The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND OPERATIONS
Overview
As used in this Quarterly Report, “we”, “us”, “our”, “ImageWare”, “ImageWare Systems” or the “Company” refers to ImageWare Systems, Inc. and all of its subsidiaries. ImageWare Systems, Inc. is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is the patented IWS Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses, and all the products are integrated into the IWS Biometric Engine.
The Company's common stock, par value $0.01 per share (the "Common Stock"), trades under the symbol "IWSY" on the OTCQB Marketplace.
Recent Developments
Charter Amendment
Our Amended and Restated Certificate of Incorporation ("Certificate of Incorporation") as of June 30, 2021 authorizes a total of 2.0 billion shares of Common Stock for issuance. Effective as of January 28, 2021 and February 16, 2021, respectively, our Board of Directors and the majority of our outstanding voting securities, on an as converted basis ("Majority Shareholders") approved and authorized an amendment to our Certificate of Incorporation to increase the number of authorized shares of Common Stock from 1.0 billion shares to 2.0 billion shares, resulting in a total increase of 1.0 billion authorized shares of Common Stock. The increase in the number of authorized shares of Common Stock became effective upon filing the Certificate of Amendment with the Delaware Division of Corporations on April 21, 2021.
2021 Lincoln Park Financing
On May 17, 2021 (the "Execution Date"), the Company entered into a purchase agreement, dated as of the Execution Date (the "2021 LPC Purchase Agreement"), and a registration rights agreement, dated as of the Execution Date (the "Registration Rights Agreement"), with Lincoln Park Capital Fund, LLC ("Lincoln Park"), pursuant to which Lincoln Park has committed to purchase up to $15,100,000 of the Company's Common Stock.
Under the terms and subject to the conditions of the 2021 LPC Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15,100,000 worth of shares of Common Stock. Such sales of Common Stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company's sole discretion, over the 24-month period commencing on July 23, 2021, the date that the registration statement covering the resale of shares of Common Stock that have been and may be issued under the 2021 LPC Purchase Agreement, which was filed with the Securities and Exchange Commission (the "SEC") pursuant to the Registration Rights Agreement, and was declared effective by the SEC and a final prospectus in connection therewith is filed and the other conditions set forth in the 2021 LPC Purchase Agreement are satisfied, all of which are outside the control of Lincoln Park (such date on which all of such conditions are satisfied, the "Commencement Date").
Under the 2021 LPC Purchase Agreement, on any business day over the term of the 2021 LPC Purchase Agreement, the Company has the right, in its sole discretion, to present Lincoln Park with a purchase notice (each, a "Purchase Notice") directing Lincoln Park to purchase up to 250,000 shares of Common Stock per business day (“Regular Purchase”), which (i) increases to up to 300,000 shares in the event the price of the Company’s Common Stock is not below $0.10 per share, (ii) increases to 350,000 shares of Common Stock per Business Day in the event the price of the Company’s Common Stock is not below $0.25 per share, and (iii) increases to 500,000 shares in the event the price of the Company’s Common Stock is not below $0.50 per share (in each case, subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the 2021 LPC Purchase Agreement). In each case, Lincoln Park's maximum commitment in any single Regular Purchase may not exceed $500,000. The parties may mutually agree to increase the number of shares to be purchased by Lincoln Park pursuant to any Regular Purchase up to 2,000,000 shares. The 2021 LPC Purchase Agreement provides for a purchase price per Purchase Share (the "Purchase Price") equal to the lesser of:
|
|
·
|
the lowest sale price of the Company's Common Stock on the purchase date; and
|
|
|
·
|
the average of the three lowest closing sale prices for the Company's Common Stock during the fifteen consecutive business days ending on the business day immediately preceding the purchase date of such shares.
|
In addition, on any date on which the Company submits a Purchase Notice to Lincoln Park, the Company also has the right, in its sole discretion, to present Lincoln Park with an accelerated purchase notice (each, an "Accelerated Purchase Notice") directing Lincoln Park to purchase an amount of stock (the "Accelerated Purchase") equal to up to the lesser of (i) three times the number of shares of Common Stock purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate shares of the Company's Common Stock traded during all or, if certain trading volume or market price thresholds specified in the 2021 LPC Purchase Agreement are crossed on the applicable Accelerated Purchase Date, the portion of the normal trading hours on the applicable Accelerated Purchase Date prior to such time that any one of such thresholds is crossed (such period of time on the applicable Accelerated Purchase Date, the "Accelerated Purchase Measurement Period"), provided that Lincoln Park will not be required to buy shares of Common Stock pursuant to an Accelerated Purchase Notice that was received by Lincoln Park on any business day on which the last closing trade price of the Company's Common Stock on the OTC Markets (or alternative national exchange in accordance with the 2021 LPC Purchase Agreement) is below $0.25 per share. The parties may mutually agree to increase the number of shares to be purchased by Lincoln Park pursuant to any Accelerated Purchase. The purchase price per share of Common Stock for each such Accelerated Purchase will be equal to 95% of the lesser of:
|
|
·
|
the volume weighted average price of the Company's Common Stock during the applicable Accelerated Purchase Measurement Period on the applicable Accelerated Purchase Date; and
|
|
|
·
|
the closing sale price of the Company's Common Stock on the applicable Accelerated Purchase Date.
|
The Company may also direct Lincoln Park on any business day on which an Accelerated Purchase has been completed and all of the shares to be purchased thereunder have been properly delivered to Lincoln Park in accordance with the 2021 LPC Purchase Agreement, to purchase an amount of stock (the "Additional Accelerated Purchase") equal to up to the lesser of (i) three times the number of shares purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate number of shares of the Company's Common Stock traded during a certain portion of the normal trading hours on the applicable Additional Accelerated Purchase date as determined in accordance with the 2021 LPC Purchase Agreement (such period of time on the applicable Additional Accelerated Purchase date, the "Additional Accelerated Purchase Measurement Period"). The parties may mutually agree to increase the number of shares to be purchased by Lincoln Park pursuant to any Additional Accelerated Purchase. Additional Accelerated Purchases will be equal to 95% of the lower of:
|
|
·
|
the volume weighted average price of the Company's Common Stock during the applicable Additional Accelerated Purchase Measurement Period on the applicable Additional Accelerated Purchase date; and
|
|
|
·
|
the closing sale price of the Company's Common Stock on the applicable Additional Accelerated Purchase date.
|
The aggregate number of shares that the Company can sell to Lincoln Park under the 2021 LPC Purchase Agreement may in no case exceed that number which, together with Lincoln Park’s then current holdings of Common Stock, exceed 4.99% of the Common Stock outstanding immediately prior to the delivery of the Purchase Notice.
Lincoln Park has no right to require the Company to sell any shares of Common Stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. There are no upper limits on the price per share that Lincoln Park must pay for shares of Common Stock.
