayed. In
addition, future sales to government agencies will depend on our
ability to meet government contracting requirements, certain of
which may be onerous or impossible to meet, resulting in our
inability to obtain a particular contract. Common requirements in
government contracts include bonding requirements, provisions
permitting the purchasing agency to modify or terminate at will the
contract without penalty, and provisions permitting the agency to
perform investigations or audits of our business practices, any of
which may limit our ability to enter into new contracts or maintain
our current contracts.
Two customers accounted for approximately 61% of our total revenue
during the year ended December 31, 2020, and two customers
accounted for approximately 37% of our total revenue during the
year ended December 31, 2019. 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 year ended December 31,
2020, two customers accounted for approximately 61% or $2,921,000 of our total revenue. During the year
ended December 31, 2019, two customers accounted for approximately
37% or $1,301,000 of our total
revenue. If these customers were to significantly reduce their
relationship with the Company, or in the event that we are unable
to replace the revenue through the sale of our products to
additional customers, our financial condition and results from
operations could be negatively impacted, and such impact would be
material.
We face competition from companies with greater financial,
technical, sales, marketing and other resources, and, if we are
unable to compete effectively with these competitors, our market
share may decline and our business could be
harmed.
We
face competition from other established companies. A number of our
competitors have longer operating histories, larger customer bases,
significantly greater financial, technological, sales, marketing
and other resources than we do. As a result, our competitors
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or client requirements, more
quickly develop new products or devote greater resources to the
promotion and sale of their products and services than we
can. Likewise, their greater capabilities in these areas may
enable them to better withstand periodic downturns in the identity
management solutions industry and compete more effectively on the
basis of price and production. In addition, new companies may
enter the markets in which we compete, further increasing
competition in the identity management solutions
industry.
We
believe that our ability to compete successfully depends on a
number of factors, including the type and quality of our products
and the strength of our brand names, as well as many factors beyond
our control. We may not be able to compete successfully against
current or future competitors, and increased competition may result
in price reductions, reduced profit margins, loss of market share
and an inability to generate cash flows that are sufficient to
maintain or expand the development and marketing of new products,
any of which would adversely impact our results of operations and
financial condition.
RISKS RELATED TO OUR TECHNOLOGY
We occasionally
rely on systems integrators to manage our large projects, and if
these companies do not perform adequately, we may lose
business.
We
occasionally act as a subcontractor to systems integrators who
manage large projects that incorporate our systems. We cannot
control these companies, and they may decide not to promote our
products or may price their services in such a way as to make it
unprofitable for us to continue our relationship with them.
Further, they may fail to perform under agreements with their
customers, in which case we might lose sales to these customers. If
we lose our relationships with these companies, our business,
financial condition and results of operations may
suffer.
Some third parties integrate our software into their platforms or
solutions. Any delay in the integration of our software or the
launch of third-party products may materially affect our results
from operations and financial condition.
We sell
some of our software through larger product partners and/or
resellers that will either resell our product alongside theirs, OEM
a white label version of our products, or sell our products fully
integrated into their offerings. In these cases, we are dependent
upon the successful rollout of our products by our distribution
partners. Any delays negatively affect our results from operations
and financial condition.
If our security measures or those of our third-party data center
hosting facilities, Cloud computing platform providers, or
third-party service partners, are breached, and unauthorized access
is obtained to a customer’s data, our data or our IT systems,
or authorized access is blocked or disabled, our services may be
perceived as not being secure, customers may curtail or stop using
our services, and we may incur significant legal and financial
exposure and liabilities.
Our
services involve the storage and transmission of our
customers’ and our customers’ customers’
proprietary and other sensitive data, including financial
information and other personally identifiable information. While we
have security measures in place, they may be breached as a result
of efforts by individuals or groups of hackers and sophisticated
organizations, including state-sponsored organizations or
nation-states. Our security measures could also be compromised by
employee error or malfeasance, which could result in someone
obtaining unauthorized access to, or denying authorized access to
our 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, if there are security
vulnerabilities in one of these components, a security breach could
occur. In addition, our internal IT systems continue to evolve, and
we are often early adapters of new technologies and new ways of
sharing data and communicating internally and with partners and
customers, which increases the complexity of our IT systems. These
risks are mitigated by our ability to maintain and improve business
and data governance policies and processes and internal security
controls, including our ability to escalate and respond to known
and potential risks.
In
addition, our customers may authorize third-party technology
providers to access their customer data, and some of our customers
may not have adequate security measures in place to protect their
data that is stored on our servers. Because we do not control our
customers or third-party technology providers, or the processing of
such data by third-party technology providers, we cannot ensure the
integrity or security of such transmissions or processing.
Malicious third parties may also conduct attacks designed to
temporarily deny customers access to our services.
A
security breach could expose us to a risk of loss or inappropriate
use of proprietary and sensitive data, or the denial of access to
this data. A security breach could also result in a loss of
confidence in the security of our services, damage our reputation,
negatively impact our future sales, disrupt our business and lead
to legal liability. Finally, the detection, prevention and
remediation of known or potential security vulnerabilities,
including those arising from third-party hardware or software may
result in additional direct and indirect costs, for example
additional infrastructure capacity to mitigate any system
degradation that could result from remediation
efforts.
RISKS RELATED TO INTELLECTUAL PROPERTY
If the patents we
own or license, or our other intellectual property rights, do not
adequately protect our products and technologies, we may lose
market share to our competitors and our business, financial
condition and results of operations would be adversely
affected.
Our success depends significantly on our ability
to protect our rights to the technologies used in our products. We
rely on patent protection, trade secrets, as well as a combination
of copyright and trademark laws and nondisclosure, confidentiality
and other contractual arrangements to protect our technology.
However, these legal means afford only limited protection and may
not adequately protect our rights or permit us to gain or keep any
competitive advantage. In addition, we cannot be assured that any
of our current and future pending patent applications will result
in the issuance of a patent to us. The U.S. Patent and Trademark
Office (“PTO”) may deny or require significant narrowing
of claims in our pending patent applications, and patents issued as
a result of the pending patent applications, if any, may not
provide us with significant commercial protection or may not be
issued in a form that is advantageous to us. We could also incur
substantial costs in proceedings before the PTO. These proceedings
could result in adverse decisions as to the claims included in our
patents.
Our
issued and licensed patents and those that may be issued or
licensed in the future may be challenged, invalidated or
circumvented, which could limit our ability to stop competitors
from marketing related products. Additionally, upon expiration of
our issued or licensed patents, we may lose some of our rights to
exclude others from making, using, selling or importing products
using the technology based on the expired patents. We also must
rely on contractual rights with the third parties that license
technology to us to protect our rights in the technology licensed
to us. Although we have taken steps to protect our intellectual
property and technology, there is no assurance that competitors
will not be able to design around our patents. We also rely on
unpatented proprietary technology. We cannot assure you that we can
meaningfully protect all our rights in our unpatented proprietary
technology or that others will not independently develop
substantially equivalent proprietary products or processes or
otherwise gain access to our unpatented proprietary technology. We
seek to protect our know-how and other unpatented proprietary
technology with confidentiality agreements and intellectual
property assignment agreements with our employees. However, such
agreements may not provide meaningful protection for our
proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements or in the event that
our competitors discover or independently develop similar or
identical designs or other proprietary information. In addition, we
rely on the use of registered and common law trademarks with
respect to the brand names of some of our products. Our common law
trademarks provide less protection than our registered trademarks.
Loss of rights in our trademarks could adversely affect our
business, financial condition and results of
operations.
Furthermore,
the laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States. If we fail to apply for intellectual property protection or
if we cannot adequately protect our intellectual property rights in
these foreign countries, our competitors may be able to compete
more effectively against us, which could adversely affect our
competitive position, as well as our business, financial condition
and results of operations.
If third parties
claim that we infringe their intellectual property rights, we may
incur liabilities and costs and may have to redesign or discontinue
selling certain products.
Whether a product infringes a patent involves
complex legal and factual issues, the determination of which is
often uncertain. We face the risk of claims that we have infringed
on third parties’ intellectual property rights. Searching for
existing intellectual property rights may not reveal important
intellectual property and our competitors may also have filed for
patent protection, which is not yet a matter of public knowledge,
or claimed trademark rights that have not been revealed through our
availability searches. Our efforts to identify and avoid infringing
on third parties’ intellectual property rights may not always
be successful. Any claims of patent or other intellectual property
infringement, even those without merit,
could:
●
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.
REGULATORY AND LEGAL RISK FACTORS
Failure to comply with federal, state and international laws
and regulations and our contractual obligations relating
to privacy, data protection and consumer protection, or
the expansion of current or the enactment of new laws
or regulations relating to privacy, data protection and
consumer protection, could adversely affect our business and
our financial condition.
We
collect and maintain significant amounts of personal data
and other data relating to our customers and employees. A
variety of federal, state and international laws and
regulations, and certain industry standards, govern or
apply to our collection, use, retention, sharing and security
of consumer data. We are subject to certain laws,
regulations, contractual obligations and industry
standards (including, for example, the Payment Card Industry
Data Security Standard, or PCI-DSS) relating to privacy,
data protection, information security and consumer protection,
which are evolving and subject to potentially differing
interpretations. These requirements may be interpreted and
applied in a manner that is inconsistent from one jurisdiction
to another or may conflict with other rules or our practices.
As a result, our practices may not comply or may not comply in the
future with all such laws, regulations, requirements and
obligations. Any failure, or perceived failure, by us to
comply with our privacy policies or with any federal, state
or international laws, regulations, industry
self-regulatory principles, industry standards or codes of
conduct, regulatory guidance, orders to which we may
be subject or other legal or contractual obligations relating
to privacy, data protection, information security
or consumer protection could adversely affect our
reputation, brand and business, and may result in claims,
proceedings or actions against us by governmental entities or
others or other liabilities or require us to change our
operations and/or cease or modify our use of certain data
sets. Any such claim, proceeding or action could hurt our
reputation, brand and business, force us to incur
significant expenses in defense of such proceedings, distract
our management, increase our costs of
doing business, result in a loss of customers and
suppliers or an inability to process credit card payments and
may result in the imposition of monetary penalties. We
may also be contractually required to indemnify and hold
harmless third parties from the costs or consequences of
non-compliance with any laws, regulations or other legal
obligations relating to privacy or consumer protection or
any inadvertent or unauthorized use or disclosure of data that
we store or handle as part of operating our
business.
Foreign
laws and regulations relating to privacy, data
protection, information security and consumer protection
often are more restrictive than those in the United
States. The European Union, for example, traditionally
has imposed stricter obligations under its laws and
regulations relating to privacy, data protection and consumer
protection than the United States. In May 2018 the
European Union's new regulation governing data practices and
privacy called the General Data Protection Regulation, or
GDPR, became effective and substantially replaced the data
protection laws of the individual European Union member
states. The law requires companies to meet more stringent
requirements regarding the handling of personal data of
individuals in the EU than were required under predecessor EU
requirements. In the United Kingdom, a Data Protection
Bill that substantially implements the GDPR also became law in
May 2018. The law also increases the penalties for
non-compliance, which may result in monetary penalties of up
to €20.0 million or 4% of a company's worldwide
turnover, whichever is higher. The GDPR and other similar
regulations require companies to give specific types of
notice and in some cases seek consent from consumers and other
data subjects before collecting or using their data
for certain purposes, including some marketing activities.
Outside of the European Union, many countries have
laws, regulations, or other requirements relating to
privacy, data protection, information security, and
consumer protection, and new countries are adopting such
legislation or other obligations with increasing frequency.
Many of these laws may require consent from consumers for
the use of data for various purposes, including
marketing, which may reduce our ability to market our
products. There is no harmonized approach to these laws and
regulations globally. Consequently, we increase
our risk of non-compliance with applicable foreign data
protection laws by operating internationally. We may need to
change and limit the way we use personal information in
operating our business and may have difficulty maintaining a
single operating model that is compliant. In addition,
various federal, state and foreign legislative and regulatory
bodies, or self-regulatory organizations, may expand current
laws or regulations, enact new laws or regulations or issue
revised rules or guidance regarding privacy, data
protection, information security and consumer protection. For
example, California recently adopted the California
Consumer Privacy Act of 2018 (“CCPA”), which provides new
data privacy rights for consumers and new
operational requirements for businesses. The CCPA includes a
statutory damages framework and private rights of
action against businesses that fail to comply
with certain CCPA terms or implement reasonable security
procedures and practices to prevent data breaches. The CCPA
went into effect in January 2020. The effects of the CCPA
potentially are significant, however, and may require us to
modify our data processing practices and policies and to incur
substantial costs and expenses in an effort to comply. As
a general matter, compliance with laws, regulations, and any
applicable rules or guidance from self-regulatory
organizations relating to privacy, data protection,
information security and consumer protection, may result
in substantial costs and may necessitate changes to
our business practices, which may compromise our growth
strategy, adversely affect our ability to acquire
customers, and otherwise adversely affect our
business, financial condition and operating
results.
We may have additional tax assessments.
We are subject to income taxes in the United
States. Significant judgments are required in determining our
provisions for income taxes. In the course of preparing our tax
provisions and returns, we must make calculations where the
ultimate tax determination may be uncertain. Our tax returns are
subject to examination by the Internal Revenue Service
(“IRS”) and state tax authorities. There can be
no assurance as to the outcome of these examinations. If the
ultimate determination of taxes owed is for an amount in excess of
amounts previously accrued, our operating results, cash flows, and
financial condition could be adversely
affected.
We operate in
foreign countries and are exposed to risks associated with foreign
political, economic and legal environments and with foreign
currency exchange rates.
We
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.
