NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
1. DESCRIPTION OF BUSINESS AND OPERATIONS
Overview
As
used in this Annual Report, “we,” “us,”
“our,” “ImageWare,” “ImageWare
Systems,” “Company” or “our 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 of the
products are integrated into the IWS Biometric Engine.
Recent Developments
Creation of Series A
Convertible Preferred Stock
On September 15, 2017, the Company filed the
Certificate of Designations, Preferences, and Rights of the Series
A Convertible Preferred Stock with the Delaware Division of
Corporations, designating 31,021 shares of the Company’s
preferred stock, par value $0.01 per share, as Series A Convertible
Preferred Stock (“
Series A
Preferred
”). See Note
12,
Equity
, below, for a description of the Series A
Preferred.
Series A Financing and Preferred Stock Exchange
On September 18, 2017, the Company offered and
sold a total of 11,000 shares of Series A Preferred at a purchase
price of $1,000 per share (the “
Series A
Financing
”), which amount
includes an aggregate total of 875 shares of Series A Preferred
issuable to Neal Goldman, a member of the Board, and S. James
Miller, the Company’s Chief Executive Officer and member of
the Board, in connection with cash advances of $875,000 previously
made to the Company. The net proceeds to the Company from the
Series A Financing were approximately $10.9 million. Concurrently
with the Series A Financing, the Company entered into Exchange
Agreements with holders of all outstanding shares of the
Company’s Series E Convertible Preferred Stock, all
outstanding shares of Series F Convertible Preferred Stock, and all
outstanding shares of Series G Convertible Preferred Stock
(collectively, “
Exchanged
Preferred
”), pursuant to
which the holders thereof agreed to cancel their Exchanged
Preferred in exchange for the same number of shares of Series A
Preferred (the “
Preferred Stock
Exchange
”). As a result
of the Preferred Stock Exchange, the Company issued to the holders
of Exchanged Preferred an aggregate total of 20,021 shares of
Series A Preferred.
The
Company evaluated the Preferred Stock Exchange and determined that
the Exchanged Preferred was both an induced conversion and an
extinguishment transaction. Using the guidance in ASC 260-10-S99-2,
Earnings Per Share – SEC Materials – SEC Staff
Announcement: The Effect on the Calculations of Earnings Per Share
for a Period That Includes the Redemption or Induced Conversion of
Preferred Stock and ASC 470-50, Debt – Modifications and
Extinguishments, the Company recorded the fair value differential
of the Exchanged Preferred as adjustments within
Shareholders’ Deficit and in the computation of Net Loss
Available to Common Shareholders in the computation of basic and
diluted loss per share. The Company utilized the services of an
independent third-party valuation firm to perform the computation
of the fair value of the Exchanged Preferred. Based on the fair
value using these methodologies, the Company recorded approximately
$1,245,000 in fair value differential as adjustments within
Shareholders’ Deficit in the Company’s Consolidated
Balance Sheet for the year ended December 31, 2017 and in the
computation of basic and diluted loss per share in the
Company’s Consolidated Statement of Operations for the year
ended December 31, 2017.
As
a result of the Preferred Stock Exchange, on October 19, 2017, the
Company filed Certificates of Elimination with the Delaware
Secretary of State to eliminate the Exchanged
Preferred.
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, including
our Lines of Credit (defined below). Our principal uses of cash
have included cash used in operations, product development and
payments relating to purchases of property and equipment. We expect
that our principal uses of cash in the future will be for product
development including customization of identity management products
for enterprise and consumer applications, further development of
intellectual property, development of Software-as-a-Service
(“
SaaS
”)
capabilities for existing products as well as general working
capital and capital expenditure requirements. Management expects
that, as our revenues grow, our sales and marketing and research
and development expenses will continue to grow, albeit at a slower
rate and, as a result, we will need to generate significant net
revenues to achieve and sustain income from
operations.
At
December 31, 2017, we had a working capital deficit of
approximately $415,000, compared to a working capital deficit of
approximately $3,014,000 at December 31, 2016. Our principal
sources of liquidity at December 31, 2017 consisted of
approximately $7,317,000 of cash, compared to available borrowings
under our Lines of Credit of $3,350,000, and approximately
$1,586,000 in cash at December 31, 2016.
Considering our projected cash requirements, and
assuming we are unable to generate incremental revenue, our
available cash may be insufficient to satisfy our cash requirements
for the next twelve months from the date of this filing. These
factors raise substantial doubt about our ability to continue as a
going concern. To address our working capital requirements,
management may seek additional equity and/or debt financing through
the issuance of additional debt and/or equity securities or may
seek strategic or other transactions intended to increase
shareholder value. There are currently no formal committed
financing arrangements to support our projected cash shortfall,
including commitments to purchase additional debt and/or equity
securities, or other agreements, and no assurances can be given
that we will be successful in raising additional 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.
The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts and classifications of liabilities that might be necessary
should the Company be unable to continue as a going
concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The
Company’s wholly-owned subsidiaries are: XImage Corporation,
a California Corporation; ImageWare Systems ID Group, Inc. a
Delaware corporation (formerly Imaging Technology Corporation);
I.W. Systems Canada Company, a Nova Scotia unlimited liability
company; ImageWare Digital Photography Systems, Inc., LLC a Nevada
limited liability company (formerly Castleworks LLC); Digital
Imaging International GmbH, a company formed under German laws;
and
Image Ware Mexico
S de RL de CV, a company formed under Mexican laws.
All significant intercompany
transactions and balances have been eliminated.
Operating Cycle
Assets
and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying
consolidated balance sheets, although they will be liquidated in
the normal course of contract completion which may take more than
one operating cycle.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America
(“
U.S.
GAAP
”) requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and
expense during the reporting period. Significant estimates include
the allowance for doubtful accounts receivable, inventory carrying
values, deferred tax asset valuation allowances, accounting for
loss contingencies, recoverability of goodwill and acquired
intangible assets and amortization periods, assumptions used in the
Black-Scholes model to calculate the fair value of share based
payments, assumptions used to compute the fair value of the
Exchanged Preferred, revenue and cost of revenues recognized under
the percentage of completion method and assumptions used in the
application of fair value methodologies to calculate the fair value
of pension assets and obligations. Actual results could differ from
estimates.
Accounts Receivable
In
the normal course of business, the Company extends credit without
collateral requirements to its customers that satisfy pre-defined
credit criteria. Accounts receivable are recorded net of an
allowance for doubtful accounts. Accounts receivable are considered
delinquent when the due date on the invoice has passed. The Company
records its allowance for doubtful accounts based upon its
assessment of various factors. The Company considers historical
experience, the age of the accounts receivable balances, the credit
quality of its customers, current economic conditions and other
factors that may affect customers’ ability to pay to
determine the level of allowance required. Accounts
receivable are written off against the allowance for doubtful
accounts when all collection efforts by the Company have been
unsuccessful.
