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.
Liquidity, Going Concern and Management’s Plan
Historically, our principal sources of cash have
included customer payments from the sale of our products, proceeds
from the issuance of common and preferred stock and proceeds from
the issuance of debt. Our principal uses of cash have included cash
used in operations, product development, and payments relating to
purchases of property and equipment. We expect that our principal
uses of cash in the future will be for product development,
including customization of identity management products for
enterprise and consumer applications, further development of
intellectual property, development of Software-as-a-Service
(“SaaS”) capabilities for existing products as
well as general working capital 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 March 31, 2021 and December 31, 2020, we had
negative working capital of $20,887,000 and $19,349,000,
respectively. Included in our
negative working capital as of March 31, 2021 are $22,850,000 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 March 31, 2021 the
Liquidation Preference Amount totaled $22,757,000. Considering the
financings consummated in 2020, as well as our projected cash
requirements, and assuming we are unable to generate incremental
revenue, our available cash will be insufficient to satisfy our
cash requirements for the next twelve months from the date of this
filing. At May 14, 2021, cash on hand approximated $3,661,000.
Based on the Company’s rate of cash consumption in the first
quarter of 2021 and the last quarter of 2020, the Company estimates
it will need additional capital in the third 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 may seek additional
equity and/or debt financing through the issuance of additional
debt and/or equity securities. Other than the Lincoln Purchase
Agreement, there are currently no financing arrangements to support
our projected cash shortfall, including commitments to purchase
additional debt and/or equity securities, or other agreements, and
no assurances can be given that we will be successful in raising
additional debt and/or equity securities, or entering into any
other transaction that addresses our ability to continue as a going
concern.
In view of the matters described in the preceding
paragraph, recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheet is
dependent upon continued operations of the Company, which, in turn,
is dependent upon the Company’s ability to continue to raise
capital and generate positive cash flows from operations. However,
the Company operates in markets that are emerging and highly
competitive. There is no assurance that the Company will be able to
obtain additional capital, operate at a profit or generate positive
cash flows in the future. Therefore, management’s plans do
not alleviate the substantial doubt of the Company’s ability
to continue as a going concern.
The
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.
Recent
Developments
Charter Amendment
Our
Certificate of Incorporation as of March 31, 2021 authorizes a
total of 1.0 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 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.
Coronavirus (COVID-19) Pandemic
On
March 11, 2020, the World Health Organization declared the novel
strain of coronavirus (“COVID-19”) a global pandemic and
recommended containment and mitigation measures worldwide. As of
May 2021, the global outbreak of COVID-19 continues to rapidly
evolve, and the extent to which COVID-19 may impact our business
and markets we serve will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, such as
the duration of the outbreak, travel restrictions and social
distancing in the United States and other countries, business
closures or business disruptions, and the effectiveness of actions
taken both in the United States and other countries. We are
continuing to vigilantly monitor the situation with our primary
focus on health and safety of our employees and
clients.
The Series D Financing
On
November 12, 2020 and December 23, 2020, the Company consummated
private placements of 12,060 shares of its Series D Convertible
Preferred Stock, par value $0.01 per share (the "Series D Preferred"), resulting in
gross proceeds to the Company of $12.06 million, less fees and
expenses (the “Series D
Financing”). The gross proceeds include approximately
$2.2 million in principal amount due and payable under the terms of
certain term loans issued by the Company on September 29, 2020
(“Bridge
Notes”), which Bridge Notes were converted into Series
D Preferred at Closing (the “Conversion”). The issuance of the
Series D Preferred was made pursuant to securities purchase
agreements, dated September 28, 2020 (the "Purchase Agreement"), by and between
the Company and certain accredited investors (the "Purchasers"), for the sale of the
Series D Preferred at a purchase price of $1,000 per share of
Series D Preferred. The holders of Series D Preferred may
voluntarily convert their shares of Series D Preferred into shares
of the Company’s Common Stock at any time that is at least
ninety days following the issuance date, at the conversion price
calculated by dividing the Stated Value by the conversion price of
$0.0583 per share of Common Stock, subject to adjustments as set
forth in Section 5(e) of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock
(the "Series D
Certificate"). Dividends on shares of Series D Preferred
will be paid prior to any junior securities and are to be paid at
the rate of 4% of the Stated Value (as defined in the Series D
Certificate) per share per annum in the form of shares of Series D
Preferred.