GOVERNANCE RISKS AND RISKS
RELATED TO OUR SECURITIES
Our Common Stock
is subject to “penny stock” rules.
Our
Common Stock is currently defined as a “penny stock”
under Rule 3a51-1 promulgated under the Exchange Act which are
subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose
additional sales practice requirements on broker-dealers that sell
penny stocks to persons other than established customers and
institutional accredited investors. Among other things, for
transactions covered by these rules, a broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction
prior to sale. Consequently, these rules may affect the ability of
broker-dealers to sell our Common Stock and affect the ability of
holders to sell their shares of our Common Stock in the secondary
market. To the extent our Common Stock is subject to the penny
stock regulations, the market liquidity for our shares will be
adversely affected.
Our stock price
has been volatile, and your investment in our Common Stock could
suffer a decline in value.
There
has been significant volatility in the market price and trading
volume of equity securities, which is unrelated to the financial
performance of the companies issuing the securities. These broad
market fluctuations may negatively affect the market price of our
Common Stock. You may not be able to resell your shares at or above
the price you pay for those shares due to fluctuations in the
market price of our Common Stock caused by changes in our operating
performance or prospects and other factors.
Some
specific factors that may have a significant effect on our Common
Stock market price include:
●
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 (as defined below) have certain rights and
privileges that are senior to our Common Stock, and we may issue
additional shares of Preferred Stock without stockholder approval
that could have a material adverse effect on the market value of
the Common Stock.
Our Board of Directors has the authority to issue
a total of up to 5.0 million shares of preferred stock, par value
$0.01 per share (“Preferred
Stock”) and to fix the
rights, preferences, privileges, and restrictions, including voting
rights, of the Preferred Stock, which typically are senior to the
rights of the Common Stock, without any further vote or action by
the holders of our Common Stock. The rights of the holders of our
Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the Preferred Stock that have been
issued or might be issued in the future. Preferred Stock also could
have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. This could
delay, defer, or prevent a change in control. Furthermore, holders
of our Preferred Stock may have other rights, including economic
rights, senior to the Common Stock. As a result, their existence
and issuance could have a material adverse effect on the market
value of the Common Stock. We have in the past issued and may from
time to time in the future issue, Preferred Stock for financing or
other purposes with rights, preferences, or privileges senior to
the Common Stock. As of March 26, 2021, we had four series of
Preferred Stock outstanding, the Series A Preferred, Series A-1
Preferred, Series B Preferred, and Series D
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, 2020 and 2019, there were
14,911 and 37,467 shares of our
Series A Preferred outstanding, respectively. As of December 31,
2020 and 2019, we had no
cumulative undeclared dividends on our Series A Preferred.
The provisions of our Series A-1 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-1 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, 2020 and 2019, there were
14,782 and 0 shares of our Series A-1
Preferred outstanding, respectively. As of December 31, 2020, we
had no cumulative undeclared
dividends on our Series A-1
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, 2020 and
2019, there were 239,400 shares of Series B Preferred outstanding.
As of December 31, 2020 and 2019, we had cumulative undeclared
dividends on our Series B Preferred of approximately
$8,000.
The provisions of our Series D Preferred prohibit
the payment of dividends on our Common Stock unless the dividends
on our preferred shares are first paid. In addition, upon a
liquidation, dissolution or sale of our business, the holders of
our Series D Preferred will be entitled to receive, in preference
to any distribution to the holders of Common Stock, initial
distributions of $1,000 per share, plus all accrued but unpaid
dividends. As of December 31, 2020 and 2019, there were 22,863.28 and 0 shares of Series D
Preferred outstanding, respectively. As of December 31, 2020, we
had no cumulative undeclared dividends on our Series D
Preferred.
The conversion of our Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock and Series D Preferred
Stock and the exercise of currently outstanding warrants could
result in significant dilution to the holders of our common
stock.
The
holders of our Series A Preferred Stock, Series A-1 Preferred
Stock, Stock Series B Preferred Stock and Series D Preferred Stock
may elect to convert their shares of Preferred Stock into shares of
Common Stock. As of December 31, 2020, we had outstanding: (i)
14,911 shares of Series A Preferred Stock, which are convertible
into 74,555,000 shares of Common Stock; (ii) 14,782 shares of
Series A-1 Preferred Stock, which are convertible into 73,910,000
shares of Common Stock; (iii) 239,400 shares of Series B Preferred
Stock, which are convertible into 46,029 shares of Common Stock;
and (iv) 22,863.28 shares of Series D Preferred Stock, which are
convertible into 392,166,023 shares of Common Stock. In addition to
our outstanding shares of Preferred Stock, as of December 31, 2020,
there were outstanding warrants to purchase 753,775 shares of our
Common Stock.
The
conversion of our Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock and Series D Preferred Stock, as
well as the exercise of our outstanding warrants could result in
significant dilution to existing common shareholders, adversely
affect the market price of our Common Stock and impair our ability
to raise capital through the sale of additional equity
securities.
Upon the occurrence of certain events, we may be required to redeem
all or a portion of our Preferred Stock.
Holders of certain of our Preferred Stock may
require us to redeem all or any portion of such Holder’s
shares Preferred Stock within
specific date from issuance or in the event of the consummation of
a Change of Control (as such term is defined in the Certificate of
Designations, Preferences and Rights of each class of Preferred
Stock). We cannot assure
you that we will maintain sufficient cash reserves or that our
business will generate cash flow from operations at levels
sufficient to permit us to redeem our shares of Preferred Stock if
and when required to do so. In the event we have insufficient cash
available or do not have access to additional third-party
financings on commercially reasonable terms or at all to complete
such redemption, our business, results of operations, and financial
condition may be materially adversely affected.
Certain large shareholders may have certain personal interests that
may affect the Company.
As a result of the securities issued to Nantahala Capital
Management, LLC (“Nantahala
Capital Management”),
and the related entities controlled by Nantahala Capital
Management, (i) Blackwell Partners LLC - Series A, (ii) Nantahala
Capital Partners Limited Partnership, (iii) Nantahala Capital
Partners II Limited Partnership, (iv) Nantahala Capital Partners
SI, LP, (v) NCP QR Limited Partnership, and (vi) Silver Creek CS
SAV, L.L.C. (collectively, "Nantahala"),
Nantahala beneficially owns, in
the aggregate, approximately 37% of the Company’s outstanding
voting securities as of March 26, 2021. As a result,
Nantahala has the potential ability to exert influence over the
outcome of issues requiring approval by the Company’s
shareholders. This concentration of ownership may have effects
such as delaying or preventing a change in control of the Company
that may be favored by other shareholders or preventing
transactions in which shareholders might otherwise recover a
premium for their shares over current market
prices.
Our corporate
documents and Delaware law contain provisions that could
discourage, delay or prevent a change in control of the
Company.
Provisions
in our 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,
holders of Preferred Stock could make it more difficult for a third
party to acquire us.
Our Amended Charter designates courts within the State of Delaware
as the sole and exclusive forum for certain types of actions and
proceedings that may be initiated by our stockholders, and the
federal district courts for the United States of America for claims
brought under the Securities Act of 1933, as amended, which could
limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers,
employees or agents.
Our
Amended and Restated Certificate of Incorporation (the
“Amended
Charter”) require that, to the fullest extent
permitted by law, and unless the Company consents in writing to the
selection of an alternative forum, a state court located within the
State of Delaware (or, if no state court located within the State
of Delaware has jurisdiction, the federal district court for the
District of Delaware), will, to the fullest extent permitted by
law, be the sole and exclusive forum for each of the
following:
●
any derivative
action or proceeding brought on behalf of the Company;
●
any action
asserting a claim of breach of a fiduciary duty owed by any
director or officer or other employee of the Company to the Company
or the Company’s stockholders;
●
any action
asserting a claim against the Company or any director or officer or
other employee of the Company arising pursuant to any provision of
the Delaware General Corporation Law or the Company’s Amended
Charter, or the Amended and Restated Bylaws; or
●
any action
asserting a claim against the Company or any director or officer or
other employee of the Company governed by the internal affairs
doctrine.
Furthermore, the
Amended Charter sets forth that the federal district courts of the
United States of America are the exclusive forum for the resolution
of any causes of action arising under the Securities Act of 1933,
as amended (the “Securities
Act”).
Because
the applicability of the exclusive forum provision is limited to
the extent permitted by law, we believe that the exclusive forum
provision would not apply to suits brought to enforce any duty or
liability created by the Securities Exchange Act of 1934, as
amended (“Exchange
Act”), or any other claim for which the federal courts
have exclusive jurisdiction. We note that there is uncertainty as
to whether a court would enforce the provision and that investors
cannot waive compliance with the federal securities laws and the
rules and regulations thereunder. Although we believe this
provision benefits us by providing increased consistency in the
application of Delaware law and federal law under the Securities
Act in the types of lawsuits to which they apply, the provisions
may have the effect of discouraging lawsuits against our directors
and officers.
We do not expect
to pay cash dividends on our Common Stock for the foreseeable
future.
We
have never paid cash dividends on our Common Stock and do not
anticipate that any cash dividends will be paid on the Common Stock
for the foreseeable future. The payment of any cash dividend by us
will be at the discretion of our Board of Directors and will depend
on, among other things, our earnings, capital, regulatory
requirements and financial condition. Furthermore, the terms of our
Series A Preferred, Series A-1 Preferred, Series B Preferred,
Series C Preferred and Series D Preferred directly limit our
ability to pay cash dividends on our Common Stock.
-19-
GENERAL RISK FACTORS
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 epidemics, pose 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.
COVID-19
has prevented employees from returning to physical offices. In many
cases, our potential customers in the government or commercial
enterprise-side like to test our software in their labs with their
systems and hardware. Potential customers have been unable to do
this and that has caused purchase decisions to be delayed as these
employees who would be testing are now working from their homes and
can’t simulate test environments. COVID-19 has further
led to a distributed work environment. Decision makers are now
working from their homes, from all different parts of a state or
country. Some have weak or no Internet connections, making it
harder to review paperwork to decide on a large financial purchase.
Some decision makers want to have more conversations with more
people, and mull over decisions longer, versus in the past, when an
individual could walk into a decision makers office and garner more
rapid approval. Some countries have limits on how many people are
permitted to gather in one meeting or have been hit particularly
hard with many residents suffering and dying from the COVID-19
virus. There is a new paradigm emerging in making critical
decisions from a video conference calls versus in
person.
An
economic recession had set in from the pandemic in 2020. Some
companies are not receiving payments and in turn are not making
payments to us, causing impairments in our ability to pay
others. COVID-19 has led to some of our customers and
potential customers being stricken with the virus causing them to
not be able to work for many weeks and therefore causing delays for
us in our projects or decisions. Technology partners have
slowed down and/or laid off employees, impacting us downstream
because decisions makers have been furloughed or the work has been
passed to new employees who need to come up to speed on a
particular project. The closing/downsizing of our offices due
to COVID-19 has further caused employees to work from home on
unsecured personal Wifi networks, and as such, working from home
may cause security breaches such as malware, ransomware, and
Phishing attempts. These attempts in some cases have knocked out
their ability to have a connection and be able to work until their
IT department resolves their issues.
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.
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.
|
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
None.
|
ITEM 2.
|
PROPERTIES
|
Our corporate headquarters is located in San Diego, California and
is currently leased on a month-to-month basis. We sublet our former
headquarters effective March 1, 2021. As of December 31, 2020, in
addition to our corporate headquarters, we lease properties in the
following locations: Ottawa, Province of Ontario, Canada; Portland,
Oregon; Mexico City, México. Management believes that leaving
the former headquarters and subleasing the space saves the company
money. The new corporate headquarters space is small and adequate
for our needs today. When the company reaches cash flow positive,
we will be looking for a new space that takes into account the
distributed workforce. We downsized our Portland, Oregon
engineering office in 2020 and are actively advertising the space
to be subleased. The San Diego headquarters suite has been sublet
effective March 1, 2021 and the headquarters moved to a smaller
office within San Diego. We maintain an office in Ottawa, Canada
and Mexico City, México for our employees and business in
those markets. The Tokyo, Japan office was closed in
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.
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information
Our
Common Stock does not trade on an established securities exchange.
Our Common Stock is quoted under the symbol “IWSY” on
the OTCQB marketplace. Any OTCQB marketplace quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual
transactions.
Holders
As of March 26, 2021, we had approximately 278
registered holders
of record of our Common Stock. A significant number of our shares
of Common Stock were held in street name and, as such, we believe
that the actual number of beneficial owners of our Common Stock is
significantly higher.
Dividends
We
have never declared or paid cash dividends on our Common Stock. We
currently intend to retain all available funds and any future
earnings for use in the operation of our business and do not
anticipate paying any cash dividends in the foreseeable future. Any
future determination to declare cash dividends will be made at the
discretion of our Board of Directors and will depend on our
financial condition, results of operations, capital requirements,
general business conditions and other factors that our Board of
Directors may deem relevant.
As
of December 31, 2020 and 2019, we had cumulative undeclared
dividends of approximately $0 relating to our Series A Preferred,
$0 related to our Series A-1 Preferred, $8,000 relating to our
Series B Preferred, $0 related to our Series C Preferred, and $0
related to our Series D Preferred.
Securities Authorized for Issuance under Equity Compensation
Plans
For
a discussion of our equity compensation plans, please see Item 11
of this Annual Report.
Recent Sales of Unregistered Securities
We
issued certain equity securities in unregistered transactions
during 2020 and fiscal year 2019. All of the securities issued in
non-registered transactions were issued in reliance on Section
3(a)(9) and/or Section 4(a)(2) of the Securities Act and were
reported in our Quarterly Reports on Form 10-Q and in our Current
Reports on Form 8-K filed with the Securities and Exchange
Commission during the fiscal year ended December 31, 2020 and
through the date of this report.