Inventories
Finished
goods inventories are stated at the lower of cost, determined using
the average cost method, or net realizable value. See Note
6.
Property, Equipment and Leasehold Improvements
Property
and equipment, consisting of furniture and equipment, are stated at
cost and are being depreciated on a straight-line basis over the
estimated useful lives of the assets, which generally range from
three to five years. Maintenance and repairs are charged to expense
as incurred. Major renewals or improvements are capitalized. When
assets are sold or abandoned, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain
or loss is recognized. Expenditures for leasehold improvements are
capitalized. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining
lease term or the estimated useful lives of the
improvements.
Fair Value of Financial Instruments
For
certain of the Company’s financial instruments, including
accounts receivable, accounts payable, accrued expenses, deferred
revenues and lines of credit payable to related parties, the
carrying amounts approximate fair value due to their relatively
short maturities.
Revenue Recognition
The
Company recognizes revenue from the following major revenue
sources:
●
Long-term fixed-price contracts involving significant
customization;
●
Fixed-price contracts involving minimal customization;
●
Sales of computer hardware and identification media;
and
●
Post-contract customer support
(“
PCS
”).
The Company’s revenue recognition policies
are consistent with U.S. GAAP including the Financial Accounting
Standards Board (“
FASB
”) Accounting Standards Codification
(“
ASC
”) 985-605, “
Software Revenue
Recognition
,” ASC 605-35
“
Revenue Recognition,
Construction-Type and Production-Type Contracts
,” “
Securities and Exchange
Commission Staff Accounting Bulletin 104
,” and ASC 605-25 “
Revenue Recognition, Multiple
Element Arrangements
.”
Accordingly, the Company recognizes revenue when all of the
following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the
fee is fixed or determinable, and collectability is reasonably
assured.
The Company recognizes revenue and profit as work
progresses on long-term, fixed-price contracts involving
significant amount of hardware and software customization using the
percentage of completion method based on costs incurred to date
compared to total estimated costs at completion. The primary
components of costs incurred are third party software and direct
labor cost including fringe benefits. Revenues recognized in excess
of amounts billed are classified as current assets under
“Costs and estimated earnings in excess of billings on
uncompleted contracts.” Amounts billed to customers in excess
of revenues recognized are classified as current liabilities under
“Billings in excess of costs and estimated earnings on
uncompleted contracts.” Revenue from contracts for which the
Company cannot reliably estimate total costs or there are not
significant amounts of customization are recognized upon
completion. For contracts that require significant amounts of
customization that the Company accounts for under the completed
contract method of revenue recognition, the Company defers revenue
recognition until customer acceptance is received. For contracts
containing either extended or dependent payment terms, revenue
recognition is deferred until such time as payment has been
received by the Company. The Company also generates non-recurring
revenue from the licensing of its software. Software license
revenue is recognized upon the execution of a license agreement,
upon deliverance, when fees are fixed and determinable, when
collectability is probable, when all other significant obligations
have been fulfilled a
nd the Company has
obtained vendor specific objective evidence
(“
VSOE
”) of the fair
value of the undelivered element. VSOE of fair value for customer
support services is determined by reference to the price the
customer pays for such element when sold separately; that is, the
renewal rate offered to customers. In those instances when
objective and reliable evidence of fair value exists for the
undelivered items but not for the delivered items, the residual
method is used to allocate the arrangement consideration. Under the
residual method, the amount of arrangement consideration allocated
to the delivered items equals the total arrangement consideration
less the aggregate fair value of the undelivered
items
. The Company also
generates revenue from the sale of computer hardware and
identification media. Revenue for these items is recognized upon
delivery of these products to the customer. The Company’s
revenue from periodic maintenance agreements is generally
recognized ratably over the respective maintenance periods provided
no significant obligations remain and collectability of the related
receivable is probable. Pricing of maintenance contracts is
consistent period to period and calculated as a percentage of the
software or hardware revenue. Amounts collected in advance for
maintenance services are included in current liabilities under
“Deferred revenue.” Sales tax collected from customers
is excluded from revenue.
Goodwill
The Company accounts for its intangible assets
under the provisions of ASC 350, “
Intangibles - Goodwill and
Other
.” In accordance
with ASC 350, intangible assets with a definite life are analyzed
for impairment under ASC 360-10-05 “
Property, Plant and
Equipment
” and intangible
assets with an indefinite life are analyzed for impairment under
ASC 360 annually, or more often if circumstances dictate. The
Company performs its annual goodwill impairment test in the fourth
quarter of each year, or if required, at the end of each fiscal
quarter. In accordance with ASC 350, goodwill, or the
excess of cost over fair value of net assets acquired is tested for
impairment using a fair value approach at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company’s reporting unit is at the entity level. The Company
recognizes an impairment charge for any amount by which the
carrying amount of a reporting unit’s goodwill exceeds its
fair value. The Company uses fair value methodologies to establish
fair values.
The
Company did not record any goodwill impairment charges for the
years ended December 31, 2017, 2016 or 2015.
Intangible and Long-Lived Assets
Intangible
assets are carried at their cost less any accumulated
amortization. Any costs incurred to renew or extend the
life of an intangible or long-lived asset are reviewed for
capitalization. The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate
their net book value may not be recoverable. When such factors and
circumstances exist, the Company compares the projected
undiscounted future cash flows associated with the related asset or
group of assets over their estimated useful lives against their
respective carrying amount. Impairment, if any, is based on the
excess of the carrying amount over the fair value, based on market
value when available, or discounted expected cash flows, of those
assets and is recorded in the period in which the determination is
made. The Company’s management currently believes there is no
impairment of its long-lived assets. There can be no assurance,
however, that market conditions will not change or demand for the
Company’s products under development will continue. Either of
these could result in future impairment of long-lived
assets.
Concentration of Credit Risk
Financial
instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high quality financial
institutions and at times during the years ended December 31, 2017
and 2016 exceeded the FDIC insurance limits of $250,000. Sales are
typically made on credit and the Company generally does not require
collateral. The Company performs ongoing credit evaluations of its
customers’ financial condition and maintains an allowance for
doubtful accounts. The Company considers historical experience, the
age of the accounts receivable balances, the credit quality of its
customers, current economic conditions and other factors that may
affect customers’ ability to pay to determine the level of
allowance required. Accounts receivable are presented net of an
allowance for doubtful accounts of approximately $15,000 and $1,000
at December 31, 2017 and 2016, respectively.