On the
fourth anniversary of the Issuance Date (as defined in the Series D
Certificate), or in the event of the consummation of a Change of
Control (as defined in the Series D Certificate), if any shares of
Series D Preferred are outstanding, then each holder of Series D
Preferred shall have the right (the “Holder Redemption
Right”), at such holder’s option, to
require the Company to redeem all or any portion of such
holder’s shares of Series D Preferred at the Liquidation
Preference Amount per share of Series D Preferred plus an amount
equal to all accrued but unpaid dividends, if any, (such price, the
“Holder Redemption
Price”), which Holder Redemption Price
shall be paid in cash.
In connection with the sale of the Series D
Preferred, we granted certain registration rights to the Investors
with respect to the Conversion Shares and Dividend Shares, pursuant
to a Registration Rights Agreement by and among us and the
Investors. The registration statement registering the Conversion
Shares and Dividend Shares was declared effective by the United
States Securities and Exchange Commission (the
“SEC”) on February 12, 2021.
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 three months ended March 31, 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.
In
accordance with ASC 606, revenue is recognized when control of the
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services.
The
core principle of the standard is that we should recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which we expect to
be entitled in exchange for those goods or services. To achieve
that core principle, we apply the following five step
model:
|
1.
|
Identify the
contract with the customer;
|
|
2.
|
Identify the
performance obligation in the contract;
|
|
3.
|
Determine the
transaction price;
|
|
4.
|
Allocate the
transaction price to the performance obligations in the contract;
and
|
|
5.
|
Recognize revenue
when (or as) each performance obligation is satisfied.
|
At
contract inception, we assess the goods and services promised in a
contract with a customer and identify as a performance obligation
each promise to transfer to the customer either: (i) a good or
service (or a bundle of goods or services) that is distinct, or
(ii) a series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the
customer. We recognize revenue only when we satisfy a performance
obligation by transferring a promised good or service to a
customer.
Determining
the timing of the satisfaction of performance obligations as well
as the transaction price and the amounts allocated to performance
obligations requires judgement.
We
disclose disaggregation of our customer revenue by classes of
similar products and services as follows:
●
Software
licensing and royalties;
●
Sales
of computer hardware and identification media;
●
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 March 31, 2021 and
December 31, 2020, we had capitalized incremental costs of
obtaining a contract with a customer of approximately $65,000. We
recorded no additional contract costs during the three months ended
March 31, 2021. Additionally, we recognized approximately $80,000
in revenue during the three months ended March 31, 2021 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
months ended March 31, 2021 and 2020:
|
|
Three
Months Ended
March
31,
|
|
Net
Revenue
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
Software and
royalties
|
$39
|
$125
|
|
Hardware and
consumables
|
13
|
14
|
|
Services
|
4
|
11
|
|
Maintenance
|
677
|
646
|
|
Total
revenue
|
$733
|
$796
|
Customer Concentration
For the
three months ended March 31, 2021, two customers accounted for
approximately 45% or $333,000 of our total revenue and had trade
receivables at March 31, 2021 of $249,000 of which approximately
$171,000 was collected as of the date of this Quarterly
Report.
For the
three months ended March 31, 2020, one customer accounted for
approximately 27% or $216,000 of our total revenue and had trade
receivables at March 31, 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 LOSS PER COMMON SHARE
Basic
loss per common share is calculated by dividing net loss available
to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted loss
per common share is calculated by dividing net loss available to
common shareholders for the period by the weighted-average number
of common shares outstanding during the period, adjusted to
include, if dilutive, potential dilutive shares consisting of
convertible preferred stock, convertible related party lines of
credit, stock options and warrants, calculated using the treasury
stock and if-converted methods. For diluted loss per share
calculation purposes, the net loss available to common shareholders
is adjusted to add back any preferred stock dividends and any
interest on convertible debt reflected in the condensed
consolidated statement of operations for the respective
periods.