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
The
disclosures in this section are not required because we qualify as
a smaller reporting company under federal securities
laws.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes and other
financial information appearing elsewhere in this Annual Report on
Form 10-K. Readers are also urged to carefully review and consider
the various disclosures made by us, which attempt to advise
interested parties of the factors which affect our business,
including (without limitation) the disclosures made under the
captions “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and
“Risk Factors”, and in the audited consolidated
financial statements and related notes included in this Annual
Report on Form 10-K.
Overview
The
Company is a pioneer and leader in biometric identification and
authentication software. Using 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 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
leveraged by our patented IWS Biometric Engine®
The IWS
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. 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”), enabling developers and
system integrators to implement biometric solutions or integrate
biometric capabilities into existing
applications.
Our
secure credential solutions empower customers to design and create
smart digital identification wristbands and badges for access
control systems. We develop, sell and support software and design
systems that utilize digital imaging and biometrics for 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 badges and related databases and records and can be
used by, among others, schools, airports, hospitals, corporations
and governments. We have added the ability to incorporate multiple
biometrics into the ID systems with the integration of IWS
Biometric Engine®.
The
Company is also a developer of a biometric based multi-factor
authentication (MFA) Cloud-based service. ImageWare Authenticate
brings together Cloud and mobile technologies to offer multi-factor
authentication for the enterprise, and across industries. ImageWare
Authenticate consists of mobile and desktop clients, and the
backend system which is a Cloud-based Software-as-a-Service
(“SaaS”)
servicing Cloud-based biometric template matching requests.
ImageWare Authenticate comes in two offerings, Workforce and
Customer. ImageWare Authenticate Customer is leveraged by product
developers to enable biometric authentication for their consumers.
For the enterprise, ImageWare Authenticate Workplace provides
turnkey integration with Microsoft Windows, Microsoft Active
Directory, CA SSO, IBM Security Access Manager (“ISAM”), SAP Cloud
Platform, Fujitsu's RunMyProcess, Palo Alto Networks
VPN 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/scars, marks, and tattoos
(SMT), as well as 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 platform 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 multiple biometrics.
Recent Market Conditions
During March 2020, a global pandemic was declared
by the World Health Organization related to the rapidly growing
outbreak of a novel strain of coronavirus
(“COVID-19”).
The
pandemic has significantly impacted the economic conditions both in
the United States and worldwide, with accelerated effects in
February 2020 through the date of this Annual Report, as federal,
state and local governments react to the public health crisis,
creating significant uncertainties in both the worldwide and the
United States economies. The situation is rapidly changing and
additional impacts to our business may arise that we are not aware
of currently. We cannot predict whether, when or the manner in
which the conditions surrounding COVID-19 will change
including the timing of lifting any restrictions or office closure
requirements.
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.
On March 27, 2020, President Trump signed into law
the “Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”). The CARES Act, 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.
Critical Accounting Estimates
The discussion and analysis of our consolidated
financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“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 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.
Significant
estimates include the evaluation of our ability to continue as a
going concern, the allowance for doubtful accounts receivable,
assumptions used in the Black-Scholes model to calculate the fair
value of share-based payments, fair value of Series D Preferred and
financial instruments issued with and affected by the Series D
Preferred Financing (defined below), fair value of financial
instruments with and affected by the Series C Preferred (defined
below), fair value of Series A Preferred (defined below), fair
value of Series A-1 Preferred (defined below), assumptions used in
the application of revenue recognition policies, assumptions used
in the derivation of the Company’s incremental borrowing rate
used in the computation of the Company’s operating lease
liabilities 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.
The
following are our critical accounting policies because we believe
they are both important to the portrayal of our financial condition
and results of operations and require critical management judgments
and estimates about matters that are uncertain. If actual results
or events differ materially from those contemplated by us in making
these estimates, our reported financial condition and results of
operations for future periods could be materially
affected.
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;
●
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 (“PCS”)
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
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.
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.
Allowance
for Doubtful Accounts. We provide an allowance for our accounts
receivable for estimated losses that may result from our
customers’ inability to pay. We determine the amount of
allowance by analyzing historical losses, customer concentrations,
customer creditworthiness, current economic trends, and the age of
the accounts receivable balances and changes in our customer
payment terms when evaluating the adequacy of the allowance for
doubtful accounts.
Impairment
of Goodwill, Other Intangible and Long-Lived Assets.
The Company
accounts for its intangible assets under the provisions of ASC 350,
“Intangibles - Goodwill and Other”. In accordance with
ASC 350, intangible assets with a definite life are analyzed for
impairment under ASC 360-10-05 “Property, Plant and
Equipment” and intangible assets with an indefinite life are
analyzed for impairment under ASC 360 annually, or more often if
circumstances dictate. The Company performs its annual simplified
impairment test in the fourth quarter of each year. In December
2018, the Company adopted the provisions of ASU 2017-04,
“Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment”. The provisions
of ASU 2017-04 eliminate the requirement to calculate the implied
fair value of goodwill to measure a goodwill impairment charge.
Instead, entities will record an impairment charge based on the
excess of a reporting unit's carrying amount over its fair value.
Entities that have reporting units with zero or negative carrying
amounts will no longer be required to perform a qualitative
assessment assuming they pass the simplified impairment
test.
The
Company did not record any goodwill impairment charges for the
years ended December 31, 2020 or 2019.
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. The Company’s
management currently 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.
There
are many management assumptions and estimates underlying the
determination of an impairment loss, and estimates using different,
but reasonable, assumptions could produce significantly different
results. Significant assumptions include estimates of future levels
of revenue and operating expense. Therefore, the timing and
recognition of impairment losses by us in the future, if any, may
be highly dependent upon our estimates and assumptions. There can
be no assurance that goodwill impairment will not occur in the
future.
Stock-Based
Compensation. At
December 31, 2020 and 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 general and administrative, sales and marketing, engineering and
customer service expense based upon the departments to which
substantially all of the associated employees report and credited
to additional paid-in capital.
ASC 718 requires the use of a valuation model to
calculate the fair value of stock-based awards. For the years ended
December 31, 2020 and 2019, 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, 2020 and 2019 ranged
from 57% and 83%.
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 to value the grants issued in 2020 and 2019 as computed by
this method was 5.17 years. The effect of 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 averaged 2.58% for the years ended
December 31, 2020 and 2019. 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 estimated an annualized
forfeiture rate of approximately 5.0% for corporate officers, 4.1%
for members of the Board of Directors and 15.0% for all other
employees. The Company reviews the expected forfeiture rate
annually to determine if that percent is still reasonable based on
historical experience.
Income
Taxes. The Company accounts for
income taxes in accordance with ASC 740, “Accounting for Income
Taxes”.
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.
ASC
740-10 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.
We
recognize and measure uncertain tax positions in accordance with
GAAP, pursuant to which we only recognize the tax benefit from an
uncertain tax position if it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. Any tax
benefits recognized in the consolidated financial statements from
such positions are then measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon
ultimate settlement. We report a liability for unrecognized tax
benefits resulting from uncertain tax positions taken or expected
to be taken in a tax return. GAAP further requires that a change in
judgment related to the expected ultimate resolution of uncertain
tax positions be recognized in earnings in the quarter of such
change. We recognize interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
We
file annual income tax returns in multiple taxing jurisdictions
around the world. A number of years may elapse before an uncertain
tax position is audited and finally resolved. While it is often
difficult to predict the final outcome or the timing of resolution
of any particular uncertain tax position, we believe that our
analysis of income tax reserves reflects the most likely outcome.
We adjust these reserves, if any, as well as the related interest,
in light of changing facts and circumstances. Settlement of any
particular position could require the use of cash.
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.
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 1991, 1995, 2000,
2003, 2004, 2011, 2012, 2018 and 2020, though the Company has not
performed a study to determine the limitation. The Company has
reduced its deferred tax assets to zero relating to its federal and
state research credits because of such limitations. The
Company continues to disclose the tax effect of the net operating
loss carryforwards at their original amount 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.
On March 27, 2020, President Trump signed the CARES Act into law,
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.
Fair-Value
Measurements. 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).
Assessing
the significance of a particular input to the fair value
measurement requires judgment, considering factors specific to the
asset or liability. Determining whether a fair value
measurement is based on Level 1, Level 2, or Level 3 inputs is
important because certain disclosures are applicable only to those
fair value measurements that use Level 3 inputs. The use of
Level 3 inputs may include information derived through
extrapolation or interpolation which involves management
assumptions as well as valuation techniques employing Monte Carlo
simulation methodologies.
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
●
Lease
classification
●
Initial direct
costs
For
a detailed discussion on the application of these and other
accounting policies, see Note 2 to the Notes to the Consolidated
Financial Statements for the Year Ended December 31,
2020.
Comparison of Results for Fiscal Years Ended December 31, 2020 and
2019
Product
Revenue
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
Net Product Revenue
|
2020
|
2019
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Software
and royalties
|
$872
|
$489
|
$383
|
78%
|
|
Percentage
of total net product revenue
|
39%
|
53%
|
|
|
|
Hardware
and consumables
|
$84
|
$96
|
$(12)
|
(13)%
|
|
Percentage
of total net product revenue
|
4%
|
10%
|
|
|
|
Services
|
$1,275
|
$338
|
$937
|
277%
|
|
Percentage
of total net product revenue
|
57%
|
37%
|
|
|
|
Total
net product revenue
|
$2,231
|
$923
|
$1,308
|
142%
|
Software and royalty revenue
increased 78% or approximately $383,000 during the year ended
December 31, 2020 as compared to the corresponding period in
2019. This increase is
attributable to higher identification project related revenue of
approximately $539,000, offset by lower law enforcement project
related revenue of approximately $11,000, lower royalty revenue of
approximately $116,000 and lower sales of boxed identity management
software sold through our distribution channel of approximately
$29,000. The increase in
identification project related revenue is reflective of the
expansion of the Company’s identity management software base
combined with the sale of additional software licenses into
existing identification projects caused by increased end-user
utilization during the year ended December 31, 2020 as compared to
the corresponding period in 2019. The decrease in our law
enforcement project revenue resulted from a decrease in the timing
of procurement by our law enforcement customers. The decrease in
boxed identity management software sold through our distribution
channel reflects slightly lower procurement from both domestic and
international customers and the decrease in royalty revenue
reflects the expiration of a minimum royalty
contract.
Revenue
from the sale of hardware and consumables decreased approximately
$12,000 during the year ended December 31, 2020 as compared to the
corresponding period in 2019 due to a decrease in project related
solutions containing hardware and consumable sales primarily to law
enforcement customers.
Services revenue is comprised primarily of
software integration services, system installation services and
customer training. Such revenue increased $937,000 during the
year ended December 31, 2020 as compared to the corresponding
period in 2019, due to an
increase in the service element of project related work completed
during the year ended December 31, 2020.
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 and
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 Annual 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 our ability to close sales transactions and 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 year ended December 31, 2020, we have focused on
strategically updating our products with the latest mobile and
cloud technology prioritized by market opportunities. We relaunched
ImageWare Authenticate (formerly GoVerify ID®) in July 2020. 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 have focused on the integration of the
suite of products that comprise our Identity Platform. Throughout
2021 we plan to continue to enhance our Identity Platform products,
including our EPI (our biometric smart access cards) and law
enforcement offerings by leveraging cloud and mobile technologies
to improve both functionality and value to the customer. Management
believes that these initiatives will result in the expansion of our
solutions into both law enforcement and non-governmental sectors
including commercial, consumer and healthcare applications, further
resulting in additional implementations of both our ImageWare
Authenticate products and Identity Platform
products.
Maintenance Revenue
|
|
Twelve Months Ended
December 31,
|
|||
|
Maintenance Revenue
|
2020
|
2019
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Total
maintenance revenue
|
$2,554
|
$2,583
|
$(29)
|
(1)%
|
Maintenance revenue was approximately $2,554,000
for the year ended December 31, 2020, as compared to approximately
$2,583,000 for the corresponding periods in 2019. For the year
ended December 31, 2020, identity management maintenance revenue
was approximately $1,264,000 as compared to $1,275,000 for the
comparable period in 2019. The decrease of $11,000
in identification software
maintenance revenue for the year ended December 31, 2020 as
compared to the corresponding period of 2019 is reflective of the
expiration of certain maintenance contracts combined with the
timing of the commencement of maintenance services related to a
certain customer. The decrease of $18,000 in law enforcement maintenance revenue for the
year ended December 31, 2020 as compared to the corresponding
period of 2019 is reflective of the expiration of certain
maintenance contracts.
We
anticipate growth of our maintenance revenue through the retention
of existing customers combined with the expansion of our installed
base resulting from the completion of project-oriented work;
however, we cannot predict the timing of this anticipated
growth.
Cost of Product Revenue
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
Cost of Product Revenue:
|
2020
|
2019
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
Software
and royalties
|
$54
|
$36
|
$18
|
50%
|
|
Percentage
of software and royalty product revenue
|
6%
|
7%
|
|
|
|
Hardware
and consumables
|
$52
|
$66
|
$(14)
|
(21)%
|
|
Percentage
of hardware and consumables product revenue
|
62%
|
69%
|
|
|
|
Services
|
$694
|
$116
|
$578
|
498%
|
|
Percentage
of services product revenue
|
54%
|
34%
|
|
|
|
Total
product cost of revenue
|
$800
|
$218
|
$582
|
267%
|
|
Percentage
of total product revenue
|
36%
|
24%
|
|
|
The cost of software and royalty product revenue
increased approximately $18,000 from higher software and royalty
revenue for the year ended December 31, 2020 of approximately
$383,000 due to a significant percentage of the revenue increase
containing solutions with extremely minimal third-party software
costs. In addition to changes
in costs of software and royalty product revenue caused by revenue
level fluctuations, costs of products can vary as a percentage of
product revenue from period to period depending upon level of
software customization and third-party software license content
included in product sales during a given
period.