For
the year ended December 31, 2017 one customer accounted for
approximately 25% or $1,089,000 of total revenues and had trade
receivables of approximately $201,000 as of the end of the
year. For the year ended December 31, 2016 two customers
accounted for approximately 30% or $1,162,000 of total revenues and
had trade receivables of $78,000 as of the end of the year. For the
year ended December 31, 2015, two customers accounted for
approximately 37% or $1,753,000 of total revenues and $78,000 trade
receivables as of the end of the year.
Stock-Based Compensation
At
December 31, 2017, the Company had one stock-based compensation
plan for employees and nonemployee directors, which authorize the
granting of various equity-based incentives including stock options
and restricted stock.
The Company estimates the fair value of its stock
options using a Black-Scholes option-pricing model, consistent with
the provisions of ASC 718, “
Compensation – Stock
Compensation
.” The fair
value of stock options granted is recognized to expense over the
requisite service period. Stock-based compensation expense for all
share-based payment awards is recognized using the straight-line
single-option method. Stock-based compensation expense is reported
in operating expenses based upon the departments to which
substantially all of the associated employees report and credited
to additional paid-in-capital. Stock-based compensation expense
related to equity options was approximately $1,094,000, $1,162,000
and $744,000 for the years ended December 31, 2017, 2016 and 2015,
respectively.
ASC
718 requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the
Black-Scholes option-pricing model, which incorporates various
assumptions including volatility, expected life, and interest
rates. The Company is required to make various assumptions in the
application of the Black-Scholes option-pricing model. The Company
has determined that the best measure of expected volatility is
based on the historical weekly volatility of the Company’s
Common Stock. Historical volatility factors utilized in the
Company’s Black-Scholes computations for options granted
during the years ended December 31, 2017, 2016 and 2015 ranged from
58% to 103%. 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 No. 110. The expected term used by the Company during the
years ended December 31, 2017, 2016 and 2015 was 5.17 years. The
difference between the actual historical expected life and the
simplified method was immaterial. The interest rate used is the
risk-free interest rate and is based upon U.S. Treasury rates
appropriate for the expected term. Interest rates used in the
Company’s Black-Scholes calculations for the years ended
December 31, 2017, 2016 and 2015 averaged 2.6%. Dividend yield is
zero as the Company does not expect to declare any dividends on the
Company’s common shares in the foreseeable
future.
In
addition to the key assumptions used in the Black-Scholes model,
the estimated forfeiture rate at the time of valuation is a
critical assumption. The Company has adopted the provisions of ASU
2016-09 and will continue to use an estimated annualized forfeiture
rate of approximately 0% for corporate officers, 4.1% for members
of the Board of Directors and 6.0% for all other employees. The
Company reviews the expected forfeiture rate annually to determine
if that percent is still reasonable based on historical
experience.
Restricted
stock units are recorded at the grant date fair value with
corresponding compensation expense recorded ratably over the
requisite service period.
Income Taxes
Current
income tax expense or benefit is the amount of income taxes
expected to be payable or refundable for the current year. A
deferred income tax asset or liability is computed for the expected
future impact of differences between the financial reporting and
tax bases of assets and liabilities and for the expected future tax
benefit to be derived from tax credits and loss carryforwards.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be
realized.
Foreign Currency Translation
The
financial position and results of operations of the Company’s
foreign subsidiaries are measured using the foreign
subsidiary’s local currency as the functional currency.
Revenues and expenses of such subsidiaries have been translated
into U.S. dollars at weighted-average exchange rates
prevailing during the period. Assets and liabilities have been
translated at the rates of exchange on the balance sheet date. The
resulting translation gain and loss adjustments are recorded
directly as a separate component of shareholders’ equity,
unless there is a sale or complete liquidation of the underlying
foreign investments. The Company translates foreign currencies of
its German, Canadian and Mexican subsidiaries. The cumulative
translation adjustment, which is recorded in accumulated other
comprehensive loss, decreased approximately $106,000 for the year
ended December 31, 2017, decreased approximately $1,000 for the
year ended December 31, 2016 and increased approximately $67,000
for the year ended December 31, 2015.
Comprehensive Loss
Comprehensive loss consists of net gains and
losses affecting shareholders’ equity that, under generally
accepted accounting principles, are excluded from net loss. For the
Company, the only items are the cumulative translation adjustment
and the additional minimum liability related to the Company’s
defined benefit pension plan, recognized pursuant to ASC 715-30,
“
Compensation - Retirement
Benefits - Defined Benefit Plans – Pension
.”
Advertising Costs
The
Company expenses advertising costs as incurred. The Company
incurred approximately $45,000 in advertising expenses during the
year ended December 31, 2017, $24,000 in advertising expenses
during the year ended December 31, 2016, and $12,000 during the
year ended December 31, 2015.
Loss Per Share
Basic
loss per common share is calculated by dividing net loss available
to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted loss
per common share is calculated by dividing net loss available to
common shareholders for the period by the weighted-average number
of common shares outstanding during the period, adjusted to
include, if dilutive, potential dilutive shares consisting of
convertible preferred stock, convertible notes payable, stock
options and warrants, calculated using the treasury stock and
if-converted methods. For diluted loss per share
calculation purposes, the net loss available to common shareholders
is adjusted to add back any preferred stock dividends in the
consolidated statement of operations for the respective
periods.
(Amounts in thousands, except share and per share
amounts)
|
|
|
|
|
|
Numerator
for basic and diluted loss per share:
|
|
|
|
Net
loss
|
$
(10,069
)
|
$
(9,527
)
|
$
(8,534
)
|
Preferred
dividends
|
(2,400
)
|
(1,347
)
|
(1,065
)
|
Preferred
stock exchange
|
(1,245
)
|
—
|
—
|
Net
loss available to common shareholders
|
$
(13,714
)
|
$
(10,874
)
|
$
(9,599
)
|
|
|
|
|
Denominator
for basic loss per share — weighted-average shares
outstanding
|
92,816,723
|
94,426,783
|
93,786,079
|
Effect
of dilutive securities
|
—
|
—
|
—
|
Denominator
for diluted loss per share — weighted-average shares
outstanding
|
92,816,723
|
94,426,783
|
93,786,079
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
Net
loss
|
$
(0.11
)
|
$
(0.10
)
|
$
(0.09
)
|
|
(0.03
)
|
(0.02
)
|
(0.01
)
|
|
(0.01
)
|
—
|
—
|
Net
loss available to common shareholders
|
$
(0.15
)
|
$
(0.12
)
|
$
(0.10
)
|
The
following potential dilutive securities have been excluded from the
computations of diluted weighted-average shares outstanding as
their effect would have been antidilutive:
Potential Dilutive Securities:
|
Common Share Equivalents at December 31, 2017
|
Common Share Equivalents at December 31, 2016
|
Common Share Equivalents at December 31, 2015
|
Convertible
lines of credit
|
5,221,964
|
2,201,903
|
—
|
Convertible
redeemable preferred stock – Series A
|
26,974,783
|
—
|
—
|
Convertible
redeemable preferred stock – Series B
|
46,029
|
46,029
|
46,029
|
Convertible
redeemable preferred stock – Series E
|
—
|
6,315,789
|
6,442,105
|
Convertible
redeemable preferred stock – Series F
|
—
|
1,333,333
|
—
|
Convertible
redeemable preferred stock – Series G
|
—
|
4,014,000
|
—
|
Stock
options
|
6,093,512
|
6,506,843
|
5,376,969
|
Warrants
|
230,000
|
175,000
|
450,000
|
Total
Potential Dilutive Securities
|
38,566,288
|
20,592,897
|
12,315,103
|
Recently Issued Accounting Standards
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (the
“
FASB
”), or other standard setting bodies, which
are adopted by us as of the specified effective date. Unless
otherwise discussed, the Company’s management believes the
impact of recently issued standards not yet effective will not have
a material impact on the Company’s consolidated financial
statements upon adoption.