The Company has agreed with Lincoln Park that it will not enter into any "variable rate" transactions with any third party for a period defined in the 2021 LPC Purchase Agreement.
The Company issued to Lincoln Park 1,000,000 shares of Common Stock as commitment shares in consideration for entering into the 2021 LPC Purchase Agreement on the Execution Date.
The 2021 LPC Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the 2021 LPC Purchase Agreement at any time, at no cost or penalty, subject to the survival of certain provisions set forth in the 2021 LPC Purchase Agreement. During any "event of default" under the 2021 LPC Purchase Agreement, all of which are outside of Lincoln Park's control, Lincoln Park does not have the right to terminate the 2021 LPC Purchase Agreement; however, the Company may not initiate any regular or other purchase of shares by Lincoln Park, until such event of default is cured. In addition, in the event of bankruptcy proceedings by or against the Company, the 2021 LPC Purchase Agreement will automatically terminate.
Actual sales of shares of Common Stock to Lincoln Park under the 2021 LPC Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the Common Stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. Lincoln Park has no right to require any sales by the Company but is obligated to make purchases from the Company as it directs in accordance with the 2021 LPC Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company's shares.
In connection with the execution of the 2021 LPC Purchase Agreement, the Company has agreed to sell, and Lincoln Park has agreed to purchase, 1,000,000 shares of Common Stock for a purchase price of $100,000 (“Original Purchase”).
Due to the terms of the 2021 LPC Purchase Agreement as described above, management is not currently expecting the related proceeds from this agreement to be sufficient to sustain operations for an extended period of time.
Prior to entering into the 2021 LPC Purchase Agreement, the Company and Lincoln Park terminated the previous agreement between the Company and Lincoln Park entered into on June 11, 2020 (the “2020 LPC Purchase Agreement”).
Going Concern and Management’s Plan
Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations and management has determined that there is substantial doubt about the Company’s ability to continue as a going concern.
At June 30, 2021 and December 31, 2020, we had negative working capital of $9,154,000 and $19,349,000, respectively. Included in our negative working capital as of June 30, 2021 are $8,925,000 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 June 30, 2021 the Liquidation Preference Amount totaled $22,958,000. Considering the financings consummated in 2020 and 2021, as well as our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash will be insufficient to satisfy our cash requirements for the next twelve months from the date of this filing. At August 17, 2021, cash on hand approximated $1,715,000. Based on the Company’s rate of cash consumption in the first two quarters of 2021 and the last quarter of 2020, the Company estimates it will need additional capital in the fourth quarter of 2021 and its prospects for obtaining that capital are uncertain. As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
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 begun instituting several cost cutting measures and has utilized cash proceeds available under the Lincoln Park to satisfy its working capital requirements. The Company may seek additional equity and/or debt financing through the issuance of additional debt and/or equity securities. Other than the 2021 LPC Purchase Agreement with Lincoln Park, there are currently no financing arrangements to support our projected cash shortfall, including commitments to purchase additional debt and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional debt and/or equity securities, or entering into any other transaction that addresses our ability to continue as a going concern.
In view of the going concern considerations described in the preceding paragraph, continued operations of the Company are dependent upon the Company’s ability to continue to raise capital and generate positive cash flows from operations. However, the Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will be able to obtain additional capital, operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2020, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on April 5, 2021.
Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or any other future periods.
Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly-owned subsidiaries are: XImage Corporation, a California Corporation; ImageWare Systems ID Group, Inc., a Delaware corporation (formerly Imaging Technology Corporation); I.W. Systems Canada Company, a Nova Scotia unlimited liability company; ImageWare Digital Photography Systems, LLC, a Nevada limited liability company (formerly Castleworks LLC); Digital Imaging International GmbH, a company formed under German laws; and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated.
Operating Cycle
Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying condensed consolidated balance sheets, although they will be liquidated in the normal course of contract completion which may take more than one operating cycle.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Preferred Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
Accounts Receivable
In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.
Inventories
Finished goods inventories are stated at the lower of cost, determined using the average cost method, or net realizable value. See Note 4.
Property, Equipment and Leasehold Improvements
Property and equipment, consisting of furniture and equipment, are stated at cost and are being depreciated on a straight-line basis over the estimated useful lives of the assets, which generally range from three to five years. Maintenance and repairs are charged to expense as incurred. Major renewals or improvements are capitalized. When assets are sold or abandoned, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Expenditures for leasehold improvements are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, and deferred revenue, the carrying amounts approximate fair value due to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use Assets
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% using a capital asset pricing model. 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.
Revenue Recognition
In accordance with ASC 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:
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|
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;
|
|
|
·
|
Post-contract customer support.
|
Software Licensing and Royalties
Software licenses consist of revenue from the sale of software for identity management applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer. We recognize revenue from software licensing at a point in time upon delivery, provided all other revenue recognition criteria are met.
Royalties consist of revenue from usage-based arrangements and guaranteed minimum-based arrangements. We recognize revenue for royalty arrangements at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied.
Computer Hardware and Identification Media
We generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer, provided all other revenue recognition criteria are met.
Services
Services revenue is comprised primarily of software customization services, software integration services, system installation services and customer training. Revenue is generally recognized upon completion of services and customer acceptance provided all other revenue recognition criteria are met.
Post-Contract Customer Support (“PCS”)
Post contract customer support consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and post-contract customer support on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service, and (ii) the percent discount off of list price approach.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. At June 30, 2021 and December 31, 2020, we had capitalized incremental costs of obtaining a contract with a customer of approximately $0 and $65,000, respectively. We recorded no additional contract costs during the three and six months ended June 30, 2021. Additionally, we recognized approximately $123,000 and $249,000 in revenue during the three and six months ended June 30, 2021, respectfully, that was related to contract costs at the beginning of the period.
Other Items
We do not offer rights of return for our products and services in the normal course of business.
Sales tax collected from customers is excluded from revenue.
The following table sets forth our disaggregated revenue for the three and six months ended June 30, 2021 and 2020:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
Net Revenue
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and royalties
|
|
$
|
222
|
|
|
$
|
68
|
|
|
$
|
261
|
|
|
$
|
193
|
|
|
Hardware and consumables
|
|
|
44
|
|
|
|
47
|
|
|
|
57
|
|
|
|
62
|
|
|
Services
|
|
|
9
|
|
|
|
6
|
|
|
|
12
|
|
|
|
17
|
|
|
Maintenance
|
|
|
667
|
|
|
|
612
|
|
|
|
1,344
|
|
|
|
1,257
|
|
|
Total revenue
|
|
$
|
942
|
|
|
$
|
733
|
|
|
$
|
1,674
|
|
|
$
|
1,529
|
|
Customer Concentration
For the three months ended June 30, 2021, two customers accounted for approximately 35% or $334,000 of our total revenue and had trade receivables at June 30, 2021 of $135,000. For the six months ended June 30, 2021, two customers accounted for approximately 40% or $667,000 of our total revenue and had trade receivables at June 30, 2021 of $135,000.