The cost of product
revenue for our hardware and consumable sales during the year ended
December 31, 2020 decreased approximately
$14,000 as
compared to the corresponding period in 2019 due primarily to lower hardware and consumable
product revenue of approximately $12,000 during the 2020 period.
The
cost of services revenue increased approximately $578,000 during
the year ended December 31, 2020 as compared to the corresponding
period in 2019 due to higher service revenue of approximately
$937,000. Cost of services revenue as a percentage of service
revenue increased to 54% for the year ended December 31, 2020 as
compared to 34% for the corresponding 2019 period. This increase
reflects the one-time impact of additional service costs incurred
in the completion of the service element for a particular customer.
Although changes in costs of services product revenue are sometimes
caused by revenue level fluctuations, costs of services can also
vary as a percentage of service revenue from period to period
depending upon both the level and complexity of professional
service resources utilized in the completion of the service
element.
Cost of Maintenance Revenue
|
Maintenance cost of revenue
|
Twelve Months Ended
December 31,
|
|
|
|
|
(dollars in thousands)
|
2020
|
2019
|
$
Change
|
%
Change
|
|
Total
maintenance cost of revenue
|
$448
|
$425
|
$23
|
5%
|
|
Percentage
of total maintenance revenue
|
18%
|
16%
|
|
|
Cost
of maintenance revenue increased approximately $23,000 during the
year ended December 31, 2020 as compared to the corresponding
period in 2019 despite lower maintenance revenue of approximately
$29,000. This increase is reflective of higher maintenance labor
costs incurred during the year ended December 31, 2020 as compared
to the corresponding period in 2019 due primarily to the
composition of engineering resources used in the provision of
maintenance services.
Product
Gross Profit
|
|
Twelve
Months Ended
December
31,
|
|
|
|
|
Product
gross profit
|
2020
|
2019
|
$
Change
|
%
Change
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$818
|
$453
|
$365
|
81%
|
|
Percentage of
software and royalty product revenue
|
94%
|
93%
|
|
|
|
Hardware and
consumables
|
$32
|
$30
|
$2
|
7%
|
|
Percentage of
hardware and consumables product revenue
|
38%
|
31%
|
|
|
|
Services
|
$581
|
$222
|
$359
|
162%
|
|
Percentage of
services product revenue
|
46%
|
66%
|
|
|
|
Total product gross
profit
|
$1,431
|
$705
|
$726
|
103%
|
|
Percentage of total
product revenue
|
64%
|
76%
|
|
|
Software and royalty gross profit increased 81% or
approximately $365,000 for the year ended December 31, 2020 as
compared to the corresponding period in 2019, due primarily to higher software and royalty
revenue of approximately $383,000 combined with higher software and
royalty cost of revenue of $18,000 for the same period. This
revenue increase with only a minimal increase in software and
royalty cost of revenue reflects
extremely low third-party software costs. In addition to changes in
costs of software and royalty product revenue caused by revenue
level fluctuations, costs of products can vary as a percentage of
product revenue from period to period depending upon level of
software customization and third-party software license content
included in product sales during a given
period.
Hardware and consumables gross profit increased
approximately $2,000 for the year ended December 31, 2020, as
compared to the 2019 period, due primarily to lower hardware and
consumable revenue of approximately $12,000 combined with lower cost of hardware and
consumable revenue of approximately $14,000. These decreases result
from a decrease in project related solutions containing hardware
and consumable components.
Services
gross profit increased approximately $359,000 for the year ended
December 31, 2020 as compared to the corresponding period in 2019
due to higher service revenue of approximately $937,000 combined
with higher service cost of revenue of $578,000 for the year ended
December 31, 2020 as compared to the corresponding period in 2019.
The decrease in services gross profit as a percentage of services
revenue from 66% in the year ended December 31, 2019 to 46% in the
corresponding period of 2020 reflects the one-time impact of
additional service costs incurred in the completion of the service
element for a particular customer. Although changes in costs of
services product revenue are sometimes caused by revenue level
fluctuations, costs of services can also vary as a percentage of
service revenue from period to period depending upon both the level
and complexity of professional service resources utilized in the
completion of the service element.
Maintenance
Gross Profit
|
Maintenance gross profit
|
Twelve
Months Ended
December
31,
|
|
|
|
|
(dollars in thousands)
|
2020
|
2019
|
$
Change
|
%
Change
|
|
Total
maintenance gross profit
|
$2,106
|
$2,158
|
$(52)
|
(2)%
|
|
Percentage
of total maintenance revenue
|
82%
|
84%
|
|
|
Gross
profit related to maintenance revenue decreased 2% or approximately
$52,000 for the year ended December 31, 2020 as compared to the
corresponding period in 2019. This decrease reflects lower
maintenance revenue of approximately $29,000 combined with higher
cost of maintenance revenue of approximately $23,000. The decrease
in maintenance revenue results from the timing of maintenance
revenue recognition related to a certain customer combined with the
expiration of certain maintenance contracts. The increase cost of
maintenance revenues for the year ended December 31, 2020 as
compared to the corresponding period in 2019 is due primarily to
the composition of engineering resources used in the provision of
maintenance services. The decrease in maintenance revenue results
from the timing of maintenance revenue recognition related to a
certain contract. Maintenance gross profit can change from period
to period depending upon both the level and complexity of
engineering resources utilized in the provision of the maintenance
services.
Operating
Expense
|
|
Twelve
Months Ended
December
31,
|
|
|
|
|
Operating expense
|
2020
|
2019
|
$ Change
|
% Change
|
|
(dollars in thousands)
|
|
|
|
|
|
General
and administrative
|
$4,102
|
$3,614
|
$488
|
14%
|
|
Percentage
of total net revenue
|
86%
|
103%
|
|
|
|
Sales
and marketing
|
$2,936
|
$3,937
|
$(1,001)
|
(25)%
|
|
Percentage
of total net revenue
|
61%
|
112%
|
|
|
|
Research and
development
|
$5,706
|
$7,488
|
$(1,782)
|
(24)%
|
|
Percentage
of total net revenue
|
119%
|
214%
|
|
|
|
Depreciation
and amortization
|
$72
|
$71
|
$1
|
1%
|
|
Percentage
of total net revenue
|
2%
|
2%
|
|
|
General and Administrative Expense
General
and administrative expense is comprised primarily of salaries and
other employee-related costs for executive, financial, and other
infrastructure personnel. General legal, accounting and consulting
services, insurance, occupancy and communication costs are also
included with general and administrative expense.
The
dollar increase of approximately $488,000 in general and
administrative expense for the year ended December 31, 2020 as
compared to the corresponding period in 2019 is comprised of the
following major components:
●
Overall decrease in personnel related expense of
approximately $55,000 is due to reductions in employer
contributions to employee benefit plans of approximately $230,000
offset by higher personnel expenses of approximately
$175,000 due to the effects of
various senior management changes;
●
Increases
in professional services of approximately $252,000 which includes
higher legal fees of approximately $197,000, higher
patent-related legal and other fees of approximately $155,000
resulting from the Company’s efforts to monetize certain
patents, higher contractor and contract service expenses of
approximately $23,000 and higher general corporate expense of
$16,000 offset by reductions in Board of Director fees of
approximately $6,000, lower investor and public relations fees of
approximately $106,000 and lower audit fees of approximately
$27,000,
●
Increase
in insurances, licenses, dues, rent, office related costs and other
of approximately $21,000;
●
Increase
in financing expense of approximately $66,000; and
●
Increase
in stock-based compensation expense related to options and
restricted stock units ("RSU’s") of approximately
$204,000.
We
continue to focus our efforts on achieving additional future
operating efficiencies by reviewing and improving upon existing
business processes and evaluating our cost structure. We believe
these efforts will allow us to continue to gradually decrease our
level of general and administrative expense expressed as a
percentage of total revenue.
Sales and Marketing Expense
Sales and marketing expense consists primarily of the salaries,
commissions, other incentive compensation, employee benefits and
travel expense of our sales, marketing, and business development
personnel.
The
dollar decrease of approximately $1,001,000 during the year ended
December 31, 2020 as compared to the corresponding period in 2019
is primarily comprised of the following major
components:
●
Decrease in personnel related expense of
approximately $369,000 driven
primarily by headcount reductions;
●
Decrease in contractor and contract services of
approximately $388,000 resulting from lower contract service expense of
approximately $303,000 which includes lower dues and subscription expense, and reduced
utilization of certain sales consultants of approximately
$85,000.;
●
Decrease
in travel, trade show expense and office related expense of
approximately $257,000;
●
Decrease in
stock-based compensation expense of approximately $45,000; and
●
Increase
in our Mexico sales office expense of approximately $58,000 due to
certain personnel separation expenses.
Research and Development Expense
Research and development expense consists primarily of salaries,
employee benefits and outside contractors for new product
development, product enhancements, custom integration work and
related facility costs.
Research and
development expense decreased approximately
$1,782,000 for the year ended
December 31, 2020, as compared to the corresponding period in 2019,
due primarily to the following major
components:
●
Decrease in personnel related expense of
approximately $1,092,000 due to headcount
reductions;
●
Decrease
in contractor fees and contract services of approximately
$537,000;
●
Decrease in rent, office related expense and engineering tools and
supplies of approximately $128,000; and
●
Decrease
in stock based-compensation expense of approximately $25,000.
Depreciation and Amortization
During
the year ended December 31, 2020, depreciation and amortization
expense increased approximately $1,000 as compared to the
corresponding period in 2019. The relatively small amount of
depreciation and amortization reflects the relatively small
property and equipment carrying value.
Interest Expense (Income), Net
For
the year ended December 31, 2020, we recognized interest income of
$2,000 and interest expense of $104,000. Interest expense for the
year ended December 31, 2020 was comprised of approximately $94,000
on our related party notes payable and approximately $10,000 on
notes payable under the PPP Loan program. For the year ended
December 31, 2019, we recognized interest income of $90,000 and
interest expense of $0.
Other
Expense
For the year ended
December 31, 2020, we recognized other income of approximately $0
and other expense of approximately $4,000. Other expense for
the year ended December 31, 2020 is comprised of
approximately $4,000 in
late payment penalty fees.
For the year ended
December 31, 2019, we recognized other income of approximately
$0 and other expense of
$1,000. Other expense for the year ended December 31, 2019 is
comprised of approximately $1,000 in foreign transaction
expense.
Change in Fair Value of Derivative Liabilities
For the year ended December 31, 2020, we
recognized approximately $369,000 from the decrease of derivative
liabilities arising from the consummation of the Series C
Convertible Preferred Stock financing in September 2019
(“Series C
Financing”). Such decrease was determined by
management using fair value methodologies and is included as
non-cash income under the caption “Change in fair value of
derivative liabilities” in our consolidated statement of
operations for twelve months ended December 31, 2020. Also for the
year ended December 31, 2020, we recognized approximately
$1,883,000 from the change in fair value of derivative liabilities
arising from the Series D Financing. Such decrease was determined
by management using fair value methodologies and is included as
non-cash income under the caption “Change in fair value of
derivative liabilities” in our consolidated statement of
operations for twelve months ended December 31, 2020.
For the year ended December 31, 2019, we
recognized approximately $696,000 from the decrease of derivative
liabilities arising from the consummation of the Series C Financing
in September 2019. Such decrease was determined by management using
fair value methodologies and is included as non-cash income under
the caption “Change in fair value of derivative
liabilities” in our consolidated statement of operations for
twelve months ended December 31, 2019.
Income Tax Expense
During
the years ended December 31, 2020 and 2019, we recorded an expense
for income taxes of $7,000 and $10,000, respectively. These tax
expenses relate to taxes on income generated in certain foreign
jurisdictions offset by research and development tax credits
generated in certain foreign jurisdictions.
We
have incurred consolidated pre-tax losses during the years ended
December 31, 2020, and 2019, and have incurred operating losses in
all prior periods. Management has determined that it is more likely
than not that a tax benefit from such losses will not be realized
and has established a full valuation allowance for any tax
benefits. Accordingly, we did not record a benefit for income taxes
for these periods.
Liquidity, Capital Resources and Going Concern
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 SaaS capabilities for existing products as well as
general working capital. 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 income from operations.
Lincoln Park Capital Fund, LLC
On
April 28, 2020, the Company entered into a purchase agreement, and
as amended on June 11, 2020 (the “Lincoln Purchase
Agreement”), and a registration rights agreement (the
“Lincoln Registration Rights Agreement”) with Lincoln
Park Capital fund, LLC (“Lincoln Park”) pursuant to
which Lincoln Park committed to purchase up to $10,250,000 of our
Common Stock.
Under
the terms and subject to the conditions of the Lincoln Purchase
Agreement, including stockholder approval of an amendment to the
Company’s Certificate of Incorporation, as amended from time
to time (the "Certificate of Incorporation"), to increase the
number of shares of the Company’s capital stock to 350
million shares, obtained from our shareholders effective June 9,
2020, we have the right, but not the obligation, to sell to Lincoln
Park, and Lincoln Park is obligated to purchase up to $10,250,000
of shares of Common Stock. Future sales of Common Stock under the
Lincoln Purchase Agreement, if any, will be subject to certain
limitations, and may occur from time to time, at our sole
discretion, over the 24-month period commencing on July 8, 2020,
and the other conditions set forth in the Purchase Agreement are
satisfied (such date on which all of such conditions are satisfied,
the “Commencement Date”). During the year ended
December 31, 2020, the Company sold an aggregate of 5,700,000
shares of Common Stock to Lincoln Park under the terms of the
Lincoln Purchase Agreement resulting in gross cash proceeds to the
Company of approximately $918,000.