FA
SB ASU No. 2014-09.
In May 2014, FASB issued Accounting
Standards Update (“
ASU
”) No. 2014-09,
Revenue from Contracts with
Customers
, which requires an
entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to
customers. ASU No. 2014-09 will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In
July 2015, the FASB finalized a one-year deferral of the effective
date of the new standard. For public entities, the deferral results
in the new revenue standard being effective for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2017. The core principle of the new guidance is that an entity
should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. Calendar year-end public
companies are therefore required to apply the revenue guidance
beginning in their 2018 interim and annual financial statements.
The standard permits the use of either the retrospective or
modified retrospective transition method. We have adopted this
standard using the modified retrospective transition method during
the first fiscal quarter in 2018.
In
preparation for adoption of the standard, we have analyzed each of
our revenue streams:
●
Long-term fixed-price contracts involving significant
customization;
●
Fixed-price contracts involving minimal customization;
●
Software licensing;
●
Sales of computer hardware and identification media;
and
●
Post-contract customer support
(“
PCS
”).
Analysis
of the above revenue streams in preparation for the adoption of the
standard resulted in the identification of one of our revenue
contracts requiring the customer to make a fixed payment for a
one-year minimum royalty. Under current GAAP, we recognized the
royalty revenue over the one year. Under the new standard, we will
recognize the minimum royalty fee upon contract
renewal.
Revenue
recognition related to our other arrangements for software
licenses, hardware and identification media, professional services
and maintenance will remain substantially unchanged.
The
Company is still evaluating the effect the standard will have on
its financial statement disclosures.
FASB ASU No.
2016-01
. In January 2016, the
FASB issued ASU 2016-01, “
Financial
Instruments—Overall – Recognition and Measurement of
Financial Assets and Financial Liabilities.”
The amendments in this ASU address
certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments and apply to all entities that
hold financial assets or owe financial liabilities. The amendments
in this ASU also simplify the impairment assessment of equity
investments without readily determinable fair values by requiring
assessment for impairment qualitatively at each reporting period.
That impairment assessment is similar to the qualitative assessment
for long-lived assets, goodwill, and indefinite-lived intangible
assets. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal
years, with earlier application permitted for financial statements
that have not been issued. An entity should apply the amendments by
means of a cumulative-effect adjustment to the balance sheet as of
the beginning of the fiscal year of adoption. We have adopted the
provisions of this ASU for our fiscal year beginning January 1,
2018 and the adoption of this standard did not have a significant
impact on our consolidated financial statements.
FASB ASU No.
2016-02
. In February 2016, the
FASB issued ASU No. 2016-02, “
Leases
.
”
This guidance will result in key changes to lease
accounting and will aim to bring leases onto balance sheets to give
investors, lenders, and other financial statement users a more
comprehensive view of a company's long-term financial obligations
as well as the assets it owns versus leases. The new leasing
standard will be effective for fiscal years beginning after
December 15, 2018, and for interim periods within those fiscal
years. The Company is currently evaluating the impact this guidance
will have on our consolidated financial statements and anticipates
commencement of adoption planning in the fourth fiscal quarter of
2018.
FASB ASU No.
2016-08
. In March 2016, the
FASB issued Accounting Standards Update No.
2016-08,
Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU 2016-08 clarifies
the implementation guidance on principal versus agent
considerations. The guidance includes indicators to assist an
entity in determining whether it controls a specified good or
service before it is transferred to the customers. This guidance is
effective for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years. We have
adopted the provisions this ASU in conjunction with our adoption of
ASU 2014-09,
Revenue from Contracts with
Customers
.
FASB ASU No.
2016-10
. In April 2016, the
FASB issued Accounting Standards Update No.
2016-10,
Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and
Licensing
(“ASU
2016-10”). ASU 2016-10 provides further implementation
guidance on identifying performance obligations and also improves
the operability and understandability of the licensing
implementation guidance. This guidance is effective for fiscal
years beginning after December 15, 2017 including interim periods
within those fiscal years. We have adopted the provisions this ASU
in conjunction with our adoption of ASU 2014-09,
Revenue from
Contracts with Customers
.
FASB ASU No.
2016-13
. In June 2016, the FASB
issued Accounting Standard Update No. 2016-13, F
inancial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.
ASU No. 2016-13 changes the impairment model
for most financial assets and certain other instruments. For trade
and other receivables, held-to-maturity debt securities, loans and
other instruments, entities will be required to use a new
forward-looking “expected loss” model that will replace
today’s “incurred loss” model and generally will
result in the earlier recognition of allowances for losses. For
available-for-sale debt securities with unrealized losses, entities
will measure credit losses in a manner similar to current practice,
except that the losses will be recognized as an allowance. This
guidance is effective for fiscal years beginning after December 15,
2019 including interim periods within those fiscal years. The
Company is currently evaluating the potential impact of adoption of
this standard on its consolidated financial
statements.
FASB ASU No.
2016-15.
In August 2016, the
FASB issued Accounting Standards Update No.
2016-15,
Statement
of Cash Flows (Topic 230)
Classification
of Certain Cash Receipts and Cash
Payments.
ASU
2016-15 eliminates the diversity in practice related to the
classification of certain cash receipts and payments for debt
prepayment or extinguishment costs, the maturing of a zero-coupon
bond, the settlement of contingent liabilities arising from a
business combination, proceeds from insurance settlements,
distributions from certain equity method investees and beneficial
interests obtained in a financial asset securitization. ASU 2016-15
designates the appropriate cash flow classification, including
requirements to allocate certain components of these cash receipts
and payments among operating, investing and financing
activities.