For the three months ended June 30, 2020, one customer accounted for approximately 30% or $216,000 of our total revenue and had trade receivables at June 30, 2020 of $0. For the six months ended June 30, 2020, one customer accounted for approximately 28% or $433,000 of our total revenue and had trade receivables at June 30, 2020 of $0.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06 “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
NOTE 3. NET INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period, adjusted to include, if dilutive, potential dilutive shares consisting of convertible preferred stock, stock options and warrants, calculated using the treasury stock and if-converted methods. For diluted income (loss) per share calculation purposes, the net income (loss) available to common shareholders is adjusted to add back any preferred stock dividends and any interest on convertible debt reflected in the condensed consolidated statement of income (loss) for the respective periods.
The table below presents the computation of basic and diluted income (loss) per share:
|
(Amounts in thousands except share and per share amounts)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Numerator for basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,266
|
|
|
$
|
(2,902
|
)
|
|
$
|
9,380
|
|
|
$
|
(6,027
|
)
|
|
Preferred dividends, deemed dividends and accretion
|
|
|
(2,069
|
)
|
|
|
(1,372
|
)
|
|
|
(4,325
|
)
|
|
|
(2,746
|
)
|
|
Net income (loss) available to common shareholders
|
|
$
|
9,197
|
|
|
$
|
(4,274
|
)
|
|
$
|
5,055
|
|
|
$
|
(8,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends, deemed dividends and accretion
|
|
|
2,069
|
|
|
|
-
|
|
|
|
4,325
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders after assumed conversions
|
|
|
11,266
|
|
|
|
(4,274
|
)
|
|
|
9,380
|
|
|
|
(8,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per share - weighted-average shares outstanding
|
|
|
304,261,199
|
|
|
|
127,065,608
|
|
|
|
287,799,416
|
|
|
|
121,630,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
16,125,547
|
|
|
|
-
|
|
|
Warrants
|
|
|
205,435
|
|
|
|
-
|
|
|
|
596,569
|
|
|
|
-
|
|
|
Convertible preferred stock
|
|
|
424,968,681
|
|
|
|
-
|
|
|
|
497,767,307
|
|
|
|
-
|
|
|
Denominator for diluted income (loss) - adjusted weighted average shares and assumed conversions
|
|
|
729,435,315
|
|
|
|
127,065,608
|
|
|
|
802,288,839
|
|
|
|
121,630,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share available to common shareholders
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
Diluted income (loss) per share available to common shareholders
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.07
|
)
|
The following table sets forth Common share equivalents at June 30, 2021 and December 31, 2020:
|
Potential Dilutive Securities:
|
|
Common Share Equivalents at
June 30, 2021
|
|
|
Common Share Equivalents at
December 31, 2020
|
|
|
Convertible redeemable preferred stock - Series A
|
|
|
11,647,000
|
|
|
|
74,555,000
|
|
|
Convertible redeemable preferred stock - Series A-1
|
|
|
11,194,000
|
|
|
|
73,910,000
|
|
|
Convertible redeemable preferred stock - Series B
|
|
|
46,029
|
|
|
|
46,029
|
|
|
Convertible redeemable preferred stock - Series D
|
|
|
393,795,883
|
|
|
|
392,166,023
|
|
|
Stock options
|
|
|
65,970,500
|
|
|
|
2,585,500
|
|
|
Restricted stock units (RSUs)
|
|
|
129,453
|
|
|
|
845,106
|
|
|
Warrants
|
|
|
842,052
|
|
|
|
753,775
|
|
|
Total Potential Dilutive Securities
|
|
|
483,624,917
|
|
|
|
544,861,433
|
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $61,000 as of June 30, 2021 were comprised of work in process of $53,000, representing direct labor costs on in-process projects and finished goods of $8,000 net of reserves for obsolete and slow-moving items of $3,000.
Inventories of $40,000 as of December 31, 2020 were comprised of work in process of $26,000, representing direct labor costs on in-process projects and finished goods of $14,000 net of reserves for obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value and required reserve levels.
Intangible Assets
The carrying amounts of the Company’s patent intangible assets were $52,000 and $58,000 as of June 30, 2021 and December 31, 2020, respectively, which includes accumulated amortization of $604,000 and $601,000 as of June 30, 2021 and December 31, 2020, respectively. Amortization expense for patent intangible assets was $3,000 and $6,000 for the three and six months ended June 30, 2021 and 2020, respectively. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately 4.33 years. There was no impairment of the Company’s intangible assets during the three and six months ended June 30, 2021 and 2020.
The estimated intangible amortization expense for the next five fiscal years is as follows:
|
Fiscal Year Ended December 31,
|
|
Estimated
Amortization
Expense
($ in thousands)
|
|
|
2021 (six months)
|
|
$
|
6
|
|
|
2022
|
|
|
12
|
|
|
2023
|
|
|
12
|
|
|
2024
|
|
|
12
|
|
|
2025
|
|
|
10
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
52
|
|
Goodwill
The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The provisions of ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts, will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only one reporting unit, Identity Management which, at June 30, 2021, had a negative carrying amount of approximately $13,140,000. Based on the results of the Company's impairment testing, the Company determined that its goodwill was not impaired as of June 30, 2021 and December 31, 2020.
Other Assets
In conjunction with the 2021 LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2021, 1,000,000 shares of Common Stock as consideration for entering into the Purchase Agreement. Pursuant to this issuance, the Company recorded $70,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under this Purchase Agreement. At June 30, 2021, the Company had approximately $70,000 in deferred stock issuance costs included in the caption “Other assets” in its condensed consolidated balance sheets. During the three months ended June 30, 2021, there were 1,000,000 shares of Common Stock sold by the Company under the 2021 LPC Purchase Agreement. The 2021 LPC Purchase Agreement supersedes and terminates the previous agreement between the Company and Lincoln Park entered into on June 11, 2020.
In conjunction with a securities purchase agreement entered into with 2020 LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2020, 2,500,000 shares of Common Stock as consideration for entering into the 2020 LPC Purchase Agreement. Pursuant to this issuance, the Company recorded $400,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under the 2020 LPC Purchase Agreement.
Due to the termination of the 2020 LPC Purchase Agreement, effectuated by the consummation of the 2021 LPC Purchase Agreement, the Company wrote-off and recorded operating expense of approximately $364,000 representing the unamortized capitalized deferred stock issuance costs remaining under the 2020 LPC Purchase Agreement during the three months ended June 30, 2021.