After
the Commencement Date, on any business day over the term of the
Lincoln Purchase Agreement, the Company has the right, in its sole
discretion, to direct Lincoln Park to purchase up to 125,000 shares
of its Common Stock on such business day (the “Regular
Purchase”), subject to increases under certain circumstances
as provided in the Lincoln Purchase Agreement. The purchase price
per share of Common Stock for each such Regular Purchase will be
based on prevailing market prices of the Company’s Common
Stock immediately preceding the time of sale as computed under the
Lincoln Purchase Agreement. In each case, Lincoln Park’s
maximum commitment in any single Regular Purchase may not exceed
$500,000. In addition to Regular Purchases, provided that the
Company presents Lincoln Park with a Lincoln Park Purchase Notice
for the full amount allowed for a Regular Purchase, the Company may
also direct Lincoln Park to make accelerated purchases and
additional accelerated purchases as described in the Lincoln
Purchase Agreement.
Pursuant to the
terms of the Lincoln Purchase Agreement, in no event may the
Company issue or sell to Lincoln Park shares of Common Stock under
the Lincoln Purchase Agreement which, when aggregated with all
other shares of Common Stock then beneficially owned by Lincoln
Park and its affiliates (as calculated pursuant to Section 13(d) of
the Exchange Act and Rule 13d-3 promulgated thereunder), would
result in the beneficial ownership by Lincoln Park and its
affiliates of more than 4.99% of the then issued and outstanding
shares of Common Stock (the “Beneficial Ownership
Limitation”).
The
Lincoln Purchase Agreement and the Lincoln Registration Rights
Agreement contain customary representations, warranties, agreements
and conditions and indemnification obligations of the parties. The
Company has the right to terminate the Purchase Agreement at any
time, at no cost or penalty. The Company issued to Lincoln Park
2,500,000 shares of Common Stock in consideration for entering into
the Lincoln Purchase Agreement. Pursuant to this issuance, $400,000
was recorded by the Company as a deferred stock issuance cost. Such
amount is recorded in the Company’s consolidated balance
sheet under the caption “Other assets”. Such deferred
stock issuance costs will be recognized as a charge against paid in
capital in proportion to securities sold under this Lincoln
Purchase Agreement. During the year ended December 31, 2020, the
Company recognized approximately $36,000, respectively, as a charge
against paid in capital relating to securities sold under the
Lincoln Purchase Agreement.
Due to the
terms of the Lincoln Purchase Agreement as described above,
management is not currently expecting the related proceeds from the
Lincoln Purchase Agreement to be sufficient to sustain operations
for an extended period of time.
Series D Preferred Stock Financings
On
November 12, 2020 and December 23, 2020, the Company consummated
private placements of 12,060 shares of its Series D Convertible
Preferred Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds included approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Series D Purchase Agreement"), by and
between the Company and certain accredited investors (the
"Purchasers"), for the sale
of the Series D Preferred at a purchase price of $1,000 per share
of Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities, and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of cash or shares of
Series D Preferred.
Concurrently with
the execution of the Purchase Agreement, the Company and the
Investors executed (i) a Registration Rights Agreement, pursuant to
which the Company agreed to file a registration statement with the
SEC within thirty days of closing to register the shares of Common
Stock issuable upon conversion of the Series D Preferred; (ii) a
Series C Exchange Agreement (the "Exchange Agreement"), pursuant to
which the Company and certain holders of the Company’s Series
C Preferred agreed to exchange their Series C Preferred, with a
liquidation preference of approximately $10.0 million, for Series D
Preferred at closing; and (iii) a Term Loan and Security Agreement
(“Loan
Agreement”), pursuant to which each investor signatory
thereto agreed to make a term loan to the Company, secured by all
assets of the Company, in an amount equal to 20% of such
investor’s purchase commitment as set forth in the Purchase
Agreement (“Bridge
Loan”), which Bridge Loan, plus accrued interest,
rolled into, and was used to purchase, Series D Preferred at
Closing.
Bridge
Loan
Concurrently with the execution of the Series D
Purchase Agreement, the Company and certain investors in the Series
D Financing executed the Loan Agreement, pursuant to which each
such investor signatory thereto (the "Investors") agreed to the Bridge Loan, secured by all
assets of the Company, in an amount equal to 20% of such
Investor’s purchase commitment as set forth in the Series D
Purchase Agreement, which Bridge Loan, plus accrued interest,
rolled into, and was used to purchase, Series D Preferred at
Closing. For more information regarding the Series D Purchase
Agreement, the Investors, the Loan Agreement, and the Bridge Loan,
see Note 1, Description of Business and Operations to
the consolidated financial statements.
Pursuant
to the Bridge Loan, the Company received proceeds of $2,187,000 in
September 2020. The Bridge Loan bears interest at a fixed
rate of 12% and is due and payable in arrears on the earlier of the
Loan Conversion Date, as such term is defined in the Loan
Agreement, or six months after the disbursement of the Bridge Loan.
All amounts due and payable pursuant to the Bridge Loan are
automatically convertible, without further action by the Investors,
into shares of Series D Preferred at closing at a purchase price of
$1,000 for each share of Series D Preferred. The repayment of all
amounts due under the terms of the Loan Agreement are secured by
all assets of the Company. On November 12, 2020, contemporaneously
with the closing of the Series D Preferred Financing, all amounts
due under the Bridge Loan were converted into shares of Series D
Preferred Stock.
Going Concern and Management’s Plan
At December 31, 2020, we had
negative working capital of approximately $19,349,000 as compared
to negative working capital of approximately $1,653,000 at December
31, 2019. Included in our
negative working capital as of December 31, 2020 are $24,128,000 of
derivative liabilities which are not required to be settled in cash
except in the event of the consummation of a Change of Control or
at any time after the fourth anniversary of the Series D Preferred
issuance, at which time the holders of the Series D Preferred may
require the Company to redeem in cash any or all of the
holder’s outstanding Series D Preferred at an amount equal to
the Series D Liquidation Preference Amount. At December 31, 2020
the Liquidation Preference Amount totaled
$22,863,000.
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.
To
address our working capital requirements, management has instituted
several cost cutting measures and has utilized cash proceeds from
borrowing under the PPP loan, sales of our Common Shares utilizing
the Lincoln Park facility and closing of the Series D Financing to
satisfy the Company’s working capital requirements. However,
we believe our available cash balances will be insufficient to
satisfy our cash requirement for the next twelve months from the
date of this filing. 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.
Other than the Lincoln Purchase Agreement, 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.
However,
in view of the matters described in
the preceding paragraphs, recoverability of a major portion of the
recorded asset amounts shown in the accompanying consolidated
balance sheet is dependent upon continued operations of the
Company, which, in turn, is dependent upon the Company’s
ability to generate positive cash flows from operations. The
Company, however, 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 regarding 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.
Operating Activities
Net cash used in operating activities was
approximately $8,009,000 during the year ended December 31, 2020 as
compared to $11,267,000 during the year ended December 31, 2019.
During the year ended December 31, 2020, net cash used in operating
activities consisted of net loss of $7,253,000 and an increase in
working capital and other assets and liabilities of $438,000. Those
amounts in addition to approximately $1,194,000 of non-cash income,
including $2,252,000 in income from the change in fair value of
derivative liabilities offset by $862,000 in stock-based
compensation, $72,000 in depreciation and amortization and $124,000
from the application of rent deposits. During the year ended
December 31, 2020, we generated cash of $690,000 from decreases in
current assets offset by $20,000 from increases in our operating
leases right-of-use assets and used cash of $410,000
through decreases in current
liabilities and deferred revenue offset by increases of $178,000 in
pension liability.
Net
cash used in operating activities was $11,267,000 during the year
ended December 31, 2019 as compared to $10,310,000 during the year
ended December 31, 2018. During the year ended December
31, 2019, net cash used in operating activities consisted of net
loss of $11,581,000 and an increase in working capital and other
assets and liabilities of $287,000. Those amounts were offset by
approximately $723,000 of non-cash costs and $696,000 in non-cash
income. Non-cash costs were $652,000 in stock-based compensation
and $71,000 in depreciation and amortization. Non-cash income
consisted of $696,000 in the change in fair value of derivative
liabilities. During the year ended December 31, 2019, we used cash
of $209,000 from increases in current assets offset by $168,000
from decreases in our operating leases right-of-use assets and
generated cash of $357,000 through increases in current liabilities
and deferred revenue offset by $32,000 used from decreases in
contract costs.
Investing Activities
There was no net cash used or generated from
investing activities for the year ended December
31, 2020. For the year ended December 31, 2019, we used cash of $31,000 to fund capital
expenditures.
Financing Activities
Cash generated from financing activities was
approximately $15,475,000 for the year ended December 31, 2020,
which consisted of cash of approximately $12,060,000 generated from
the sale of 12,060 shares of
Series D Preferred. Such amount includes $2,187,000 received by the
Company in the form of a Bridge Loan which was converted into
shares of Series D Preferred before recognition of approximately
$726,000 in cash direct stock issuance costs. We also generated
cash of approximately $900,000 from the issuance of related party
notes payable and generated cash of $1,571,000 from the issuance of
the PPP Loan under the CARES Act. Also in the year ended December
31, 2020, we generated cash of approximately $2,360,000 from the
sales of 15,700,000 shares of Common Stock before recognition of
approximately $64,000 in direct stock issuance costs. We used cash
of approximately $575,000 to repay certain related party notes
payable and used cash of approximately $51,000 for the payment of
dividends on our Series B Preferred.
Cash
generated from financing activities was approximately $6,635,000
for the year ended December 31, 2019, which consisted of cash
generated of approximately $166,000 from the exercise of 351,334
stock options resulting in the issuance of 351,334 shares of Common
Stock, and cash generated of $6,520,000 from the sale of 5,954,545
shares of Common Stock, offset by cash used of approximately
$51,000 for the payment of dividends on our Series B Preferred
Stock.
Real Property Leases
Our
corporate headquarters is located in San Diego, California, where
we now occupy approximately 500 square feet of office space at a
cost of approximately $2,000 per month. We entered into this
facility’s lease in February 2021 and this new lease
commenced on March 1, 2021 and is on a month-to-month basis. In
addition to our corporate headquarters, we also occupied the
following spaces at December 31, 2020:
●
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. The
Company extended this lease for a 30-day period and is currently
evaluating alternative premises which the Company believes are
readily available;
●
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,
2021.
Prior to entering into our current lease agreement
in January 2021 and moving our corporate headquarters to a new
location, we occupied 8,511 square feet of office space in San
Diego, at a cost of approximately $30,000 per month. In January
2021, we entered in a subleasing agreement for our previously
occupied corporate headquarters located in San Diego, California.
The term of the sublease commences on April 1, 2021 and expires on
April 20, 2025 coterminous with the expiration of the Company's
master lease. Sublease
payments due the Company approximate $26,000 per month over the
term of the sublease.
Stock-Based Compensation
Stock-based
compensation related to equity options and restricted stock has
been classified as follows in the accompanying consolidated
statements of operations (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
2019
|
|
Cost
of revenue
|
$15
|
$13
|
|
General
and administrative
|
550
|
347
|
|
Sales
and marketing
|
163
|
148
|
|
Research
and development
|
134
|
135
|
|
|
|
|
|
Total
|
$862
|
$643
|
Off-Balance Sheet Arrangements
At
December 31, 2020, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance, special purpose or
variable interest entities, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we did not
engage in trading activities involving non-exchange traded
contracts. As a result, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged
in such relationships. We do not have relationships and
transactions with persons or entities that derive benefits from
their non-independent relationship with us or our related parties
except as disclosed elsewhere in this Annual Report.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (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. See Note 2 to these consolidated
financial statements for a detailed discussion of recently issued
accounting pronouncements.
Impact of Inflation
The
primary inflationary factor affecting our operations is labor
costs, and we do not believe that inflation has materially affected
earnings during the past four years. Substantial increases in costs
and expense, particularly labor and operating expense, could have a
significant impact on our operating results to the extent that such
increases cannot be passed along to customers and end
users.
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
|
Our
business extends to countries outside the United States, and we
intend to continue to expand our foreign operations. As a
result, our revenue and results of operations are affected by
fluctuations in currency exchange rates, interest rates, and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
We
had approximately $23,000 and $104,000 in revenue from sources
outside the United States for the years ended December 31, 2020 and
2019, respectively. We made payments in foreign currencies to
fund our foreign operations of approximately $1,015,000 and
$983,000 for the years ended December 31, 2020 and 2019,
respectively. Changes in currency exchange rates affect the
relative prices at which we sell our products and purchase goods
and services. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations
on our future business, product pricing, results of operations, or
financial condition. We do not use foreign currency exchange
contracts or derivative financial instruments for hedging or
speculative purposes. To the extent foreign sales become a
more significant part of our business in the future, we may seek to
implement strategies which make use of these or other instruments
in order to minimize the effects of foreign currency exchange on
our business.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
Our
consolidated financial statements as of and for the years ended
December 31, 2020 and 2019 and the report of our independent
registered public accounting firm are included in Item 15 of this
Annual Report.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM 9A.
|
CONTROLS AND
PROCEDURES
|
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation
of our Management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rules 13a-15I and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), as of December 31,
2020. Based on this evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective to ensure that information
required to be disclosed in the reports submitted under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms. In
making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) in Internal Control—Integrated
Framework.