The
table below presents the computation of basic and diluted loss per
share:
|
(Amounts
in thousands except share and per share amounts)
|
Three Months Ended
March
31,
|
|
|
|
|
|
Numerator for basic
and diluted loss per share:
|
|
|
|
Net
loss
|
$(1,885)
|
$(3,124)
|
|
Preferred dividends
and preferred stock discount accretion
|
(2,255)
|
(1,374)
|
|
Net loss available
to common shareholders
|
$(4,140)
|
$(4,498)
|
|
|
|
|
|
Denominator for
basic and dilutive loss per share — weighted-average shares
outstanding
|
245,829,914
|
116,196,197
|
|
|
|
|
|
Basic and diluted
loss per share available to common shareholders
|
$(0.02)
|
$(0.04)
|
The
following potential dilutive securities have been excluded from the
computations of diluted weighted-average shares outstanding, as
their effect would have been antidilutive:
Potential Dilutive Securities:
|
Common Share Equivalents at
March 31, 2021
|
Common Share Equivalents at
December 31, 2020
|
|
Convertible
redeemable preferred stock – Series A
|
30,743,500
|
74,555,000
|
|
Convertible
redeemable preferred stock – Series A-1
|
29,610,000
|
73,910,000
|
|
Convertible
redeemable preferred stock – Series B
|
46,980
|
46,029
|
|
Convertible
redeemable preferred stock – Series D
|
390,348,199
|
392,166,023
|
|
Stock
options
|
2,574,669
|
2,585,500
|
|
Restricted
stock units (RSUs)
|
618,004
|
845,106
|
|
Warrants
|
393,589
|
753,775
|
|
Total
Potential Dilutive Securities
|
454,334,941
|
544,861,433
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories
of $88,000
as of March
31, 2021 were comprised of work in process of $78,000, representing direct
labor costs on in-process projects and finished goods of
$10,000 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 $55,000 and $58,000 as of March 31, 2021 and December 31,
2020, respectively, which includes accumulated amortization of
$604,000 and $601,000 as of March 31, 2021 and December 31, 2020,
respectively. Amortization expense for patent intangible
assets was $3,000 for the three months ended March 31, 2021 and
2020, respectively. Patent intangible assets are being amortized on
a straight-line basis over their remaining life of approximately
4.58 years. There was no impairment of the Company’s
intangible assets during the three months ended March 31, 2021 and
2020.
The
estimated intangible amortization expense for the next five fiscal
years is as follows:
|
Fiscal
Year Ended December 31,
|
Estimated
Amortization
Expense
($ in thousands)
|
|
2021 (nine
months)
|
$9
|
|
2022
|
12
|
|
2023
|
12
|
|
2024
|
12
|
|
2025
|
10
|
|
Thereafter
|
—
|
|
Total
|
$55
|
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 March 31, 2021, had a negative
carrying amount of approximately $22,933,000. Based on the results
of the Company's impairment testing, the Company determined that
its goodwill was not impaired as of March 31, 2021 and
December 31, 2020.
Other Assets
In
conjunction with the Lincoln Purchase Agreement, the Company issued
to Lincoln Park, in May 2020, 2,500,000 shares of Common Stock as
consideration for entering into the Lincoln 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 Lincoln Purchase Agreement.
At March 31, 2021 and December 31, 2020, the Company had
approximately $364,000 in deferred stock issuance costs included in
the caption “Other assets” in its condensed
consolidated balance sheets. During the three months ended March
31, 2021, there were no securities sold by the Company under the
Lincoln Park Purchase Agreement. For more information on the
Lincoln Purchase Agreement, see our Annual Report on Form 10-K for
the fiscal year ended December 31, 2020, as filed with the SEC on
April 5, 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 March 31, 2021, such
assets and liabilities aggregated approximately $1,462,000 and
$1,613,000, 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 March 31, 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
March 31, 2021. The Company extended this lease for a 30-day period
and is currently evaluating alternative premises which the Company
believes are readily available;
●
9,720
square feet in Portland, Oregon, at a cost of approximately $23,000
per month until the expiration of the lease on February 28, 2023;
and
●
183 square feet of office space in Mexico City,
Mexico, at a cost of approximately $2,000 per month
until September 30,
2021.
Prior to entering into our current lease agreement
in January 2021 and moving our corporate headquarters to a new
location, we occupied 8,511 square feet of office space in San
Diego, at a cost of approximately $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 March 31, 2021 and 2020, the Company recorded
approximately $154,000 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 March 31, 2021 is 2.0 years.
Cash payments under operating leases aggregated approximately
$166,000 for the three months ended March 31, 2021 and $161,000 for
the comparable period in 2020 and are included in operating cash
flows.
The
Company’s lease liability was computed using the present
value of future lease payments. The Company has utilized the
practical expedient regarding lease and non-lease components and
combined such components into a single combined component in the
determination of the lease liability. The Company has excluded the
lease of its office space in Mexico City, Mexico in the
determination of the lease liability as its term is less than 12
months.