NOTE 5. LEASES
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 - Leases. In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% as the discount rates implicit in the Company’s leases cannot be readily determined. At December 31, 2020, such assets and liabilities aggregated approximately $1,557,000 and $1,718,000, respectively. At June 30, 2021, such assets and liabilities aggregated approximately $1,372,000 and $1,513,000, respectively. The Company determined that it had no arrangements representing finance 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, with the new lease commencing on March 1, 2021 on a month-to-month basis. In addition to our corporate headquarters, we also occupied the following spaces at June 30, 2021:
|
|
·
|
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 June 30, 2021. The Company extended this lease for a 30-day period and has concluded that it will not renew this premises due to alternate remote access capabilities;
|
|
|
·
|
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 $28,000 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 commenced on April 1, 2021 and expires on April 30, 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.
The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases.
For the three months ended June 30, 2021 and 2020, the Company recorded approximately $160,000 and $169,000, respectively, in lease expense using the straight-line method. For the six months ended June 30, 2021 and 2020, the Company recorded approximately $330,000 and $338,000, respectively, in lease expense using the straight-line method. Under the provisions of ASC 842, lease expense is comprised of the total lease payments under the lease plus any initial direct costs incurred less any lease incentives received by the lessor amortized ratably using the straight-line method over the lease term. The weighted-average remaining lease term of the Company’s operating leases as of June 30, 2021 is 1.8 years. Cash payments under operating leases aggregated approximately $165,000 and $330,000, respectively, for the three and six months ended June 30, 2021 and $162,000 and $323,000, respectively, for the comparable periods in 2020, and are included in operating cash flows.
The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as its term is less than 12 months.
At June 30, 2021, future minimum undiscounted lease payments are as follows:
|
($ in thousands)
|
|
|
|
|
2021 (six months)
|
|
$
|
326
|
|
|
2022
|
|
|
653
|
|
|
2023
|
|
|
424
|
|
|
2024
|
|
|
387
|
|
|
2025
|
|
|
131
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
1,921
|
|
|
Short-term leases not included in lease liability
|
|
|
(7
|
)
|
|
Present Value effect on future minimum undiscounted lease payments at June 30, 2021
|
|
|
(401
|
)
|
|
Lease liability at June 30, 2021
|
|
$
|
1,513
|
|
|
Less current portion
|
|
|
(453
|
)
|
|
Non-current lease liability at June 30, 2021
|
|
$
|
1,060
|
|
NOTE 6. MEZZANINE EQUITY
Series C Convertible Redeemable Preferred Stock
On September 18, 2018, the Company filed the Series C Certificate with the Secretary of State for the State of Delaware designating 1,000 shares of the Company’s preferred stock, par value $0.01 per shares, as Series C Preferred, each share with a stated value of $10,000 per share. The Company noted that the Series C Preferred instruments were hybrid instruments that contained several embedded features. The Company evaluated the identified embedded features of the Series C Preferred host instrument and determined that certain features met the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument. The Company has bifurcated from the Series C Preferred host instrument the conversion options, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $833,000 at issuance and were recorded by the Company as a discount to the Series C Preferred.
For the three and six months ended June 30, 2020, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $175,000 and $347,000, respectively. Concurrently with the issuance of Series D Convertible Redeemable Preferred Stock (described below), all holders of Series C exchanged their shares for shares of Series D Preferred.
Series D Convertible Redeemable Preferred Stock
On November 12, 2020, the Company filed the Series D Certificate with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred, and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities, and are to be paid at the rate of 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. Holders of Series D Preferred shall vote together with holders of Common Stock on an as-converted basis, and not as a separate class, except (i) the holders of Series D Preferred, voting as a separate class, shall be entitled to elect two directors, (ii) the holders of Series D Preferred have the right to vote as a separate class regarding the waiver of certain protective provisions set forth in the Series D Certificate, and (iii) as otherwise required by law.
The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into Common Stock at any time that is at least ninety days following the issuance date, at the conversion price calculated by dividing the Stated Value by the conversion price of $0.0583 per share of Common Stock, subject to adjustments as set forth in Section 5(e) of the Series D Certificate. The shares of Common Stock issuable upon conversion of the Series D Preferred shall be subject to the following registration rights: (i) one demand registration starting three months after the Closing, (ii) two demand registrations starting one year after the Closing, and (iii) unlimited piggy-back and Form S-3 registration rights with reasonable and customary terms.
If, on any date that is at least five (5) years following the Issuance Date, (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common Shares issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common Shares will be either (A) covered by an effective registration statement under the Securities Act, which is then available for the immediate resale of such Common Shares by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.
On the fourth anniversary of the Issuance Date, or in the event of the consummation of a Change of Control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.
On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of 11,560 shares of its Series D Preferred, resulting in gross proceeds to the Company of $11.56 million, less fees and expenses. 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 Note”), which Bridge Notes were converted into Series D Preferred at Closing (the “Conversion”). The issuance and sale of the Series D Preferred was made pursuant to that certain Securities Purchase Agreement, dated September 28, 2020 (the "Series D Purchase Agreement"), by and between the Company and the Investors, for the purchase price of $1,000 per share of Series D Preferred. The Conversion and Series D Financing was undertaken pursuant to Section 3(a)(9) and/or Rule 506 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). On December 23, 2020, the Company sold an additional 500 shares of Series D Preferred resulting in gross proceeds to the Company of $500,000 less fees and expenses.
On the Closing Date, the Company exchanged approximately $661,000 of liabilities of the Company for 6613 shares of Series D Preferred, and received notice from the holders of a majority of the Series C Preferred (the “Series C Exchange Notice”) of their election to convert all of their shares of Series C Preferred into Series D Preferred, and further exercising their right to require all other holders of Series C Preferred to convert their shares of Series C Preferred into Series D Preferred (the “Series C Exchange”). Upon the consummation of the Series C Exchange in accordance with the terms of the Series C Exchange Notice, the Company issued an additional 10,000 shares of Series D Preferred in exchange for all 1,000 issued and outstanding shares of the Company’s Series C Preferred.
On December 31, 2020, the Company issued 142 shares of Series D Preferred Stock as payment of dividends due to the Series D Preferred stockholders. During the six months ended June 30, 2021, the Company issued 499 shares of Series D Preferred Stock as payment of dividends due to the Series D Preferred stockholders. During the six months ended June 30, 2021, certain holders of Series D Preferred converted 404 shares of Series D into 6,973,615 shares of Common Stock which includes 42,941 shares of common stock issued for dividends up to the date of conversion.
Guidance for accounting for freestanding financial instruments that contain characteristics of both liabilities and equity are contained in ASC 480, Distinguishing Liabilities From Equity and Accounting Series Release 268 (“ASR 268”) Redeemable Preferred Stocks. The Company evaluated the provisions of the Series D Preferred and determined that the provisions of the Series D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series D Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control, the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.
The Company noted that the Series D Preferred instruments were hybrid instruments that contain several embedded features. In November 2014, the FASB issued ASU 2014-16 to amend ASC 815, “Derivatives and Hedging”, (“ASC 815”) and require the use of the whole instrument approach (described below) to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity.