(b) Management’s Annual
Report on Internal Control over Financial
Reporting.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). Our internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes of
accounting principles generally accepted in the United
States.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only
reasonable assurance of achieving their control
objectives.
Our
Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our internal control over financial reporting as
of December 31, 2020. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) in Internal
Control—Integrated Framework. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that,
as of December 31, 2020 our internal control over financial
reporting was effective.
(c) Changes
in Internal Controls over Financial Reporting.
The
Company’s Chief Executive Officer and Chief Financial Officer
have determined that there have been no changes in the
Company’s internal control over financial reporting during
the period covered by this report identified in connection with the
evaluation described in the above paragraph that have materially
affected, or are reasonably likely to materially affect,
Company’s internal control over financial
reporting.
|
ITEM 9B.
|
OTHER INFORMATION
|
Not applicable.
PART
III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
|
The
following sets forth certain information regarding each of our
directors and executive officers.
|
Name
|
|
Age
|
|
Title/Position Held with the Company
|
|
Kristin
Taylor
|
|
53
|
|
President,
Chief Executive Officer, Director
|
|
Jay B. Lewis
|
|
62
|
|
Senior
Vice President, Chief Financial Officer
|
|
James
M. Demitrieus
|
|
72
|
|
Director
|
|
Douglas
Morgan
|
|
68
|
|
Director
|
|
Lauren
C. Anderson
|
|
63
|
|
Director
|
There
are no familial relationships between any of the Company’s
executive officers and directors listed above.
The
following biographical information regarding the foregoing
directors and officers of the Company following the Board
Restructuring is presented below:
Kristin Taylor, President,
Chief Executive Officer and Director. Ms. Taylor serves as
our President and Chief Executive Officer since her appointment in
March 2020 and as a member of our Board since May 2020, and is a
seasoned innovative technology executive with over 20 years of
experience in leading organizational modernization and developing
go-to-market strategies. She formerly served as Principal of
Veritas Lux since November 2019 and principal of Kristin Taylor
Consulting since 2012, in which she developed a proprietary
algorithmic methodology to weigh and rank the most influential
global technical analysts. From 2017 to 2019, Ms. Taylor served as
Global Vice President of Worldwide Analyst Relations at IBM and led
the efforts to modernize and transform IBM's analyst relations
organization to drive revenue, not just influence. From 2013 to
2017, she served as Vice President, Global Analyst and Public
Relations at MediaTek, the third largest fabless semiconductor
company in the world with a $30 billion market cap, where she led
the buildout of a new global Public and Analyst Relations
organization to penetrate the North American, European, Latin
American, Russian and Indian markets. Prior to that, she served in
various positions of increasing responsibility with Qualcomm from
1998 to 2010 including: Head of Industry Analyst Relations, Senior
Director of Business Development, and Director of Information
Technology. Ms. Taylor developed and commercialized a highly
successful embedded computing module, designed for notebook
computers which thrust Qualcomm into the computing sector in 2006
to create hundreds of millions of valuation as they expanded from
mobile. Ms. Taylor earned her Bachelor's degree in Sociology and
Business Management from the University of New Hampshire in Durham,
New Hampshire.
Jay B. Lewis, Senior Vice
President and Chief Financial Officer. Mr. Lewis
serves as our Senior Vice President and Chief Financial Officer
since his appointment on January 8, 2021. On March 23, 2021,
Mr. Lewis resigned from his position as Senior Vice President and
Chief Financial Officer, effective April 7, 2021. Mr.
Lewis has over 20 years of experience as a senior financial officer
of high growth public companies, and has raised over $300 million
of capital including public and private equity, high-yield and
other debt and executed over $400 million of M&A
transactions. Mr. Lewis previously served as the Chief
Financial Officer of ID Watchdog, Inc. from 2011 until 2017. ID
Watchdog provided subscription-based identity theft protection and
resolution services to individuals throughout the United States.
Prior to the August 2017 sale to Equifax, Inc. it was a public
company traded on the TSX Venture Exchange. As Chief Financial
Officer he managed all finance, accounting, public company
reporting, investor relations, tax matters and human resources as
well as other administrative functions. Prior to ID Watchdog, Lewis
served in various senior finance roles, including as Chief
Financial Officer of Jones Media Networks, Ltd., which owned cable
television networks and the fourth largest network radio company in
the United States, and as Vice President of Finance and Treasurer
of Jones International, Ltd., a holding company with controlling
interests in cable television and other media and technology
companies. Mr. Lewis is a Certified Public Accountant, an alumnus
of EY, a Big-4 public accounting firm, and holds a Bachelor's
degree in accounting from the University of Wyoming.
James M.
Demitrieus. Mr. Demitrieus was appointed as a
member of the Board of Directors on November 13, 2020. From March
2018 to present, Mr. Demitrieus has served as Managing Director of
Jameson Associates, a specialty investment management and financial
advisory firm. Prior to Jameson, he served in multiple
positions at Eyelock Corporation beginning in 2009, including Chief
Executive Officer from 2010 to 2018. Eyelock Corporation
provides iris based biometric solutions to various business
verticals. Prior to Eyelock Corporation, he served in various
senior executive roles, including as President of Sherwood Valve, a
division of Harsco Corporation, and as Chief Executive Officer
at Aluma Systems. Earlier in Mr. Demitrieus’ career, he
served in numerous senior accounting and finance roles, including
with the public accounting firm of Arthur Andersen & Co.
Mr. Demitrieus holds a Bachelor's in Business Administration
from Adelphi University in New York.
Mr.
Demitrieus was selected as a member of the Board due to his
experience in the field of biometrics, as well as his extensive
management, finance and accounting experience, that management
believes will provide the Board with valuable insights regarding
monetizing the Company’s product offerings and intellectual
property.
Douglas Morgan. Mr.
Morgan was appointed as a member of the Board of Directors on
November 24, 2020. From March 2019 to present, Mr. Morgan has
served as an Advisory Board member and Consultant to Clyra Medical
Technologies, a biotechnology company specializing in wound healing
and antimicrobial solutions, and prior to that as a Consultant to
the public parent company, BioLargo (symbol: BLGO) on business
strategy and a capital raise. He is CEO of Performance
Strategies, Inc., a business and technology consulting firm where
he has worked with companies across numerous sectors including
security, payments and biotech, assisting them with financing
strategies, market positioning, technology development and IP
strategy. Earlier in his career, he helped found Hirsch
Electronics, a security systems company known for its patented
ScamblePad product. He served as Hirsch’s VP
Engineering managing the development of their entire line of
security systems and controllers, and later as a Director helped
negotiate Hirsch’s merger with publicly traded Identiv
(symbol: INVE) where he again served on the Board of
Directors. He graduated Summa Cum Laude from both MIT with a
BS in Computer Science, and Stanford University with an MS in
Electrical Engineering, and was also a National Science Foundation
Fellow.
Mr. Morgan was
selected as a member of the Board due to his past experience in the
Security industry, his background in intellectual property
development and strategies, and his work and broad experience in
business strategy, product definition and market positioning for
technology-based companies.
Lauren C.
Anderson. Ms. Anderson joined
the Company’s Board in February 2021. She is the founder and
Chief Executive Officer of LC Anderson International Consulting,
founded in 2013. Ms. Anderson, a former Federal Bureau of
Investigation ("FBI") Senior Executive, has a background in high
risk, complex, domestic, and international environments and
currently serves as an
advisor to the U.S. Comptroller General at the Government Accountability Office on
international security, intelligence, criminal justice, law
enforcement, and women’s leadership. Ms. Anderson also serves
as an advisor and special skilled role player for the U.S. Army,
and she is an advisor with Stellar Solutions. Ms. Anderson worked
in various leadership roles for the FBI from February 1984 until
December 2012, and was the FBI Legal Attaché at United States
Embassies in France and Morocco from March 2002 through November
2006. Ms. Anderson holds numerous professional awards and
certifications, including achievement awards from the Director of
National Intelligence, Legal Momentum, LIM College and Muhlenberg
College. She is a member of the Council on Foreign Relations, a
director emeritus for the Women's Forum of NY, served as a judge
for the Women's Safety XPrize and the Stevie Awards, and is a
mentor with the Women's Foreign Policy Group and Girl Security. She
holds a security clearance and numerous certifications with the
United States government. Ms. Anderson has an Honorary Doctorate of
Humane Letters, awarded in 2019, by LIM College, New York City, a
Bachelor of Arts in Psychology from Muhlenberg College, in
Allentown, Pennsylvania, and completed executive programs at each
of Harvard Business School, Northwestern University's Kellogg
School of Management, Cambridge Judge Business School, and the
George C. Marshall European Center for Security Studies in
Garmisch, Germany.
Ms.
Anderson was selected as a member of the Board due to her extensive
experience as a security expert at the highest level within the
Federal government, and her relationships with law enforcement and
government agencies, each key markets for the Company.
There
have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the
evaluation of the ability and integrity of any director or nominee
set forth above during the past ten years.
Board of Directors; Attendance at Meetings
The
Board held four meetings and acted by unanimous written consent
five times during the year ended December 31, 2020. Each director
attended at least 75% of Board meetings during the year ended
December 31, 2020. We have no formal policy with respect to the
attendance of Board members at annual meetings of shareholders, but
encourage all incumbent directors and director nominees to attend
each annual meeting of shareholders.
Director Independence
Our
Board has determined that all of its current members, other than
Ms. Taylor, are “independent” within the meaning of the
Nasdaq Stock Market Rules and SEC rules regarding
independence.
Board Committees and Charters
Our
Board has an Audit Committee, a Compensation Committee and a
Nominating and Corporate Governance Committee, each of which has
the composition and responsibilities described below.
Audit Committee
The
Audit Committee provides assistance to the Board in fulfilling its
legal and fiduciary obligations in matters involving our
accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by
our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal accounting
controls. The Audit Committee also oversees the audit efforts of
our independent accountants and takes those actions as it deems
necessary to satisfy it that the accountants are independent of
management. The Audit Committee currently consists of Messrs.
Demitrieus (Committee Chair), and Morgan, each of whom is a
non-management member of our Board. Mr. Demitrieus is also our
Audit Committee financial expert, as currently defined under
current SEC rules. The Audit Committee met four times during
the year ended December 31, 2020. We believe that the
composition of our Audit Committee meets the criteria for
independence under, and the functioning of our Audit Committee
complies with the applicable Nasdaq Stock Market Rules and SEC
rules and regulations.
Compensation Committee
The
Compensation Committee determines our general compensation policies
and the compensation provided to our directors and officers. The
Compensation Committee also reviews and determines bonuses for our
officers and other employees. In addition, the Compensation
Committee reviews and determines equity-based compensation for our
directors, officers, employees and consultants and administers our
stock option plans. The Compensation Committee currently
consists of Messrs. Morgan (Committee Chair) and Demitrieus,
each of whom is a non-management member of our Board. The
Compensation Committee did not meet during the year ended December
31, 2020. All members of the Compensation Committee currently meet
the criteria for independence under the applicable Nasdaq Stock
Market Rules and SEC rules and regulations.
Nominating and Corporate Governance
Committee
The
Nominating and Corporate Governance Committee is responsible for
making recommendations to the Board regarding candidates for
directorships and the size and composition of the Board. In
addition, the Nominating and Corporate Governance Committee is
responsible for overseeing our corporate governance guidelines and
reporting and making recommendations to the Board concerning
corporate governance matters. The Nominating and Corporate
Governance Committee currently consists of all the members of the
Board. The Nominating and Corporate Governance Committee did
not meet during the year ended December 31, 2020.
Board Leadership Structure
Our
Board has discretion to determine whether to separate or combine
the roles of Chief Executive Officer and Chair of the Board. Prior
to the appointment of Kristin Taylor as President and Chief
Executive Officer on March 2, 2020, and during the year ended
December 31, 2019, S. James Miller held the roles of both Chief
Executive Officer and Chair of the Board since 1996, and our Board
believed that at the time, his combined role was advantageous to
the Company and its shareholders. Currently, Ms. Taylor serves as
both Chief Executive Officer and Chair of the Board as the Board
believes, at this time, her combined role is advantageous to the
Company and its shareholders.
The
Board maintains effective independent oversight through a number of
governance practices, including open and direct communication with
management, input on meeting agendas, and regular executive
sessions.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a)
of the Exchange Act requires our directors and executive officers,
and persons who beneficially own more than 10% of a registered
class of our equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of our
Common Stock and other equity securities. Such persons are required
by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely
on a review of the copies of such reports furnished to us and
written representations that no other reports were required, during
the fiscal year ended December 31, 2019, all Section 16(a)
filing requirements were complied with in a timely
manner.
Board
Role in Risk Assessment
Management, in
consultation with outside professionals, as applicable, identifies
risks associated with the Company’s operations, strategies
and financial statements. Risk assessment is also performed through
periodic reports received by the Audit Committee from management,
counsel and the Company’s independent registered public
accountants relating to risk assessment and management. Audit
Committee members meet privately in executive sessions with
representatives of the Company’s independent registered
public accountants. The Board also provides risk oversight through
its periodic reviews of the financial and operational performance
of the Company.
Code of Ethics
The
Company has adopted a Code of
Business Conduct and Ethics policy that applies to our
directors and employees (including the Company’s principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions). The Company intends to promptly disclose (i) the
nature of any amendment to this code of ethics that applies to our
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions and (ii) the nature of any waiver, including an implicit
waiver, from a provision of this code of ethics that is granted to
one of these specified individuals, the name of such person who is
granted the waiver and the date of the waiver on our website in the
future. A copy of our Code of Business Conduct and
Ethics can be obtained from our website
at http://www.iwsinc.com.