At
March 31, 2021, future minimum undiscounted lease payments are as
follows:
|
($ in thousands)
|
|
|
2021
(nine months)
|
$491
|
|
2022
|
653
|
|
2023
|
424
|
|
2024
|
387
|
|
2025
|
128
|
|
Thereafter
|
—
|
|
Total
|
$2,083
|
|
Short-term
leases not included in lease liability
|
(14)
|
Present
Value effect on future minimum undiscounted lease payments at March
31, 2021
|
(456)
|
|
Lease
liability at March 31, 2021
|
$1,613
|
|
Less
current portion
|
(435)
|
|
Non-current
lease liability at March 31, 2021
|
$1,178
|
NOTE 6. MEZZANINE EQUITY
Series C Convertible
Redeemable Preferred Stock
On
September 18, 2020, 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.
During
the three months ended March 31, 2020, the Company recorded
$250,000 as accrued Series C Preferred dividends and recorded the
accretion of debt issuance costs and derivative liabilities of
approximately $175,000. 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
"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 661.3 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 three months ended March 31,
2021, the Company issued 248 shares of Series D Preferred Stock as
payment of dividends due to the Series D Preferred stockholders.
During the three months ended March 31, 2021, certain holders of
Series D Preferred converted 354 shares of Series D into 6,115,324
shares of Common Stock which includes 42,283 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 months ended March 31, 2021, the Company recorded
the accretion of debt issuance costs and derivative liabilities
aggregating approximately $1,817,000 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:
|
|
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
|
The
carrying value of the Company’s Series D Preferred was
approximately $3,391,000 and $1,572,000 net of discount of
approximately $19,366,000 and $21,291,000 as of March 31, 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 $22,850,000 and $24,128,000 at March 31,
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 operations.
For the three months ended March 31, 2021, the Company recorded a
decrease to its derivative liabilities using fair value
methodologies of approximately $1,172,000 related to Series D
embedded derivatives. In conjunction with the conversion of 354
shares of the Company’s Series D Preferred into Common Stock
during the three months ended March 31, 2021, the Company
recognized a loss on the extinguishment of derivative liabilities
of approximately $335,000.
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 $172,000 at March 31, 2020. There is no
Series C Preferred outstanding at March 31, 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.
For the three months ended March 31, 2020, the Company recorded a
decrease to these derivative liabilities using fair value
methodologies of approximately $197,000 related to Series C
embedded derivatives.
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, which the Company continues to evaluate. While no
determination has been made at the time of the filing of this
Quarterly Report, the Series D Financing may affect the Company's
ability to have the PPP Loan forgiven under the PPP. 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. The Company plans to file for loan forgiveness within 30
days of the filing of this Quarterly Report. At March 31, 2021, the
Company has recorded the current portion of the PPP Loan of
approximately $1,107,000 as a current liability under the caption
“Notes payable, current portion” in its condensed
consolidated March 31, 2021 balance sheet. The remaining portion of
approximately $464,000 is recorded as a long-term liability under
the caption “Note payable, net of current portion” in
its condensed consolidated March 31, 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, as amended,
authorizes the issuance of two classes of stock to be designated
“Common Stock” and “Preferred Stock”. The
Preferred Stock may be divided into such number of series and with
the rights, preferences, privileges and restrictions as the Board
of Directors may determine.
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 (i) 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 (ii) 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 6,149 and 14,911 shares of Series A Preferred outstanding as
of March 31, 2021 and December 31, 2020, respectively. At
March 31, 2021 and December 31, 2020, the Company had cumulative
undeclared dividends of $0. During the three
months ended March 31, 2021, the Company issued the
holders of Series A Preferred 1,050,826 shares of Common Stock
as payment of dividends due. During the three
months ended March 31, 2021, the Company issued
43,819,500 shares of Common Stock upon the conversion of 8,762
shares of Series A Preferred Stock. During the three months ended
March 31, 2020, the Company recorded accrued unpaid dividends of
approximately $937,000 on its Series A Preferred Stock. There were
no conversions of Series A Preferred into Common Stock during the
three months ended March 31, 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 March 31, 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) $1,000 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 i) 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 5,922 and 14,782
shares of Series A-1 Preferred outstanding as of March 31, 2021 and
December 31, 2020, respectively. During the three months ended March 31, 2021, the
Company issued the holders of Series A-1 Preferred 963,266 shares
of Common Stock as
payment of dividends due. During the three months ended March 31, 2021,
the
Company issued 44,300,000 shares of Common Stock upon the
conversion of 8,860 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 March 31, 2021 and December 31, 2020. At March 31, 2021 and
December 31, 2020, the Company had cumulative undeclared dividends
of approximately $21,000 and $8,000, respectively. There were no
conversions of Series B Preferred into Common Stock during the
three months ended March 31, 2021 and 2020.