The whole instrument approach requires an issuer or investor to consider the economic characteristics and risks of the entire hybrid instrument, including all of its stated and implied substantive terms and features. Under this approach, all stated and implied features, including the embedded feature being evaluated for bifurcation, must be considered. Each term and feature should be weighed based on the relevant facts and circumstances to determine the nature of the host contract. This approach results in a single, consistent determination of the nature of the host contract, which is then used to evaluate each embedded feature for bifurcation. That is, the host contract does not change as each feature is evaluated.
The revised guidance further clarifies that the existence or omission of any single feature, including an investor-held, fixed-price, noncontingent redemption option, does not determine the economic characteristics and risks of the host contract. Instead, an entity must base that determination on an evaluation of the entire hybrid instrument, including all substantive terms and features.
However, an individual term or feature may be weighed more heavily in the evaluation based on facts and circumstances. An evaluation of all relevant terms and features, including the circumstances surrounding the issuance or acquisition of the equity share, as well as the likelihood that an issuer or investor is expected to exercise any options within the host contract, to determine the nature of the host contract, requires judgement.
Using the whole instrument approach, the Company concluded that the host instrument of the Series D Preferred was more akin to debt than equity as the majority of identified features contain more characteristics of debt.
The Company evaluated the identified embedded features of the Series D Preferred host instrument and determined that certain features meet the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument.
The Company has bifurcated from the Series D Preferred host instrument the conversion options, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $26,011,000 at issuance and have been recorded as a discount to the Series D. During the three and six months ended June 30, 2021, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $1,732,000 and $3,549,000, respectfully, using the effective interest rate method as a deemed dividend.
The following table summarizes the share activity of Series D Preferred for the three months ended March 31, 2021 and the three months ended June 30, 2021:
|
|
|
Series D
Convertible Redeemable Preferred
|
|
|
|
|
|
|
|
Total shares of Series D Preferred Stock - December 31, 2020
|
|
|
22,863
|
|
|
Conversion of Series D Preferred into Common Stock
|
|
|
(354
|
)
|
|
Issuance of Series D Preferred as payment of dividends due
|
|
|
248
|
|
|
Total shares of Series D Preferred Stock - March 31, 2021
|
|
|
22,757
|
|
|
Conversion of Series D Preferred into Common Stock
|
|
|
(50
|
)
|
|
Issuance of Series D Preferred as payment of dividends due
|
|
|
251
|
|
|
Total shares of Series D Preferred Stock - June 30, 2021
|
|
|
22,958
|
|
The carrying value of the Company’s Series D Preferred was approximately $5,203,000 and $1,572,000 net of discount of approximately $17,755,000 and $21,291,000 as of June 30, 2021 and December 31, 2020, respectively.
NOTE 7. DERIVATIVE LIABILITIES
The Company accounts for its derivative instruments under the provisions of ASC 815, “Derivatives and Hedging”. Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contracts that qualify as derivative instruments and require bifurcation.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series D Preferred host instrument required bifurcation. The Company valued the bifurcatable features at fair value. Such liabilities aggregated approximately $8,925,000 and $24,128,000 at June 30, 2021 and December 31, 2020, respectively, and are classified as current liabilities on the Company’s condensed consolidated balance sheets under the caption “Derivative liabilities”. The Company will revalue these features at each balance sheet date and record any change in fair value in the determination of period net income or loss.
The change in fair value of such amounts are recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of income (loss). For the three and six months ended June 30, 2021, the Company recorded a decrease to its derivative liabilities using fair value methodologies of approximately $14,043,000 and $15,215,000 related to Series D embedded derivatives. In conjunction with the conversion of 404 shares of the Company’s Series D Preferred into Common Stock during the three and six months ended June 30, 2021, the Company recognized a loss on the extinguishment of derivative liabilities of approximately $10,000 and $345,000, respectively.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series C Preferred host instrument required bifurcation. The Company valued these bifurcatable features at fair value and such liabilities aggregated approximately $535,000 at June 30, 2020. There is no Series C Preferred outstanding at June 30, 2021. The change in fair value of such amounts are recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. During the three and six months ended June 30, 2020, the Company recorded an increase to these derivative liabilities using fair value methodologies of approximately $363,000 and $166,000, respectively.
NOTE 8. NOTES PAYABLE
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). On May 4, 2020, the Company entered into a loan agreement (the “PPP Loan”) with Comerica Bank (“Comerica”) under the Paycheck Protection Program (the “PPP”), which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under the PPP, the Company received proceeds of approximately $1,571,000. In accordance with the requirements of the PPP, the Company utilized the proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, matures on May 4, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. In July 2021, the Company filed an application with the SBA requesting loan forgiveness. At the time of the filing of this Quarterly Report, no determination has been made by the SBA. The Company has recorded the entire amount of the PPP Loan as debt. Under the terms of the PPP Loan, monthly payments of principal and interest were due to commence November 1, 2020, however the SBA is deferring loan payments for borrowers who apply for loan forgiveness until the SBA remits the borrower’s loan forgiveness amount to the lender. At June 30, 2021, the Company has recorded the current portion of the PPP Loan of approximately $1,305,000 as a current liability under the caption “Notes payable, current portion” in its condensed consolidated June 30, 2021 balance sheet. The remaining portion of approximately $266,000 is recorded as a long-term liability under the caption “Note payable, net of current portion” in its condensed consolidated June 30, 2021 balance sheet. At December 31, 2020, the Company has recorded the current portion of the PPP Loan of approximately $918,000 as a current liability under the caption “Notes payable, current portion” in its condensed consolidated December 31, 2020 balance sheet. The remaining portion of approximately $653,000 is recorded as a long-term liability under the caption “Note payable, net of current portion” in its condensed consolidated December 31, 2020 balance sheet.
NOTE 9. EQUITY
The Company’s Certificate of Incorporation authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board of Directors may determine.
On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of 179 million to 350 million, consisting of 345 million shares of Common Stock and 5 million shares of Preferred Stock. On September 28, 2020, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 345 million shares to 1.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective October 13, 2020. On February 16, 2021, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 1.0 billion shares to 2.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective April 21, 2021.
Series A Convertible Preferred Stock
On September 15, 2017, the Company filed the Certificate of Designations of the Series A Preferred with the Delaware Secretary of State (the “Series A Certificate”), designating 38,000 shares of the Company’s preferred stock, par value $0.01 per share, as Series A Preferred. The Company had 37,467 shares of Series A Preferred outstanding as of December 31, 2019.
During July 2020, the Company entered into the Series A Exchange Agreement with the Series A Holders, pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred in consideration for their waiver of approximately $1,849,000 in dividends payable.