Indemnification of Officers and Directors
To the
extent permitted by Delaware law, the Company will indemnify
its directors and officers against expenses and
liabilities they incur to defend, settle, or satisfy any civil
or criminal action brought against them on account
of their being or having been Company directors or officers
unless, in any such action, they are adjudged to have acted
with gross negligence or willful
misconduct.
Summary
Compensation Table
The following table
sets forth certain information about the compensation paid or
accrued during the years ended December 31, 2020 and 2019 to our
Chief Executive Officer and each of our two most highly compensated
executive officers other than our Chief Executive Officer who were
serving as executive officers at December 31, 2020, and whose
annual compensation exceeded $100,000 during such year or would
have exceeded $100,000 during such year if the executive officer
were employed by the Company for the entire fiscal year
(collectively the “Named
Executive Officers”).
|
Name and Principal Position (1)
|
Year
|
|
Salary
|
|
Bonus
|
|
|
Stock Awards
|
|
|
Option
Awards(2)(3)
|
|
|
All Other Compensation
|
|
|
Total
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Kristin
Taylor (4)
|
2020
|
|
$
|
275,000
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
11,561
|
(8)
|
|
$
|
286,561
|
|
|
|
Chief Executive Officer and Chair of the Board
|
2019
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sudheer
Koganti
|
2020
|
|
$
|
131,629
|
|
$
|
12,500
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
-
|
|
|
$
|
144,129
|
|
|
Vice President of Engineering
|
2019
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Dickson
|
2020
|
|
$
|
113,352
|
|
$
|
10,359
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
40,680
|
(9)
|
|
$
|
164,391
|
|
|
Vice President of Sales
|
2019
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
James Miller, Jr. (5)
|
2020
|
|
$
|
227,359
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,250
|
|
|
$
|
72,665
|
(10)
|
|
$
|
347,274
|
|
|
Former Chair of the Board and Former Chief Executive
Officer
|
2019
|
|
$
|
400,856
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,799
|
|
|
$
|
417,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan
Morris (6)
|
2020
|
|
$
|
168,000
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
168,000
|
|
|
Former Senior Vice President and Chief Financial
Officer
|
2019
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Harding (7)
|
2020
|
|
$
|
152,778
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,086
|
(11)
|
|
$
|
178,864
|
|
|
Former Vice President and Chief Technical Officer
|
2019
|
|
$
|
275,000
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
275,000
|
|
-46-
|
(1)
|
Jay B.
Lewis was appointed as Senior Vice President and Chief Financial
Officer of the Company on January 8, 2021, after the fiscal year
end date of December 31, 2020, and therefore has been excluded from
the Summary Compensation Table above. On March 23, 2021, Mr. Lewis
resigned from his position as Senior Vice President and Chief
Financial Officer, effective April 7, 2021.
|
|
|
|
|
(2)
|
All
option awards were granted under the Company’s 2020 Plan or
the 1999 Plan.
|
|
|
|
|
(3)
|
The
amounts presented in this column do not reflect the cash value or
realizable value of option grants to the named executive officers
during the year ended December 31, 2020 or 2019. During the year
ended December 31, 2020 and 2019, no named executive officer
exercised an option and therefore no value was realized during the
reporting period. The amounts reflect the grant date fair value of
the options awarded in the fiscal years ended December 31, 2020 and
2019, respectively, in accordance with the provisions of FASB ASC
Topic 718. We have elected to use the Black-Scholes option-pricing
model, which incorporates various assumptions including volatility,
expected life, and interest rates. We are required to make various
assumptions in the application of the Black-Scholes option-pricing
model and have determined that the best measure of expected
volatility is based on the historical weekly volatility of our
Common Stock. Historical volatility factors utilized in our
Black-Scholes computations for options granted during the years
ended December 31, 2020 and 2019 ranged from 57% to 83%. We have 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, 2020 and 2019 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, 2020 and 2019 was
2.58%. Dividend yield is zero,
as we do not expect to declare any dividends on shares of our
Common Stock 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.
We have estimated an annualized forfeiture rate of 5.0% for
corporate officers, 4.1% for members of the Board and 15.0% for all
other employees. We review the expected forfeiture rate annually to
determine if that percent is still reasonable based on historical
experience.
|
|
|
|
|
(4)
|
Ms.
Taylor was appointed as the Company’s President and Chief
Executive Officer on March 2, 2020, and received no compensation
prior to her employment. Under the
terms of Kristin Taylor’s Employment Agreement, dated March
2, 2020, Ms. Taylor is entitled to an option to purchase 1,750,000
shares of Common Stock, which option has not been granted as of the
date of this Annual Report, pending the negotiation of a new grant
since the consummation of the offering of Series D Preferred in
November 2020.
|
|
|
|
|
(5)
|
Effective
November 12, 2020, Mr. Miller, Former Chief Executive Officer of
the Company, resigned from his position as a member of the Board of
Directors of the Company. Although Mr. Miller currently provides
consulting services to the Company under the terms of an Amended
and Restated Consulting Agreement (“Consulting Agreement”), such
Consulting Agreement terminates on April 12, 2021.
|
|
|
|
|
(6)
|
Mr.
Morris was appointed as the Company’s Senior Vice President
and Chief Financial Officer on May 1, 2020, and received no
compensation prior to his employment. Effective December 31, 2020,
Mr. Morris’s employment as an officer and employee of the
Company was terminated by mutual agreement between Mr. Morris and
the Company.
|
|
|
|
|
(7)
|
Effective
July 21, 2020, Mr. Harding resigned from his position with the
Company.
|
|
|
|
|
(8)
|
Includes
group benefits paid to all employees of the Company.
|
|
|
|
|
(9)
|
Includes
$31,126 paid to Mr. Dickson in commissions earned during the fiscal
year, and $9,554 in group benefits paid to all employees of the
Company.
|
|
|
|
|
(10)
|
Includes
$39,315 in accrued paid time off paid to Mr. Miller upon his
resignation, and $33,350 in group benefits paid to all employees of
the Company.
|
|
|
|
|
(11)
|
Includes
$17,029 in accrued paid time off paid to Mr. Harding upon his
resignation, and $9,057 in group benefits paid to all employees of
the Company.
|
-47-
Outstanding
Equity Awards at Fiscal Year-End
The following table
sets forth information regarding unexercised options, stock that
has not vested and equity incentive awards held by each of the then
Named Executive Officers outstanding as of December 31,
2020:
|
|
Option Awards
|
|
Stock
Awards
|
|||
|
|
Number of
Securities
Underlying
Unexercised
Options:
Exercisable
(#)
|
Number of
Securities
Underlying
Unexercised
Options:
Unexercisable
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of Shares That
Have Not Vested
(#)
|
Market Value of Shares That Have Not
Vested
($)
|
|
Named
Executive Officers (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sudheer
Koganti
|
-
|
100,000
|
0.13
|
7/29/2030
|
100,000
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Dickson
|
-
|
100,000
|
0.13
|
7/29/2030
|
100,000
|
$-
|
|
|
|
|
|
|
|
|
|
Former
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Harding
|
-
|
-
|
$N/A
|
N/A
|
-
|
$-
|
|
|
|
|
|
|
|
|
|
S. James
Miller, Jr.
|
-
|
-
|
$N/A
|
N/A
|
-
|
$-
|
(1)
Jay B. Lewis was
appointed as Senior Vice President and Chief Financial Officer of
the Company on January 8, 2021, after the fiscal year end date of
December 31, 2020, and therefore has been excluded from the
Outstanding Equity Awards at Fiscal Year-End Table above.
On March 23, 2021,
Mr. Lewis resigned from his position as Senior Vice President and
Chief Financial Officer, effective April 7, 2021.
Under the terms of Kristin Taylor’s
Employment Agreement, dated March 2, 2020, Ms. Taylor is entitled
to an option to purchase 1,750,000 shares of Common Stock, which
option has not been granted as of the date of this Annual Report,
pending the negotiation of a new grant since the consummation of
the offering of Series D Preferred in November
2020.
Employment Agreements
Kristin Taylor. On
March 2, 2020, we entered into an employment agreement with Ms.
Kristin Taylor, the Company’s President and Chief Executive
Officer. This agreement provides for an annual base salary of
$330,000 for a period of 24 months effective April 10, 2020. Ms.
Taylor’s annual base salary was increased to $350,000
effective February 1, 2021. Ms. Taylor’s employment agreement
also provides for (i) the grant of a stock option to purchase 1.75
million shares of the Company's Common Stock, which stock option
has not been issued as of the date of this Annual Report. Upon
issuance, the stock option shall vest in three equal annual
installments beginning one year from the date of the employment
agreement; (ii) an annual bonus equal to 100% of Ms. Taylor's
annual salary upon meeting the following performance objectives:
(a) the Company establishing a major partnership that generates
$1.5 million in revenue during the calendar year 2020; (b) the
Company achieving positive cash flow by the year ended December 31,
2020; (c) the Company's operating loss being reduced by a minimum
of 50% by the year ended December 31, 2020; and (d) total sales
exceeding $10.0 million in 2020, with each objective equal to 25%
of the total bonus objective. If all performance objectives are
met, Ms. Taylor will be granted an additional stock option to
purchase 500,000 shares of Common Stock. In the event of
termination of her employment other than by reason of death or
disability, or for cause, the employment agreement is also
anticipated to provide Ms. Taylor with certain severance payments,
including continuation of her salary for the greater of one year or
the remaining term under her employment agreement.
Jay
Lewis. Mr. Lewis joined the
Company as its Senior Vice President and Chief Financial Officer on
January 7, 2021. The Company and Mr. Lewis are parties to a letter
agreement, pursuant to which Mr. Lewis will be paid an annual base
salary of $240,000. In addition to other benefits provided to the
Company’s executives, he will be issued an option to purchase
that number of shares of the Company’s Common Stock equal to
not less than 2% of the Company’s fully diluted shares of
Common Stock, determined in the discretion of the Board of
Directors, at an exercise price based on the fair market value of
the Company’s Common Stock on the date of grant. The option
shall vest ratably over a three-year period from the date of grant.
As of the date of this Annual Report, the Company has not issued
the option.
On March 23, 2021,
Mr. Lewis resigned from his position as Senior Vice President and
Chief Financial Officer, effective April 7,
2021.
-49-
Former
Named Executive Officers
S. James
Miller, Jr. On October 1, 2005, the
Company entered into an employment agreement with Mr. Miller,
pursuant to which Mr. Miller served as President and Chief
Executive Officer until his resignation on March 2, 2020. On March
2, 2020, the Company entered into a Transition Services Agreement
(the “Transition
Agreement”) with Mr. Miller, whereby Mr. Miller
continued to serve the Company as its Executive Chairman of the
Board of Directors until May 2, 2021; however, the Transition Agreement was
terminated on November 13, 2020, when the Company and Mr. Miller
entered into the Consulting Agreement (the “Consulting Agreement”). Under the
Consulting Agreement, Mr. Miller is to provide consulting services
for up to 16 hours per week in consideration for the payment to Mr.
Miller of a monthly consulting fee of $19,000 payable for five
months or through until April 12, 2021 (the “Termination Date”). In addition,
Mr. Miller is entitled to a commission equal to 1.0% of all amounts
actually paid to the Company resulting from certain contracts
and/or purchase orders received by the Company prior to the
Termination Date, provided the Company receives at least $1.7
million in revenue from such contracts and/or purchase orders. In
all cases, the maximum commission that Mr. Miller may receive based
on the foregoing is $228,000. In addition, Mr. Miller was entitled
to 525,000 vested restricted stock units (“RSUs”), and his remaining 262,000
RSUs were terminated.
David
Harding. On January 1, 2013, the Company entered into
an Employment Agreement with Mr. David Harding, pursuant to
which Mr. Harding served as the Company’s Vice President and
Chief Technical Officer until his resignation on July 21,
2020. The Agreement was originally for a one-year term, ending
on December 31, 2013; however, the Agreement was amended to extend
the expiration date to December 31, 2020. Under the terms of the
Agreement, Mr. Harding was paid a semi-monthly base salary of
$9,375. Following his resignation, Mr. Harding received his then
current salary accrued through the effective date of his
resignation, plus accrued compensation in connection with unused
vacation.
For purposes of the
above-referenced agreements, termination for “cause”
means the executive’s commission of a criminal act or an act
of fraud, embezzlement, breach of trust or other act of gross
misconduct; violations of policies or rules of the Company; refusal
to follow the direction given by the Company from time to time or
breach of any covenant or obligation under the above-referenced
agreements or other agreements with the Company; neglect of duty;
misappropriation, concealment, or conversion of any money or
property of the Company; intentional damage or destruction of
property of the Company; reckless conduct which endangers the
safety of other persons or property during the course of employment
or while on premises leased or owned by the Company; or a breach of
any obligation or requirement set forth in the above-referenced
agreements. A “change in control” as used in these
agreements generally means the occurrence of any of the following
events: (i) the acquisition by any person or group of 50% or
more of the Company’s outstanding voting stock; (ii) the
consummation of a merger, consolidation, reorganization, or similar
transaction other than a transaction: (1) in which
substantially all of the holders of the Company’s voting
stock hold or receive directly or indirectly 50% or more of the
voting stock of the resulting entity or a parent company thereof,
in substantially the same proportions as their ownership of the
Company immediately prior to the transaction, or (2) in which
the holders of the Company’s capital stock immediately before
such transaction will, immediately after such transaction, hold as
a group on a fully diluted basis the ability to elect at least a
majority of the directors of the surviving corporation (or a parent
company); (iii) there is consummated a sale, lease, exclusive
license, or other disposition of all or substantially all of the
consolidated assets of the Company and the Company’s
subsidiaries, other than a sale, lease, license, or other
disposition of all or substantially all of the consolidated assets
of the Company and the Company’s subsidiaries to an entity,
50% or more of the combined voting power of the voting securities
of which are owned by the Company’s shareholders in
substantially the same proportions as their ownership of the
Company immediately prior to such sale, lease, license, or other
disposition; or (iv) individuals who, on the date the
applicable agreement was adopted by the Board, are directors (the
“Incumbent
Board”) cease for any reason to constitute at least a
majority of the directors; provided, however, that if the
appointment or election (or nomination for election) of any new
director was approved or recommended by a majority vote of the
members of the Incumbent Board then still in office, such new
member shall, for purposes of the applicable agreement, be
considered as a member of the Incumbent Board.