Common Stock
As
of March 31, 2021, we had 276,749,448 and 276,742,744 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 three months ended March 31, 2021:
|
|
|
|
Shares
outstanding at December 31, 2020
|
180,089,613
|
|
Shares issued pursuant to payment of stock dividend on Series A
Preferred
|
1,050,826
|
|
Shares
issued pursuant to payment of stock dividend on Series A-1
Preferred
|
963,266
|
|
Shares
issued pursuant to Series D conversion to Common Stock
|
6,115,324
|
|
Shares
issued pursuant to Series A conversion to Common Stock
|
43,819,500
|
|
Shares
issued pursuant to Series A-1 conversion to Common
Stock
|
44,300,000
|
|
Shares
issued pursuant to warrant exercises
|
400
|
|
Shares
issued as compensation in lieu of cash
|
242,647
|
Shares issued pursuant to RSU vesting
|
161,168
|
Shares
outstanding at March 31, 2021
|
276,742,744
|
Warrants
As
of March 31, 2021, warrants to purchase 393,589 shares of Common
Stock at prices ranging from $0.01 to $0.80 were outstanding. At
March 31, 2021, no warrants are exercisable and become exercisable
only upon the attainment of specified events. All warrants expire
on September 19, 2028 with the exception of 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
March 31, 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:
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
Balance
at December 31, 2020
|
753,775
|
$0.17
|
|
Granted
|
—
|
$—
|
|
Expired
/ Canceled
|
(359,786)
|
$0.01
|
|
Exercised
|
(400)
|
$0.01
|
Balance
at March 31, 2021
|
393,589
|
$0.31
|
There
were no warrants issued during the three months ended March 31,
2021. During the three months ended March 31, 2021, 359,786
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 March 31, 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. As of the March 31, 2021, there were 26,511,811 shares
available for issuance under the 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.
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. There were no options granted during the three
months ended March 31, 2021 and 2020.
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:
|
|
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
Balance
at December 31, 2020
|
2,585,500
|
$0.19
|
9.2
|
|
Granted
|
—
|
|
|
|
Expired/Cancelled
|
(10,831)
|
$ 0.78
|
|
|
Exercised
|
—
|
|
|
Balance at March
31, 2021
|
2,574,669
|
$0.18
|
8.9
|
There
were no issuances of options to purchase Common Stock during the
three months ended March 31, 2021
During the three months ended March 31,
2021, an aggregate of 10,381 options expired
unexercised.
At March 31, 2021, a total
of 2,574,669 options were outstanding, of which 110,091 were
exercisable at a weighted average price of $1.09 per share with a
remaining weighted average contractual term of 6.06 years.
The Company expects that, in addition to the 110,091 options that
were exercisable as of March 31, 2021, another 2,464,578 will
ultimately vest resulting in a combined total
of 2,574,669. Those 2,574,669 shares have a
weighted average exercise price of $0.18 and an aggregate intrinsic
value of approximately $0 as of March 31, 2021. Stock-based
compensation expense related to equity options was approximately
$32,000 for the three months ended March 31,
2021.
The intrinsic value of options exercisable and
outstanding at March 31, 2020 was $0. The aggregate
intrinsic value for all options outstanding as of March 31,
2020 was $0. The
weighted-average grant-date per share fair value of options granted
during the three months ended March 31, 2020 was $0 as there were
no option grants during this period. At March 31, 2020, the total
remaining unrecognized compensation cost related to unvested stock
options amounted to approximately $558,000, which will be
recognized over a weighted-average period of 1.5
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:
|
|
|
Weighted-Average
Issuance
Price
|
|
Balance at December
31, 2020
|
845,106
|
$0.14
|
|
Granted
|
—
|
$—
|
|
Expired/Cancelled
|
(150,935)
|
$0.13
|
|
Vested
|
(76,167)
|
$0.13
|
Balance at March
31, 2021
|
618,004
|
$0.14
|
There
were no RSUs granted to employees during the three months ended March 31, 2021.
During the
three months ended March 31,
2021, 76,167 RSUs vested
with the remainder of outstanding RSUs vesting at various times
through September 29, 2022.