This guidance
is effective for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years.
The
retrospective transition method, requiring adjustment to all
comparative periods presented, is required unless it is
impracticable for some of the amendments, in which case those
amendments would be prospectively as of the earliest date
practicable.
We have adopted
the provisions of this ASU for our fiscal year beginning January 1,
2018 and the adoption of this standard did not have a significant
impact on our consolidated financial
statements.
FASB ASU No. 2017-04.
In January 2017, the FASB issued ASU
No. 2017-04,
Intangibles – Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.
The amendments of this
ASU eliminate step 2 from the goodwill impairment test. The annual,
or interim test is performed by comparing the fair value of a
reporting unit with its carrying amount. The amendments of this ASU
also eliminate the requirements for any reporting unit with a zero
or negative carrying amount to perform a qualitative assessment and
if it fails that qualitative test, to perform step 2 of the
goodwill impairment test. ASU No. 2017-04 is effective for fiscal
years beginning after December 15, 2019.
The Company is currently evaluating the potential
impact of adoption of this standard on its consolidated financial
statements.
FASB ASU No.
2017-09.
In May 2017,
the FASB issued ASU
No. 2017-09, “
Scope
of Modification Accounting
,” to reduce
diversity in practice and provide clarity regarding existing
guidance in ASC 718, “
Stock
Compensation
.” The amendments
in this updated guidance clarify that an entity should apply
modification accounting in response to a change in the terms and
conditions of an entity’s share-based payment awards unless
three newly specified criteria are met. This guidance is effective
for fiscal years beginning after December 15, 2017, including
interim periods within that reporting
period.
We have adopted
the provisions of this ASU for our fiscal year beginning January 1,
2018 and the adoption of this standard did not have a significant
impact on our consolidated financial
statements.
FASB ASU No. 2017-11.
In July 2017, the FASB issued ASU No
2017-11, “
Earnings Per Share (Topic
260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral
.
”
The ASU applies to issuers of financial
instruments with down-round features. It amends (1) the
classification of such instruments as liabilities or equity by
revising the guidance in ASC 815 on the evaluation of whether
instruments or embedded features with down-round provisions must be
accounted for as derivative instruments and (2) the guidance on
recognition and measurement of the value transferred upon the
trigger of a down-round feature for equity-classified instruments
by revising ASC 260. The ASU is effective for public business
entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. For all other
organizations, the amendments are effective for fiscal years
beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is
permitted.
The Company is
currently evaluating the potential impact of this updated guidance
on its consolidated financial
statements.
3. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “
Fair Value Measurements and
Disclosures
,” which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other
than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
Fair Value at December 31, 2017
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$
1,806
|
$
1,806
|
$
—
|
$
—
|
Totals
|
$
1,806
|
$
1,806
|
$
—
|
$
—
|
|
Fair Value at December 31, 2016
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$
1,645
|
$
1,645
|
$
—
|
$
—
|
Totals
|
$
1,645
|
$
1,645
|
$
—
|
$
—
|
The
Company’s pension assets are classified within Level 1 of the
fair value hierarchy because they are valued using market prices.
The pension assets are primarily comprised of the cash surrender
value of insurance contracts. All plan assets are managed in a
policyholder pool in Germany by outside investment managers. The
investment objectives for the plan are the preservation of capital,
current income and long-term growth of capital.
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.
4. INTANGIBLE ASSETS AND GOODWILL
The Company has intangible assets in the form of
trademarks, trade names and patents. The carrying amount of the
Company’s trademarks and trade names was $0 as of December
31, 2017 and 2016, respectively, which include accumulated
amortization of $347,000 as of December 31, 2017 and 2016.
Amortization expense related to trademarks and tradenames was $0,
$0 and $15,000 for the years ended December 31, 2017, 2016 and
2015, respectively. All intangible assets are amortized over their
estimated useful lives with no estimated residual values. Any costs
incurred by the Company to renew or extend the life of intangible
assets will be evaluated under ASC No. 350,
Intangibles – Goodwill
and Other
, for proper
treatment.
The
carrying amounts of the Company’s patent intangible assets
were $93,000 and $105,000 as of December 31, 2017 and 2016,
respectively, which includes accumulated amortization of $566,000
and $554,000 as of December 31, 2017 and 2016,
respectively. Amortization expense for patent intangible
assets was $12,000 for the years ended December 31, 2017, 2016 and
2015. Patent intangible assets are being amortized on a
straight-line basis over their remaining life of approximately 8.5
years. There was no impairment of the Company’s intangible
assets during the years ended December 31, 2017, 2016 and
2015.
The
Company annually, or more frequently if events or circumstances
indicate a need, tests the carrying amount of goodwill for
impairment. The Company performs its annual impairment test in the
fourth quarter of each year. A two-step impairment test is used to
first identify potential goodwill impairment and then measure the
amount of goodwill impairment loss, if any. The first step was
conducted by determining and comparing the fair value, employing
the market approach, of the Company’s reporting unit to the
carrying value of the reporting unit. The Company continues to have
only one reporting unit, Identity Management. Based on the results
of this impairment test, the Company determined that its goodwill
was not impaired during the years ended December 31,
2017, 2016 and 2015.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
Fiscal Year Ended December 31,
|
Estimated Amortization
Expense
($ in thousands)
|
2018
|
$
12
|
2019
|
12
|
2020
|
12
|
2021
|
12
|
2022
|
12
|
Thereafter
|
33
|
Totals
|
$
93
|
5. RELATED PARTIES
Lines of Credit with Related Parties
In March 2013, the Company and Neal Goldman, a
member of the Company’s Board of Directors
(“
Goldman
”), entered into a line of credit (the
“
Goldman Line of
Credit
”) with available
borrowings of up to $2.5 million. In March 2014, the Goldman Line
of Credit’s borrowing was increased to an aggregate total of
$3.5 million (the “
Amendment
”). Pursuant to the terms and conditions of
the Amendment, Goldman had the right to convert up to $2.5 million
of the outstanding balance of the Goldman Line of Credit into
shares of the Company’s Common Stock for $0.95 per share. Any
remaining outstanding balance was convertible into shares of
the Company’s Common Stock for $2.25 per
share.