On September 28, 2020, the Company received executed written consents from (i) the requisite holders of the Company’s voting securities, voting on an as-converted basis, and (ii) the requisite holders of Series A Preferred, voting as a separate class, approving the Amended Series A Certificate, which, among other things, provides for (a) the automatic conversion of all Series A Preferred into Common Stock at a rate of 10% per month following the Closing of the Series D Financing, with the conversion price for such conversion reduced from $1.15 per share of Common Stock, to $0.20 per share of Common Stock, and (b) a reduction of the dividend rate from 8% of the stated Series A Liquidation Preference Amount if paid in cash and 10% of the stated Series A Liquidation Preference Amount if paid in Common Stock, to 4% of the Series A Liquidation Preference Amount, with the dividends being paid only in shares of Common Stock.
The Company had 2,330 and 14,911 shares of Series A Preferred outstanding as of June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, the Company had cumulative undeclared dividends of $0. During the three months ended June 30, 2021, the Company issued the holders of Series A Preferred 750,925 shares of Common Stock as payment of dividends due. During the six months ended June 30, 2021, the Company issued the holders of Series A Preferred 1,801,751 shares of Common Stock as payment of dividends due.
During the three months ended June 30, 2021, the Company issued 19,095,500 shares of Common Stock upon the conversion of 3,819 shares of Series A Preferred Stock. During the six months ended June 30, 2021 the Company issued 62,915,000 shares of Common Stock upon the conversion of 12,581 shares of Series A Preferred Stock.
During the three and six months ended June 30, 2020, the Company recorded accrued unpaid dividends of approximately $937,000 and $1,874,000 on its Series A Preferred Stock. There were no conversions of Series A Preferred into Common Stock during the three and six months ended June 30, 2020.
Series A-1 Convertible Preferred Stock
In July 2020, the Company filed the Series A-1 Certificate with the Secretary of State for the State of Delaware - Division of Corporations, designating 31,021 shares of the Company’s Preferred Stock as Series A-1 Preferred. Shares of Series A-1 Preferred accrue cumulative dividends and are payable quarterly beginning June 30, 2021 at a rate of 8% per annum if paid in cash, or 10% per annum if paid by the issuance of shares of the Company’s Common Stock.
Shares of Series A-1 Preferred rank senior to the Company’s Common Stock, pari-passu to the Company's Series A Preferred, and are subordinate and rank junior to Series B Preferred and Series D Preferred.
Each share of Series A-1 Preferred has a liquidation preference equal to the greater of (i) $1000 per share plus all accrued and unpaid dividends, or (ii) such amount per share as would have been payable had each such share been converted into Common Stock immediately prior to such liquidation, dissolution or winding up (the amount payable pursuant to the foregoing is referred to herein as the “Series A-1 Liquidation Preference Amount”) before any payment shall be made or any assets distributed to the holders of the Common Stock or any other classes and series of equity securities of the Company which by their terms rank junior to the Series A-1 Preferred.
Each share of Series A-1 Preferred was convertible into that number of shares of the Company’s Common Stock (“Series A-1 Conversion Shares”) equal to that number of shares of Series A-1 Preferred being converted multiplied by $1,000, divided by $0.65, or the conversion price as defined in the Series A-1 Certificate in effect as of the date the holder delivers to the Company their notice of election to convert. Holders of Series A-1 Preferred may elect to convert shares of Series A-1 Preferred into Common Stock at any time. In addition to the aforementioned holder conversion option, if the volume weighted average closing price ("VWAP") of the Company’s Common Stock is at least $1.00 per share for 20 consecutive trading days, then the Company has the right to convert one-half of the issued and outstanding shares of Series A-1 Preferred into Common Stock. In the event of a Change of Control, the Company will have the option to redeem all issued and outstanding shares of Series A-1 Preferred for 115% of the Liquidation Preference per share.
During July 2020, the Company entered into an Exchange Agreement, Consent and Waiver (“Exchange Agreement”) with certain holders of its Series A Preferred (the "Series A Holders"), pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred.
On September 28, 2020, the Company's holders of Common Stock and Preferred Stock voted to revise the Series A-1 Certificate by amending and restating the Series A-1 Certificate to, without limitation, provide for (i) the voluntary conversion of all outstanding shares of the Company's Series A-1 Preferred into shares of the Company’s Common Stock at a reduced conversion price of $0.20 per share of Common Stock, and (ii) the automatic conversion of all issued and outstanding shares of Series A Preferred and Series A-1 Preferred into shares of Common Stock at a rate of 10% per month, beginning on November 1, 2020, and ending on August 1, 2021, at the reduced conversion price of $0.20 per share of Common Stock.
The Company had 2,239 and 14,782 shares of Series A-1 Preferred outstanding as of June 30, 2021 and December 31, 2020, respectively. During the three months ended June 30, 2021, the Company issued the holders of Series A-1 Preferred 720,978 shares of Common Stock as payment of dividends due. During the six months ended June 30, 2021, the Company issued the holders of Series A-1 Preferred 1,684,244 shares of Common Stock as payment of dividends due.
During the three months ended June 30, 2021, the Company issued 18,416,000 shares of Common Stock upon the conversion of 3,683 shares of Series A-1 Preferred. During the six months ended June 30, 2021, the Company issued 62,716,000 shares of Common Stock upon the conversion of 12,543 shares of Series A-1 Preferred.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B Convertible Preferred Stock (“Series B Preferred”) outstanding as of June 30, 2021 and December 31, 2020. At June 30, 2021 and December 31, 2020, the Company had cumulative undeclared dividends of approximately $8,000. There were no conversions of Series B Preferred into Common Stock during the three and six months ended June 30, 2021 and 2020.
Common Stock
As of June 30, 2021, we had 319,426,123 and 319,419,419 shares of Common Stock issued and outstanding, respectively. Our authorized but unissued shares of Common Stock are available for issuance without action by our shareholders.
The following table summarizes outstanding Common Stock activity during the six months ended June 30, 2021:
|
|
|
Common Stock
|
|
|
Shares outstanding at December 31, 2020
|
|
|
180,089,613
|
|
|
Shares issued pursuant to payment of stock dividend on Series A Preferred
|
|
|
1,801,751
|
|
|
Shares issued pursuant to payment of stock dividend on Series A-1 Preferred
|
|
|
1,684,244
|
|
|
Shares issued pursuant to Series D conversion to Common Stock
|
|
|
6,973,615
|
|
|
Shares issued pursuant to Series A conversion to Common Stock
|
|
|
62,915,000
|
|
|
Shares issued pursuant to Series A-1 conversion to Common Stock
|
|
|
62,716,000
|
|
|
Shares issued pursuant to warrant exercises
|
|
|
400
|
|
|
Shares issued to secure financing facility
|
|
|
1,000,000
|
|
|
Shares issued for cash
|
|
|
1,000,000
|
|
|
Shares issued as compensation in lieu of cash
|
|
|
421,218
|
|
|
Shares issued pursuant to RSU vesting
|
|
|
817,578
|
|
|
Shares outstanding at June 30, 2021
|
|
|
319,419,419
|
|
During the three months ended June 30, 2021, the Company sold 1,000,000 shares of its Common Stock to Lincoln Park pursuant to the 2021 LPC Purchase Agreement for $0.10 per share resulting in proceeds to the Company of $100,000. Also in May 2021, the Company issued to Lincoln Park 1,000,000 shares of its Common Stock as consideration for entering into the Purchase Agreement. The Company has recorded this issuance as a deferred stock issuance cost in the amount of $70,000. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under this Purchase Agreement.