Other than as set
forth above, there were no arrangements or understandings between
the Company’s Named Executive Officers and any other person
pursuant to which they were appointed as officers as of December
31, 2020. None of the Company’s Named Executive Officers as
of December 31, 2020 had a family relationship that is required to
be disclosed under Item 401(d) of Regulation S-K.
|
ITEM 12.
|
As of March 12, 2021, we had five classes of voting stock issued
and outstanding: (i) Common Stock; (ii) our Series A Preferred;
(iii) our Series A-1 Preferred; (iv) our Series B Preferred; and
(v) our Series D Preferred. The following tables sets forth
information regarding shares of Series A Preferred, Series A-1
Preferred, Series B Preferred, Series D Preferred and Common Stock
beneficially owned as of March 12, 2021.
The following tables set forth information
regarding shares of Series A Preferred, Series A-1 Preferred,
Series B Preferred, Series D Preferred, and Common Stock
beneficially owned as of March 12, 2021 by
(i)
Each
of our officers and directors;
(ii)
All
officer and directors as a group; and
(iii)
Each person known
by us to beneficially own five percent or more of the outstanding
shares of our Common Stock, Series A Preferred, Series A-1
Preferred, Series B Preferred and Series D Preferred.
Percent ownership
is calculated based on 6,148.7 shares of Series A Preferred,
5,922.0 shares of Series A-1 Preferred, 239,400 shares of Series B
Preferred, 22,661.3 shares of Series D Preferred and 274,959,927
shares Common Stock outstanding as of March 12,
2021.
|
Beneficial Ownership of Series
A Preferred
Name, Address and Title (if
applicable)
(1)
|
Series A Preferred Stock (2)(3)
|
% Ownership of Class (3)
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
CAP 1 LLC (4)
14000
Quail Spring Parkway, Suite 2200
Oklahoma
City, OK 73134
|
750
|
12.2%
|
|
Wynnefield Partners (5)
450 7th Ave. Suite
509
New York, NY,
10123
|
375
|
6.1%
|
|
Charles Frischer
4404 52nd Avenue NE
Seattle,
WA 98105
|
576
|
9.4%
|
|
Neal
Goldman
767 Third Avenue,
16th
Floor
New York, NY
10017
|
2,358.5
|
38.4%
|
*
less than 1%
(1)
Each of the Company’s Named Executive
Officers and directors who do not hold shares of Series A Preferred
are excluded from this table. The business address of each of the
executive officers and directors is 11440 W. Bernardo Court,
Suite 300, San Diego, California 92127.
(2)
In connection with
a private placement transaction completed in November and December
23, 2020 (the
“Series D
Financing”), all
of the outstanding shares of Series A-1 Preferred will be converted
into shares of Common Stock over a period of time with 100% of the
such outstanding shares being converted by August 1,
2021.
(3)
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
(4)
Mr.
David Sackler, President of CAP I LLC, may be deemed to have voting
and investment discretion over the securities identified
herein.
(5)
Wynnefield
Partners owns shares in its Wynnefield Partners SmallCap Value
Fund, Wynnefield Partners SmallCap Value LP 1 Funds, and its
Wynnefield SmallCap Value Offshore Fund.
-51-
|
Beneficial Ownership of Series A-1 Preferred
Name, Address and Title (if applicable)(1)
|
Series A-1
Preferred Stock(2)(3)
|
% Ownership
of Class (3)
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
CAP 1 LLC (4)
14000
Quail Spring Parkway, Suite 2200
Oklahoma
City, OK 73134
|
750
|
12.7%
|
|
Wynnefield Partners (5)
|
375
|
6.3%
|
|
450 7th Ave. Suite
509
New York, NY,
10123
|
|
|
|
Charles Frischer
4404 52nd Avenue NE
Seattle,
WA 98105
|
576.5
|
9.7%
|
|
Neal
Goldman
767 Third Avenue,
16th
Floor
New York, NY
10017
|
2,358.5
|
39.8%
|
(1)
Each of the Company’s Named Executive
Officers and directors who do not hold shares of Series A-1
Preferred are excluded from this table. The business address of
each of the executive officers and directors is 11440 W.
Bernardo Court, Suite 300, San Diego, California 92127.
(2)
In connection with
the Series D Financing, all of
the outstanding shares of Series A-1 Preferred will be converted
into shares of Common Stock over a period of time with 100% of such
outstanding shares being converted by August 1, 2021.
(3)
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
(4)
Mr.
David Sackler, President of CAP I LLC, may be deemed to have voting
and investment discretion over the securities identified
herein.
(5)
Wynnefield
Partners owns shares in its Wynnefield Partners SmallCap Value
Fund, Wynnefield Partners SmallCap Value LP 1 Funds, and its
Wynnefield SmallCap Value Offshore Fund.
|
Beneficial Ownership of Series B Preferred
Name, Address and Title (if
applicable) (1)
|
Series B
Preferred Stock
(2)
|
% Ownership
of Class (2)
|
|
Darrelyn
Carpenter
|
28,000
|
12%
|
|
Howard
Harrison
|
20,000
|
8%
|
|
Wesley
Hampton
|
16,000
|
7%
|
|
Frederick
C. Orton
|
20,000
|
8%
|
(1)
Each of the Company’s Named Executive
Officers and directors who do not hold shares of Series B Preferred
are excluded from this table. The business address of each of the
executive officers and directors is 11440 W. Bernardo Court,
Suite 300, San Diego, California 92127.
(2)
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
-52-
|
Beneficial Ownership of Series
D Preferred
|
Series D Preferred
|
% Ownership of
|
|
Name, Address and Title (if applicable) (1)
|
Stock (2)
|
Class (2)
|
|
|
|
|
|
Blackwell Partners LLC (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
2,421.7
|
10.7%
|
|
Nantahala Capital Partners Limited
Partnership (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
945.4
|
4.2%
|
|
Nantahala Capital Partners II Limited
Partnership (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
2,755.9
|
12.2%
|
|
Nantahala Capital Partners SI LP
(3)
|
|
|
|
c/o Nantahala
Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
7,146.9
|
31.5%
|
|
NCP QR LP (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
1,095.5
|
4.8%
|
|
Plum Investments L.P. (4)
|
|
|
|
1807
S. San Gabriel Blvd.
|
|
|
|
San
Gabriel, CA 91776
|
1,509.0
|
6.7%
|
|
Silver Creek CS SAV, L.L.C. (3)
|
|
|
|
c/o
Nantahala Capital Management, LLC
|
|
|
|
19
Old Kings Highway South, Suite 200
|
|
|
|
Darien,
CT 06820
|
721.6
|
3.2%
|
*
less than 1%
(1)
Each
of the Company’s Named Executive Officers and directors who
do not hold shares of Series D Preferred are excluded from this
table.
(2)
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
(3)
Nantahala
Capital Management, LLC is a Registered Investment Adviser and has
been delegated the legal power to vote and/or direct the
disposition of securities on behalf of these entities as a General
Partner or Investment Manager and would be considered the
beneficial owner of such securities. The above shall not be deemed
to be an admission by the record owners that they are themselves
beneficial owners of these shares of Series C Preferred for
purposes of Section 13(d) of the Exchange Act or any other
purpose.
(4)
Tom
Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold voting
and dispositive power over the shares identified
herein.
-53-
|
Beneficial Ownership of Common Stock
|
|
|
|
|
Number
|
Percent
|
|
Name
and Address
|
of Shares
(1)
|
of Class
(2)
|
|
Directors
and Named Executive Officers:
|
|
|
|
Kristin
Taylor, President and Chief Executive Officer
|
-
|
*
|
|
Jay
Lewis, Senior Vice President and Chief Financial
Officer
|
-
|
*
|
|
James
M. Demitrieus
|
-
|
*
|
|
Douglas
Morgan
|
-
|
*
|
|
Lauren C. Anderson
|
-
|
*
|
|
|
|
|
|
Total
beneficial ownership of Directors and Named Executive Officers as a
group (five persons):
|
-
|
*
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
Blackwell Partners LLC
(3)(4)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
42,426,169
|
15.46%
|
|
Nantahala Capital Partners
Limited Partnership (5)(4)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
16,652,077
|
6.1%
|
|
Nantahala Capital Partners II
Limited Partnership (6)(4)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
48,134,518
|
17.57%
|
|
Nantahala Capital Partners SI LP
(7)(4)
c/o Nantahala
Capital Management, LLC
19 Old Kings Highway
South, Suite 200
Darien, CT
06820
|
125,675,253
|
46.2%
|
|
NCP QR
LP (8)(4)
c/o Nantahala
Capital Management, LLC
19 Old Kings Highway
South, Suite 200
Darien, CT
06820
|
19,473,850
|
7.2%
|
|
Neal Goldman (9)
767 Third Avenue, 16th
Floor
New
York, NY10017
|
86,667,547
|
28.9%
|
|
Plum Investments
(10)
1807
S. San Gabriel Blvd.
San
Gabriel, CA 91776
|
39,421,295
|
14.5%
|
|
Silver Creek CS, SAV,
L.L.C (11)(4)
c/o
Nantahala Capital Management, LLC
19
Old Kings Highway South, Suite 200
Darien,
CT 06820
|
12,744,891
|
4.7%
|
|
W Ryan Goldman
(12)
570 Lawrence
Ave
Westfield, NJ.
07060 |
17,152,659
|
6.3%
|
|
Shellback Financial
(13)
16045
54th Ave
N
Minneapolis, MN.
55446
|
17,255,575
|
6.3%
|
*
less than 1%
-54-
|
(1)
|
All entries exclude beneficial ownership of shares issuable
pursuant to options, warrants, or other convertible securities that
have not vested, are not convertible, or that are not otherwise
exercisable as of the date hereof, or which will not become vested,
convertible or exercisable within 60 days of March 12,
2021.
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|
(2)
|
Percentages are rounded to the nearest one-tenth of one percent.
Percentages are based on 272,239,927 shares of Common Stock
outstanding as of March 12, 2021. Options, warrants, and other
convertible securities that are presently convertible or
exercisable, or convertible or exercisable within 60 days of March
12, 2021 are deemed to be beneficially owned by the shareholder
holding the options, warrants, or other convertible securities for
the purpose of computing the percentage ownership of that
shareholder, but are not treated as outstanding for the purpose of
computing the percentage of any other shareholder.
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|
(3)
|
Includes
41,538,593 shares issuable upon the conversion of approximately
2,421.7 shares of Series D Preferred issued in the Series D
Financing, of which 1,280 shares of Series D Preferred were
received in exchange for 128 shares of Series C Preferred on
November 12, 2020.
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|
(4)
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Nantahala
Capital Management, LLC is a Registered Investment Adviser and has
been delegated the legal power to vote and/or direct the
disposition of securities on behalf of this entity as a General
Partner or Investment Manager and would be considered the
beneficial owner of such securities. Wilmot B. Harkley and Daniel
Mack, as principles of Nantahala Capital Management, LLC, may be
deemed to hold voting and dispositive power over the shares
identified herein. The above shall not be deemed to be an admission
by the record owners or these selling shareholders that they are
themselves beneficial owners of these shares of securities for
purposes of Section 13(d) of the Exchange Act or any other
purpose.
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|
(5)
|
Includes
16,216,124 shares issuable upon the conversion of approximately
945.4 shares of Series D Preferred.
|
|
(6)
|
Includes
47,271,012 shares issuable upon the conversion of approximately
2,755.9 shares of Series D Preferred.
|
|
(7)
|
Includes
122,588,336 shares issuable upon the conversion of approximately
7,146.9 shares of Series D Preferred issued in the Series D
Financing, of which 3,970 shares of Series D Preferred were
received in exchange for 397 shares of Series C Preferred on
November 12, 2020.
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|
(8)
|
Includes
18,790,738 shares issuable upon the conversion of approximately
1,095.5 shares of Series D Preferred.
|
|
(9)
|
Includes
11,792,500 shares issuable upon the conversion of Series A
Preferred, 11,792,500 shares issuable upon the conversion of Series
A-1 Preferred, 4,006,861 shares issuable upon the conversion of
Series D Preferred, and 112,838 shares issuable upon the exercise
of warrants exercisable within 60 days of
March 12, 2021. Mr. Goldman exercises sole voting and
dispositive power over 72,158,770 shares, including the
aforementioned Series A conversion shares, Series A-1 conversion
shares, Series D conversion shares, stock options and warrants, and
shared voting and dispositive power over 14,508,777 reported
shares, of which 3,000,000 shares are owned by the Goldman Family
2012 GST Trust, 11,361,077 are held in an individual retirement
account, and 147,700 shares are owned by The Neal and Marlene
Goldman Foundation.
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