As consideration for the initial Goldman Line of
Credit, the Company issued a warrant to Goldman, exercisable for
1,052,632 shares of the Company’s Common Stock (the
“
Line
of Credit Warrant
”). The
Goldman Line of Credit Warrant had a term of two years from the
date of issuance and an exercise price of $0.95 per
share. As consideration for entering into the Amendment,
the Company issued to Goldman a second warrant, exercisable for
177,778 shares of the Company’s Common Stock (the
“
Amendment
Warrant
”). The Amendment
Warrant expired on March 27, 2015 and had an exercise price of
$2.25 per share.
The
Company estimated the fair value of the Line of Credit Warrant
using the Black-Scholes option pricing model using the following
assumptions: term of two years, a risk-free interest rate of 2.58%,
a dividend yield of 0%, and volatility of 79%. The Company recorded
the fair value of the Line of Credit Warrant as a deferred
financing fee of approximately $580,000 to be amortized over the
life of the Goldman Line of Credit. The Company estimated the fair
value of the Amendment Warrant using the Black-Scholes option
pricing model using the following assumptions: term on one year, a
risk-free interest rate of 2.58%, a dividend yield of 0% and
volatility of 74%. The Company recorded the fair value of the
Amendment Warrant as an additional deferred financing fee of
approximately $127,000 to be amortized over the life of the Goldman
Line of Credit.
During
the years ended December 31, 2017 and 2016, the Company recorded an
aggregate of approximately $11,000 and $48,000, respectively in
deferred financing fee amortization expense which is recorded as a
component of interest expense in the Company’s consolidated
statements of operations.
In April 2014, the Company and Goldman entered
into a further amendment to the Goldman Line of Credit to decrease
the available borrowings to $3.0 million (the
“
Second
Amendment
”). Contemporaneous with the execution
of the Second Amendment, the Company entered into a new unsecured
line of credit with Charles Crocker, a member of the
Company’s Board of Directors (“
Crocker
”), with available borrowings of up to
$500,000 (the “
Crocker LOC
”), which amount was convertible into
shares of the Company’s Common Stock for $2.25 per share. As
a result of these amendments, total available borrowings under the
Lines of Credit available to the Company remained unchanged at a
total of $3.5 million. In connection with the Second Amendment,
Goldman assigned and transferred to Crocker one-half of the
Amendment Warrant.
In December 2014, the Company and Goldman entered
into a further amendment to the Goldman Line of Credit to increase
the available borrowing to $5.0 million and extend the maturity
date of the Goldman Line of Credit to March 27, 2017 (the
“
Third
Amendment
”). Also, as a
result of the Third Amendment, Goldman had the right to convert up
to $2.5 million outstanding principal, plus any accrued but unpaid
interest (“
Outstanding
Balance
”) into shares of
the Company’s Common Stock for $0.95 per share, the next
$500,000 Outstanding Balance into shares of Common Stock for $2.25
per share and any remaining outstanding balance thereafter into
shares of Common Stock for $2.30 per share. The Third Amendment
also modified the definition of a “Qualified Financing”
to mean a debt or equity financing resulting in gross proceeds to
the Company of at least $5.0 million.
In
February 2015, as a result of the Series E Financing, the Company
issued 1,978 shares of Series E Preferred to Goldman to satisfy
$1,950,000 in principal borrowings under the Goldman Line of Credit
plus approximately $28,000 in accrued interest. As a result of the
Series E Financing, the Company’s borrowing capacity under
the Goldman Line of Credit was reduced to $3,050,000 with the
maturity date unchanged and the Crocker LOC was terminated in
accordance with its terms.
In March 2016, the Company and Goldman entered
into a fourth amendment to the Goldman Line of Credit (the
“
Fourth
Amendment
”) solely to (i)
increase available borrowings to $5.0 million; (ii) extend the
maturity date to June 30, 2017, and (iii) provide for the
conversion of the outstanding balance due under the terms of the
Goldman Line of Credit into that number of fully paid and
non-assessable shares of the Company’s Common Stock as is
equal to the quotient obtained by dividing the outstanding balance
by $1.25.
Contemporaneous with the execution of the Fourth
Amendment, the Company entered into a new $500,000 Line of Credit
(the “
New Crocker
LOC
”) with available
borrowings of up to $500,000 with Crocker, which replaced the
original Crocker LOC that terminated as a result of the
consummation of the Series E Financing. Similar to the
Fourth Amendment, the New Crocker LOC with Crocker originally
matured on June 30, 2017, and provides for the conversion of
the outstanding balance due under the terms of the New Crocker LOC
into that number of fully paid and non-assessable shares of the
Company’s Common Stock as is equal to the quotient obtained
by dividing the outstanding balance by $1.25.
On
December 27, 2016, in connection with the consummation of the
Series G Financing, the Company and Holder agreed to enter
into the
Fifth Amendment (the “
Line
of Credit Amendment
”) to the Goldman
Line of Credit to provide the Company with the ability to borrow up
to $5.5 million under the terms of the Goldman Line of Credit. In
addition, the Maturity Date, as defined in the Goldman Line of
Credit was amended to be December 31, 2017. The Line of Credit
Amendment was executed on January 23, 2017.
In addition, on January 23, 2017, the Company and Crocker amended
the New Crocker LOC to extend the maturity date thereof to December
31, 2017.
On May 10, 2017, Goldman and Crocker agreed to
further extend the maturity dates of Lines of Credit to December
31, 2018
.
As the
aforementioned amendments to the Lines of Credit resulted in an
increase to the borrowing capacity of the Lines of Credit, the
Company adjusted the amortization period of any remaining
unamortized deferred costs and note discounts to the term of the
new arrangement.
The
Company evaluated the Lines of Credit and determined that the
instruments contain a contingent beneficial conversion feature,
i.e. an embedded conversion right that enables the holder to obtain
the underlying Common Stock at a price below market value. The
beneficial conversion feature is contingent as the terms of the
conversion do not permit the Company to compute the number of
shares that the holder would receive if the contingent event occurs
(i.e. future borrowings under the Line of Credit). The Company has
considered the accounting for this contingent beneficial conversion
feature using the guidance in ASC 470, Debt. The guidance in ASC
470 states that a contingent beneficial conversion feature in an
instrument shall not be recognized in earnings until the
contingency is resolved. The beneficial conversion features of
future borrowings under the Line of Credit will be measured
using the intrinsic value calculated at the date the contingency is
resolved using the conversion price and trading value of the
Company’s Common Stock at the date the Lines of Credit were
issued (commitment date). Pursuant to borrowings made during the
2015 year, the Company recognized approximately $146,000 in
beneficial conversion feature as debt discount. As a result of the
retirement of all amounts outstanding under the Lines of Credit in
2015, the Company recognized all remaining unamortized debt
discount of approximately $385,000 as a component of interest
expense during the three months ended March 31, 2015. As a result
of $2,650,000 in borrowings under the Lines of Credit during the
year ended December 31, 2016, the Company recorded approximately
$219,000 in debt discount attributable to the beneficial conversion
feature during the year ended December 31, 2016. During the year
ended December 31, 2016, the Company accreted approximately $97,000
of debt discount as a component of interest expense. At December
31, 2016, unamortized note discount was approximately $122,000. As
a result of an additional $3,350,000 in borrowings under the Lines
of Credit during the year ended December 31, 2017, the Company
recorded approximately $302,000 in debt discount attributable to
the beneficial conversion feature during the year ended December
31, 2017. During the year ended December 31, 2017, the Company
accreted approximately $198,000 of debt discount which is
classified as a component of interest expense. At December 31,
2017, unamortized note discount was approximately
$226,000.