During the three months ended March 31, 2021 and 2020, the Company
recorded compensation expense of approximately $15,000 and $0
related to RSUs. During the three months ended March 31, 2021 and
2020, the Company issued 161,168 and 0 shares of its Common Stock
pursuant to the vesting of RSUs.
As
of March 31, 2021, the Company has not issued the Common Stock
shares pursuant to the vesting of the 808,859 RSUs.
Stock-based Compensation
Stock-based
compensation related to equity options and RSUs has been classified
as follows in the accompanying consolidated statements of
operations (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Cost
of revenue
|
$1
|
$2
|
|
General
and administrative
|
37
|
67
|
|
Sales
and marketing
|
21
|
29
|
|
Research
and development
|
19
|
26
|
|
Total
|
$78
|
$124
|
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “Fair Value Measurements and
Disclosures”, which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
|
|
Level
2
|
Applies
to assets or liabilities for which there are inputs other than
quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
|
|
|
|
|
|
Level
3
|
Prices
or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
|
Fair Value at March 31, 2021
|
|
($ in thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Pension
assets
|
$1,800
|
$—
|
$—
|
$1,800
|
|
Totals
|
$1,800
|
$—
|
$—
|
$1,800
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liabilities
|
$22,850
|
$—
|
$—
|
$22,850
|
|
Totals
|
$22,850
|
$—
|
$—
|
$22,850
|
|
|
Fair Value at December 31, 2020
|
|
($ in thousands)
|
|
|
|
|
|
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 March 31, 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 $22,850,000 and $24,128,000 at March 31,
2021 and December 31, 2020, respectively, and are classified as a
current liability in the condensed consolidated balance sheets as
of March 31, 2021 and December 31, 2020. The fair value of the
Company’s derivative liabilities is classified
within Level 3 of the fair value hierarchy because they are valued
using pricing models that incorporate management assumptions that
cannot be corroborated with observable market data. The
Company uses Monte-Carlo simulations in the determination of the
fair value of derivative liabilities.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events. Significant assumptions used in the fair value
methodologies during the three months ended March 31, 2021 are a
risk-free rate of 0.56%, equity volatility of 103.6%, effective
life of 3.75 years and a preferred stock dividend rate of 4%. These
assumptions incorporate management’s estimate of the
probability of future financings (Series D Financing) and the
timing of potential change of control events. The primary
assumptions impacted by Series D Financing were the effective life
of 3.75 years and equity volatility.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
The reconciliations of Level 3 pension assets
measured at fair value during the three months ended March 31, 2021
and 2020 are presented below:
|
($
in thousands)
|
Three
months ended March 31, 2021
|
Three
months ended March 31, 2020
|
|
|
|
|
|
Pension
assets:
|
|
|
|
Fair
value at beginning of period
|
$1,881
|
$1,713
|
|
Return
on plan assets
|
15
|
14
|
|
Company
contributions and benefits paid, net
|
2
|
(10)
|
|
Effect
of rate changes
|
(98)
|
(42)
|
|
Fair
value at end of period
|
$1,800
|
$1,675
|
The reconciliations of Level 3 derivative liabilities measured at
fair value for Series D Preferred Stock during the three months
ended March 31, 2021 and for Series C Preferred Stock during the
three months ended March 31, 2020 are presented
below:
|
($
in thousands)
|
Three
months ended March 31, 2021
|
Three
months ended March 31, 2020
|
|
|
|
|
|
Derivative
liabilities
|
|
|
|
Fair
value at beginning of period
|
$24,128
|
$369
|
|
Derivative
liability from issuance of Preferred Series D
|
248
|
—
|
|
Decrease
in derivative liability from conversions of Preferred Series
D
|
(354)
|
—
|
|
Change
in fair value included in earnings
|
(1,172)
|
(197)
|
|
Fair
value at end of period
|
$22,850
|
$172
|
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 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 three months ended March
31, 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, 2022. 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, the Chief Executive Officer will be
entitled to the following severance benefits if we terminate their
employment without cause or in the event of an involuntary
termination: (i) severance payments equal to the lesser of twelve
months’ base salary or the remaining period prior to the
expiration of the Employment Period; (ii) continuation of fringe
benefits and medical insurance for a period of twelve months. In
the event that the Chief Executive Officer’s employment is
terminated within six months prior to or thirteen months following
a change of control (as defined in the employment agreements), the
Chief Executive Officer is entitled to the severance benefits
described above, except that 100% of the Chief Executive
Officer’s outstanding stock options and restricted stock
awards will immediately vest.