Warrants
As of June 30, 2021, warrants to purchase 1,504,470 shares of Common Stock at prices ranging from $0.01 to $0.80 were outstanding. All warrants expire on September 19, 2028 with the exception of 600,000 warrants whose expiration date is April 16, 2022 and 150,000 warrants whose expiration date is 3 years from initial vesting, such vesting based on certain events. The intrinsic value of warrants outstanding at June 30, 2021 was $0. The Company has excluded from this computation any intrinsic value of the 243,589 warrants issued to the Series A Preferred stockholders due to the conversion exercise contingency associated with these warrants.
The following table summarizes warrant activity for the following periods:
|
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
753,775
|
|
|
$
|
0.17
|
|
|
Granted
|
|
|
600,000
|
|
|
$
|
0.07
|
|
|
Expired / Canceled
|
|
|
(511,323
|
)
|
|
$
|
0.01
|
|
|
Exercised
|
|
|
(400
|
)
|
|
$
|
0.01
|
|
|
Balance at June 30, 2021
|
|
|
842,052
|
|
|
$
|
0.19
|
|
In April 2021, the Company created an advisory board to the Board of Directors comprised of 3 individuals. As compensation for advisory board services, the Company granted each member warrants to purchase 200,000 shares of the Company’s Common Stock. Such warrants have an exercise price of $0.07 per share and will vest over a one-year period beginning on April 19, 2021. There were no other warrants issued during the six months ended June 30, 2021. During the three and six months ended June 30, 2021, the Company recorded approximately $10,000 in expense related to the vesting of these warrants.
During the six months ended June 30, 2021, 511,323 warrants were cancelled pursuant to the mandatory conversion of Series A Preferred Stock into Common Stock and 400 warrants were exercised at $0.01 per warrant.
NOTE 10. STOCK-BASED COMPENSATION
Stock Options
As of June 30, 2021, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”). Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Plan and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan. The Company amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to 145.0 million shares. Such amendment became effective on April 21, 2021. As of June 30, 2021, there were 83,535,453 shares available for issuance under the 2020 Plan.
The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation - Stock Compensation”. The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.
ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14.
In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has adopted the provisions of ASU 2016-09 and will continue to use an estimated annualized forfeiture rate of approximately 0% for corporate officers, 4.1% for members of the Board of Directors and 15.0% for all other employees. The Company is currently in the process of reviewing the expected forfeiture rate to determine if that percent is still reasonable based on recent historical experience.
A summary of the activity under the Company’s stock option plans is as follows:
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
|
Balance at December 31, 2020
|
|
|
2,585,500
|
|
|
$
|
0.19
|
|
|
|
9.2
|
|
|
Granted
|
|
|
65,720,000
|
|
|
$
|
0.07
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
(2,335,000
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Balance at June 30, 2021
|
|
|
65,970,500
|
|
|
$
|
0.07
|
|
|
|
6.8
|
|
During the three months ended June 30, 2021, the Company granted an aggregate of 65,720,000 options to purchase shares of Common Stock including 61,620,000 to certain officers and employees and 4,100,000 to certain members of the Company’s Board of Directors. Such options have an exercise price ranging from $0.067 to $0.07 and vest at various times through April 16, 2023. As a condition of issuance of these options, certain employees exchanged an aggregate of 1,950,000 previously issued option awards and 400,000 unvested RSUs and 170,000 previously vested RSUs. The Company determined that the exchange agreements are modifications of share-based payment awards under ASC 718. Accordingly, the Company computed any incremental compensation expense as a component of the total compensation cost to be measured at the modification date. Aggregate incremental compensation expense measured from the aforementioned modifications was approximately $1,489,000. The total compensation of the awards will be recognized over the modified requisite service period.
During the six months ended June 30, 2021, an aggregate of 370,000 options expired unexercised.
At June 30, 2021, a total of 65,970,500 options were outstanding, of which 7,318,760 were exercisable at a weighted average price of $0.09 per share with a remaining weighted average contractual term of 6.8 years. The Company expects that, in addition to the 7,318,760 options that were exercisable as of June 30, 2021, another 58,651,740 will ultimately vest resulting in a combined total of 65,970,500. Those 58,651,740 shares have a weighted average exercise price of $0.07 and an aggregate intrinsic value of approximately $0 as of June 30, 2021. Stock-based compensation expense related to equity options was approximately $295,000 for the six months ended June 30, 2021.
The intrinsic value of options exercisable and outstanding at June 30, 2020 was $0. The aggregate intrinsic value for all options outstanding as of June 30, 2020 was approximately $368,000. The weighted-average grant-date per share fair value of options granted during the six months ended June 30, 2020 was $0.09. At June 30, 2020, the total remaining unrecognized compensation cost related to unvested stock options amounted to approximately $238,000, which will be recognized over a weighted-average period of 1.4 years.
The Company periodically issues Restricted Stock Units (“RSUs”) to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.
A summary of the activity related to RSUs is as follows:
|
|
|
RSU’s
|
|
|
Weighted-Average
Issuance Price
|
|
|
Balance at December 31, 2020
|
|
|
845,106
|
|
|
$
|
0.14
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
Expired/Cancelled
|
|
|
(538,076
|
)
|
|
$
|
0.13
|
|
|
Vested
|
|
|
(177,577
|
)
|
|
$
|
0.13
|
|
|
Balance at June 30, 2021
|
|
|
129,453
|
|
|
$
|
0.16
|
|
There were no RSUs granted to employees during the six months ended June 30, 2021. During the six months ended June 30, 2021, 177,577 RSUs vested with the remainder of outstanding RSUs vesting at various times through September 29, 2022.
During the three and six months ended June 30, 2021 and 2020, the Company recorded compensation expense of approximately $4,000 and $0, respectively, and $19,000 and $0, respectively related to RSUs. During the six months ended June 30, 2021 and 2020, the Company issued 262,578 and 0 shares of its Common Stock pursuant to the vesting of RSUs. Also during the six months ended June 30, 2021, the Company issued 555,000 shares of its Common Stock pursuant to RSUs that vested in 2020 for which shares were not previously issued.
As of June 30, 2021, the Company has not issued the Common Stock shares pursuant to the vesting of the 67,191 RSUs.