The
following table sets forth the Company’s activity under its
Lines of Credit for the periods indicated:
Balance
outstanding under Lines of Credit as of December 31,
2015
|
$
—
|
Borrowing
under Lines of Credit
|
2,650
|
Repayments
|
—
|
Balance
outstanding under Lines of Credit as of December 31,
2016
|
$
2,650
|
Borrowings
under Lines of Credit
|
3,350
|
Repayments
|
—
|
Balance
outstanding under Lines of Credit as of December 31,
2017
|
$
6,000
|
Series A Preferred Stock
A
member of the Company's Board of Directors and certain members of
management participated in the Series A Preferred Stock financing
on the same terms as all other participants. Management purchased
an aggregate of 125 shares for $125,000 and our Board Member
purchased 855 shares for $855,000.
6. INVENTORY
Inventories of
$79,000
as of December 31, 2017
were comprised of work in process of
$53,000
representing direct
labor costs on in-process projects and finished goods of
$26,000
net of reserves for
obsolete and slow-moving items of
$3,000
.
Inventories of $23,000 as of December 31, 2016 were comprised of
work in process of $19,000 representing direct labor costs on
in-process projects and finished goods of $4,000 net of reserves
for obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive
levels, deterioration and other factors in evaluating net
realizable value and required reserve levels.
7. PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2017 and 2016, consists
of:
($ in thousands)
|
|
|
|
|
|
Equipment
|
$
946
|
$
935
|
Leasehold
improvements
|
11
|
11
|
Furniture
|
102
|
101
|
|
1,059
|
1,047
|
Less
accumulated depreciation
|
(1,016
)
|
(954
)
|
|
$
43
|
$
93
|
Total
depreciation expense for the years ended December 31, 2017, 2016
and 2015 was approximately $56,000, $117,000 and $137,000,
respectively.
8. ACCRUED EXPENSES
Principal
components of accrued expenses consist of:
($ in thousands)
|
|
|
|
|
|
Compensated
absences
|
$
273
|
$
313
|
Wages,
payroll taxes and sales commissions
|
38
|
28
|
Customer
deposits
|
40
|
198
|
Royalties
|
72
|
147
|
Pension
and employee benefit plans
|
5
|
7
|
Professional
services
|
100
|
—
|
Income
and sales taxes
|
27
|
161
|
Dividends
|
34
|
27
|
Other
|
69
|
64
|
|
$
658
|
$
945
|
9. LINES OF CREDIT
Outstanding
lines of credit consist of the following:
|
|
|
Lines
of Credit with Related Parties
|
|
|
8%
convertible lines of credit. Face value of advances under lines of
credit $6,000 at December 31, 2017 and $2,650 at December 31, 2016.
Discount on advances under lines of credit is $226 at December 31,
2017 and $122 at December 31, 2016. Maturity date is December
31, 2018.
|
$
5,774
|
$
2,528
|
|
|
|
Total
lines of credit to related parties
|
5,774
|
2,528
|
Less
current portion
|
(5,774
)
|
(2,528
)
|
Long-term
lines of credit to related parties
|
$
—
|
$
—
|
For a more detailed discussion of the Company’s Lines of
Credit, see Note 5, Related Parties.
10. INCOME TAXES
The Company accounts for income taxes in
accordance with ASC 740,
Accounting for Income
Taxes,
(ASC 740). Deferred
income taxes are recognized for the tax consequences related to
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used
for tax purposes at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation
allowance is established when necessary based on the weight of
available evidence, if it is considered more likely than not that
all or some portion of the deferred tax assets will not be
realized. Income tax expense is the sum of current income tax plus
the change in deferred tax assets and liabilities. The
Company has established a valuation allowance against its deferred
tax asset due to the uncertainty surrounding the realization of
such asset.
ASC
740 requires a company to first determine whether it is
more-likely-than-not (defined as a likelihood of more than fifty
percent) that a tax position will be sustained based on its
technical merits as of the reporting date, assuming that taxing
authorities will examine the position and have full knowledge of
all relevant information. A tax position that meets this
more-likely-than-not threshold is then measured and recognized at
the largest amount of benefit that is greater than fifty percent
likely to be realized upon effective settlement with a taxing
authority. The amount accrued for uncertain tax
positions was zero at December 31, 2017, 2016 and 2015,
respectively.
The
Company’s uncertain position relative to unrecognized tax
benefits and any potential increase in these liabilities relates
primarily to the allocations of revenue and costs among the
Company’s global operations and the impact of tax rulings
made during the period affecting its tax positions. The
Company’s existing tax position could result in liabilities
for unrecognized tax benefits. The Company recognizes interest
and/or penalties related to uncertain tax positions in income tax
expense. The amount of interest and penalties accrued as of
December 31, 2017 and 2016 was approximately $10,000 and $12,000,
respectively.
Significant
judgment is required in evaluating the Company’s uncertain
tax positions and determining the Company’s provision for
income taxes. No assurance can be given that the final tax outcome
of these matters will not be different from that which is reflected
in the Company’s historical income tax provisions and
accruals. The Company adjusts these items in light of changing
facts and circumstances. To the extent that the final tax outcome
of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the
period in which such determination is made.