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
Issuance of Common Stock due to Conversions and Vesting of
Restricted Stock Units (“RSUs”)
During
the period April 1, 2021 through May 20, 2021, the Company issued
an aggregate 26,550,242 shares of its Common Stock including
25,950,904 shares of Common Stock for conversions of its Preferred
Stocks and 599,338 pursuant to RSU vestings.
Amendment to Certificate of Incorporation
Our
Certificate of Incorporation as of March 31, 2021 authorizes a
total of 1.0 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 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. Contemporaneous with this
action, the Company amended the 2020 Omnibus Incentive Plan to
increase the number of shares of Common Stock available for
issuance under the 2020 Plan to 145.0 million shares. These actions
became effective on April 21, 2021.
Creation of Advisory Board and Issuance of Warrants
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.
Issuance of Options
In
April 2021, the Company granted an aggregate of 54,050,000 options
to purchase shares of Common Stock including 50,700,000 to certain
officers and employees and 3,350,000 to certain members of the
Company’s Board of Directors. Such options have an exercise
price of $0.067 and vest at various times through April 16, 2023.
As a condition of issuance of these options, certain employees
surrendered an aggregate of 6,520,000 previously issued or
contractually promised equity awards and certain members of the
Company’s Board of Directors surrendered the right to an
initial grant of options to purchase that number of shares of
Common Stock equal to $120,000 divided by the fair market value of
the Company’s Common Stock as determined on the date of grant
as reported on the OTC Markets, and further surrendered an option
to purchase that number of shares of Common Stock equal to $60,000
divided by the fair market value of the Company’s Common
Stock as determined on the date of grant beginning on the first
anniversary and on each annual anniversary thereafter.
Entry into Second Lincoln Park Purchase Agreement
On May
17, 2021 (the "Execution
Date"), the Company entered into a purchase agreement, dated
as of the Execution Date (the "Purchase Agreement"), and a
registration rights agreement, dated as of the Execution Date (the
"Registration Rights
Agreement"), with Lincoln Park Capital Fund, LLC
("Lincoln Park"), pursuant
to which Lincoln Park has committed to purchase up to $15,100,000
of the Company's Common Stock, $0.01 par value per
share.
Under
the terms and subject to the conditions of the 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 the date that a
registration statement covering the resale of shares of Common
Stock that have been and may be issued under the Purchase
Agreement, which the Company agreed to file with the Securities and
Exchange Commission (the "SEC") pursuant to the Registration
Rights Agreement, is declared effective by the SEC and a final
prospectus in connection therewith is filed and the other
conditions set forth in the Purchase Agreement are satisfied, all
of which are outside the control of Lincoln Park (such date on
which all of such conditions are satisfied, the "Commencement Date"). The Company has
until May 31, 2021 to file the registration statement.
Under
the Purchase Agreement, on any business day over the term of the
Purchase Agreement, the Company has the right, in its sole
discretion, to present Lincoln Park with a purchase notice (each, a
"Purchase Notice")
directing Lincoln Park to purchase up to 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
Purchase Agreement). In each case, Lincoln Park's maximum
commitment in any single Regular Purchase may not exceed $500,000.
The Purchase Agreement provides for a purchase price per Purchase
Share (the "Purchase
Price") equal to the lesser of:
|
●
|
the
lowest sale price of the Company's Common Stock on the purchase
date; and
|
|
●
|
the
average of the three lowest closing sale prices for the Company's
Common Stock during the fifteen consecutive business days ending on
the business day immediately preceding the purchase date of such
shares.
|
In
addition, on any date on which the Company submits a Purchase
Notice to Lincoln Park, the Company also has the right, in its sole
discretion, to present Lincoln with an accelerated purchase notice
(each, an "Accelerated Purchase
Notice") directing Lincoln Park to purchase an amount of
stock (the "Accelerated
Purchase") equal to up to the lesser of (i) three times the
number of shares of Common Stock purchased pursuant to such Regular
Purchase; and (ii) 30% of the aggregate shares of the Company's
Common Stock traded during all or, if certain trading volume or
market price thresholds specified in the Purchase Agreement are
crossed on the applicable Accelerated Purchase Date, the portion of
the normal trading hours on the applicable Accelerated Purchase
Date prior to such time that any one of such thresholds is crossed
(such period of time on the applicable Accelerated Purchase Date,
the "Accelerated Purchase
Measurement Period"), provided that Lincoln Park will not be
required to buy shares of Common Stock pursuant to an Accelerated
Purchase Notice that was received by Lincoln Park on any business
day on which the last closing trade price of the Company's Common
Stock on the OTC Markets (or alternative national exchange in
accordance with the Purchase Agreement) is below $0.25 per share.