Stock-based Compensation
Stock-based compensation related to equity options, RSUs and warrants has been classified as follows in the accompanying consolidated statements of income (loss) (in thousands):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Cost of revenue
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
General and administrative
|
|
|
172
|
|
|
|
89
|
|
|
|
208
|
|
|
|
156
|
|
|
Sales and marketing
|
|
|
68
|
|
|
|
10
|
|
|
|
89
|
|
|
|
100
|
|
|
Research and development
|
|
|
62
|
|
|
|
35
|
|
|
|
81
|
|
|
|
61
|
|
|
Total
|
|
$
|
308
|
|
|
$
|
136
|
|
|
$
|
385
|
|
|
$
|
322
|
|
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
|
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
Fair Value at June 30, 2021
|
|
|
($ in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets
|
|
$
|
1,819
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,819
|
|
|
Totals
|
|
$
|
1,819
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,819
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
8,925
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,925
|
|
|
Totals
|
|
$
|
8,925
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,925
|
|
|
|
|
Fair Value at December 31, 2020
|
|
|
($ in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets
|
|
$
|
1,881
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,881
|
|
|
Totals
|
|
$
|
1,881
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,881
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
24,128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,128
|
|
|
Totals
|
|
$
|
24,128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,128
|
|
The Company’s German pension plan is funded by insurance contract policies whereby the insurance company guarantees a fixed minimum return. The Company has determined that the pension assets are appropriately classified within Level 3 of the fair value hierarchy because they are valued using actuarial valuation methodologies which approximate cash surrender value that cannot be corroborated with observable market data. All plan assets are managed in a policyholder pool in Germany by outside investment managers. The investment manager is responsible for the investment strategy of the insurance premiums that Company submits and does not hold individual assets per participating employer. The German Federal Financial Supervisory oversees and supervises the insurance contracts.
As of June 30, 2021, the Company had embedded features contained in the Series D Preferred host instrument that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $8,925,000 and $24,128,000 at June 30, 2021 and December 31, 2020, respectively, and are classified as a current liability in the condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020. The fair value of the Company’s derivative liabilities is classified within Level 3 of the fair value hierarchy because they are valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The Company uses Monte-Carlo simulations in the determination of the fair value of derivative liabilities.
Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events. Significant assumptions used in the fair value methodologies during the six months ended June 30, 2021 are a risk-free rate of 0.56%, equity volatility of 107.5%, effective life of 3.51 years and a preferred stock dividend rate of 4%. These assumptions incorporate management’s estimate of the probability of future financings (Series D Financing) and the timing of potential change of control events. The primary assumptions impacted by Series D Financing were the effective life of 3.75 years and equity volatility.
The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.
The reconciliations of Level 3 pension assets measured at fair value during the three and six months ended June 30, 2021 and 2020 are presented below:
|
($ in thousands)
|
|
Three months ended
June 30, 2021
|
|
|
Three months ended
June 30, 2020
|
|
|
Six months ended
June 30, 2021
|
|
|
Six months ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
|
$
|
1,800
|
|
|
$
|
1,675
|
|
|
$
|
1,881
|
|
|
$
|
1,713
|
|
|
Return on plan assets
|
|
|
15
|
|
|
|
16
|
|
|
|
30
|
|
|
|
30
|
|
|
Company contributions and benefits paid, net
|
|
|
(19
|
)
|
|
|
(23
|
)
|
|
|
(17
|
)
|
|
|
(33
|
)
|
|
Effect of exchange rate changes
|
|
|
23
|
|
|
|
43
|
|
|
|
(75
|
)
|
|
|
1
|
|
|
Fair value at end of period
|
|
$
|
1,819
|
|
|
$
|
1,711
|
|
|
$
|
1,819
|
|
|
$
|
1,711
|
|
The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three and six months ended June 30, 2021 is presented below:
|
($ in thousands)
|
|
Three months ended
June 30, 2021
|
|
|
Three months ended
June 30, 2020
|
|
|
Six months ended
June 30, 2021
|
|
|
Six months ended
June 30, 2020
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
|
|
22,850
|
|
|
|
172
|
|
|
|
24,128
|
|
|
|
369
|
|
|
Derivative liability from issuance of Preferred Series C
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Decrease in derivative liability from conversions of Preferred Series C
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Derivative liability from issuance of Preferred Series D
|
|
|
168
|
|
|
|
-
|
|
|
|
416
|
|
|
|
-
|
|
|
Decrease in derivative liability from conversions of Preferred Series D
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(404
|
)
|
|
|
-
|
|
|
Change in fair value included in earnings
|
|
|
(14,043
|
)
|
|
|
363
|
|
|
|
(15,215
|
)
|
|
|
166
|
|
|
Fair value at end of period
|
|
$
|
8,925
|
|
|
$
|
535
|
|
|
$
|
8,925
|
|
|
$
|
535
|
|
NOTE 11. RELATED PARTY TRANSACTIONS
Professional Services Agreement
During the year ended December 31, 2020, the Company entered into professional services agreement with a firm affiliated with a member of the Company’s Board of Directors at the time the parties entered into the agreement. The Company made no payments pursuant to this agreement during the twelve months ended December 31, 2020 and made payment of approximately $34,000 during six months ended June 30, 2021. The Company has the right to terminate the agreement on thirty days written notice at any time.
NOTE 12. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024. The Company may terminate the agreement with or without cause. Subject to the conditions and other limitations set forth in the employment agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the employment agreement) by the Company or by the executive:
Under the terms of the agreement, if employment is terminated by the Company without cause or there is a change of control, then the Executive shall be entitled to severance payments equal to the Executive’s annual salary and shall remain enrolled in the Company’s health, dental, and life insurance plans for the lesser of twelve (12) months or the remaining period prior to expiration of the Employment Period plus the Executive shall be entitled to any bonus due as of the effective date of such termination.
Litigation
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
NOTE 13. SUBSEQUENT EVENTS
During the period July 1, 2021 through August 10, 2021, the Company issued an aggregate 22,884,151 shares of its Common Stock including 22,841,000 shares of Common Stock for conversions of its Preferred Stocks and 43,151 shares of Common Stock pursuant to RSU vestings.
Subsequent to June 30, 2021, the Company agreed to issue an aggregate of 2,000,000 warrants to purchase shares of the Company’s Common Stock to a new advisory board member with 200,000 of such warrants exercisable at $0.048 per share and the remainder exercisable at $0.07 per share. Such warrants vest ratably over twelve months.
On August 12, 2021, the Company retained a leading investment bank with significant expertise in the security sector, to initiate a review of available strategic alternatives to maximize shareholder value for the Company in connection with potential transactions which may include (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company and/or (ii) the private placement of any financing required for general corporate purposes or in conjunction with the consummation of the above strategic transactions.