The purchase price per share of Common Stock for each such
Accelerated Purchase will be equal to the lesser of:
|
●
|
95% of
the volume weighted average price of the Company's Common Stock
during the applicable Accelerated Purchase Measurement Period on
the applicable Accelerated Purchase Date; and
|
|
●
|
the
closing sale price of the Company's Common Stock on the applicable
Accelerated Purchase Date.
|
The
Company may also direct Lincoln Park on any business day on which
an Accelerated Purchase has been completed and all of the shares to
be purchased thereunder have been properly delivered to Lincoln
Park in accordance with the Purchase Agreement, to purchase an
amount of stock (the "Additional
Accelerated Purchase") equal to up to the lesser of (i)
three times the number of shares purchased pursuant to such Regular
Purchase; and (ii) 30% of the aggregate number of shares of the
Company's Common Stock traded during a certain portion of the
normal trading hours on the applicable Additional Accelerated
Purchase date as determined in accordance with the Purchase
Agreement (such period of time on the applicable Additional
Accelerated Purchase date, the "Additional Accelerated Purchase Measurement
Period"). Additional Accelerated Purchases will be equal to
the lower of:
|
●
|
95% of
the volume weighted average price of the Company's Common Stock
during the applicable Additional Accelerated Purchase Measurement
Period on the applicable Additional Accelerated Purchase date;
and
|
|
●
|
the
closing sale price of the Company's Common Stock on the applicable
Additional Accelerated Purchase date.
|
The
aggregate number of shares that the Company can sell to Lincoln
Park under the Purchase Agreement may in no case exceed that number
which, together with Lincoln Park’s then current holdings of
Common Stock, exceed 4.99% of the Common Stock outstanding
immediately prior to the delivery of the Purchase
Notice.
Lincoln
Park has no right to require the Company to sell any shares of
Common Stock to Lincoln Park, but Lincoln Park is obligated to make
purchases as the Company directs, subject to certain conditions.
There are no upper limits on the price per share that Lincoln Park
must pay for shares of Common Stock.
The
Company has agreed with Lincoln Park that it will not enter into
any "variable rate" transactions with any third party for a period
defined in the Purchase Agreement.
The
Company has agreed to issue to Lincoln Park 1,000,000 shares of
Common Stock as commitment shares in consideration for entering
into the Purchase Agreement on the Execution Date.
The
Purchase Agreement and the Registration Rights Agreement contain
customary representations, warranties, agreements and conditions to
completing future sale transactions, indemnification rights and
obligations of the parties. The Company has the right to terminate
the Purchase Agreement at any time, at no cost or penalty, subject
to the survival of certain provisions set forth in the Purchase
Agreement. During any "event of default" under the Purchase
Agreement, all of which are outside of Lincoln Park's control,
Lincoln Park does not have the right to terminate the Purchase
Agreement; however, the Company may not initiate any regular or
other purchase of shares by Lincoln Park, until such event of
default is cured. In addition, in the event of bankruptcy
proceedings by or against the Company, the Purchase Agreement will
automatically terminate.
Actual
sales of shares of Common Stock to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by
the Company from time to time, including, among others, market
conditions, the trading price of the Common Stock and
determinations by the Company as to the appropriate sources of
funding for the Company and its operations. Lincoln Park has no
right to require any sales by the Company but is obligated to make
purchases from the Company as it directs in accordance with the
Purchase Agreement. Lincoln Park has covenanted not to cause or
engage in any manner whatsoever, any direct or indirect short
selling or hedging of the Company's shares.
In
connection with the execution of the Purchase Agreement, the
Company has agreed to sell, and Lincoln Park has agreed to
purchase, 1.0 million shares of Common Stock for a purchase price
of $100,000 (“Original
Purchase”).
Due to
the terms of the Purchase Agreement as described above, management
is not currently expecting the related proceeds from this agreement
to be sufficient to sustain operations for an extended period of
time.
The May
17, 2021 Purchase Agreement supersedes and terminates the previous
agreement between the Company and Lincoln Park entered into on June
11, 2020.