The
significant components of the income tax provision are as
follows:
($ in thousands)
|
|
Current
|
|
|
|
Federal
|
$
—
|
$
—
|
$
—
|
State
|
—
|
—
|
—
|
Foreign
|
(124
)
|
21
|
22
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
—
|
—
|
—
|
State
|
—
|
—
|
—
|
Foreign
|
—
|
—
|
—
|
|
|
|
|
|
$
(124
)
|
$
21
|
$
22
|
The
principal components of the Company’s deferred tax assets at
December 31, 2017, 2016 and 2015 are as follows:
($ in thousands)
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
$
13,734
|
$
17,829
|
$
15,948
|
Intangible
and fixed assets
|
(28
)
|
102
|
220
|
Stock
based compensation
|
1,954
|
2,324
|
1,861
|
Reserves
and accrued expenses
|
38
|
8
|
8
|
Other
|
—
|
—
|
—
|
|
15,698
|
20,263
|
18,037
|
Less
valuation allowance
|
(15,698
)
|
(20,263
)
|
(18,037
)
|
|
|
|
|
Net
deferred tax assets
|
$
—
|
$
—
|
$
—
|
A
reconciliation of the provision for income taxes to the amount
computed by applying the statutory income tax rates to loss before
income taxes is as follows:
|
|
|
|
|
|
|
|
Amounts
computed at statutory rates
|
$
(3,423
)
|
$
(3,239
)
|
$
(2,902
)
|
State
income tax, net of federal benefit
|
(497
)
|
(462
)
|
(262
)
|
Expiration
of net operating loss carryforwards
|
688
|
1,082
|
695
|
Non-deductible
interest
|
250
|
49
|
149
|
Tax
Act – federal rate change
|
7,276
|
—
|
—
|
Foreign
taxes
|
143
|
362
|
413
|
Other
|
4
|
3
|
5
|
Net
change in valuation allowance on deferred tax assets
|
(4,565
)
|
2,226
|
1,924
|
|
|
|
|
|
$
(124
)
|
$
21
|
$
22
|
The
Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of
such assets.
On December 22,
2017 the 2017 Tax Cuts and Jobs Act (the “
Act
”) was enacted into laws and
the new legislation reduces the corporate tax rate to 21% effective
January 1, 2018. Consequently, the Company remeasured the deferred
tax assets and recorded a decrease in federal tax assets and
valuation allowance of approximately $7,276,000. The Company
believes that the one-time transition tax does not apply because
there were no post-1986 earnings and profits previously deferred
from US income taxes.
At
December 31, 2017, 2016 and 2015, the Company had federal and state
net operating loss carryforwards, a portion of which may be
available to offset future taxable income for tax purposes. The
federal net operating loss carryforwards expire at various dates
from 2022 through 2037. The state net operating loss carryforwards
expire at various dates from 2030 through 2037.
The Internal Revenue Code (the
“
Code
”) limits the availability of certain tax
credits and net operating losses that arose prior to certain
cumulative changes in a corporation’s ownership resulting in
a change of control of the Company. The Company’s use of its
net operating loss carryforwards and tax credit carryforwards will
be significantly limited because the Company believes it underwent
“ownership changes,” as defined under Section 382 of
the Internal Revenue Code, in 1991, 1995, 2000, 2003, 2004, 2011
and 2012, though the Company has not performed a study to determine
the limitation. The Company has reduced its deferred tax assets to
zero relating to its federal and state research credits because of
such limitations. The Company continues to disclose the tax effect
of the net operating loss carryforwards at their original amount in
the table above as the actual limitation has not yet been
quantified. The Company has also established a full valuation
allowance for substantially all deferred tax assets due to
uncertainties surrounding its ability to generate future taxable
income to realize these assets. Since substantially all deferred
tax assets are fullyreserved, future changes in tax benefits will
not impact the effective tax rate. Management periodically
evaluates the recoverability of the deferred tax assets. If it is
determined at some time in the future that it is more likely than
not that deferred tax assets will be realized, the valuation
allowance would be reduced accordingly at that
time.
Tax returns for the years 2013 through 2017 are
subject to examination by taxing authorities.
11. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The
Company has employment agreements with its Chief Executive Officer
and its Chief Technical Officer. The Company may terminate the
agreements with or without cause. Subject to the conditions and
other limitations set forth in each respective employment
agreement, each executive will be entitled to the following
severance benefits if the Company terminates the executive’s
employment without cause or in the event of an involuntary
termination (as defined in the employment agreements) by the
Company or by the executive:
Under
the terms of the agreement, the Chief Executive Officer will be
entitled to the following severance benefits if we terminate his
employment without cause or in the event of an involuntary
termination: (i) a lump sum cash payment equal to twenty-four
months’ base salary; (ii) continuation of fringe benefits and
medical insurance for a period of three years; and (iii) immediate
vesting of 50% of outstanding stock options and restricted stock
awards. In the event that the Chief Executive Officer’s
employment is terminated within six months prior to or thirteen
months following a change of control (as defined in the employment
agreements), the Chief Executive Officer is entitled to the
severance benefits described above, except that 100% of the Chief
Executive Officer’s outstanding stock options and restricted
stock awards will immediately vest.
Under
the terms of the employment agreement with our Chief Technical
Officer, this executive will be entitled to the following severance
benefits if we terminate his employment without cause or in the
event of an involuntary termination: (i) a lump sum cash payment
equal to six months of base salary; and (ii) continuation of their
fringe benefits and medical insurance for a period of six months.
In the event that his employment is terminated within six months
prior to or thirteen months following a change of control (as
defined in the employment agreements), he is entitled to the
severance benefits described above, except that 100% of his
outstanding stock options and restricted stock awards will
immediately vest.
The
employment agreements for the Company’s Chief Executive
Officer and Chief Technical Officer were amended to extend the term
of each executive officer's employment agreement until December 31,
2018.
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.
Leases
The
Company’s corporate headquarters are located in San Diego,
California where we occupy 9,927 square feet of office space. This
facility’s lease was renewed in September 2017 through
October 2018 at a cost of approximately $30,000 per month. In
addition to our corporate headquarters, we also occupied the
following spaces at December 31, 2017:
●
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. This lease was renewed in April 2016 for a
five-year period ending on March 31, 2021. Renewal terms were
substantially unchanged from the existing lease;
●
9,720 square feet in Portland, Oregon, at a cost of approximately
$21,000 per month until the expiration of the lease on December 31,
2021. This lease was renewed in September 2017 resulting in an
additional 1,675 feet, an increase from approximately $18,000 to
approximately $21,000 per month and the extension of the term from
October 2018 to December 2021; and
●
304 square feet of office space in Mexico
City, Mexico, at a cost of approximately $3,000 per month
until November 30,
2018.
At
December 31, 2017, future minimum lease payments are as
follows:
($ in thousands)
|
|
2018
|
$
607
|
2019
|
284
|
2020
|
291
|
2021
|
272
|
2022
|
270
|
Thereafter
|
46
|
Total
|
$
1,770
|
Rental
expense incurred under operating leases for the years ended
December 31, 2017, 2016 and 2015 was approximately $545,000,
$492,000 and $477,000, respectively.
12. EQUITY
The
Company’s Certificate of Incorporation, as amended, authorize
the issuance of two classes of stock to be designated “Common
Stock” and “Preferred Stock”. The Preferred Stock
may be divided into such number of series and with the rights,
preferences, privileges and restrictions as the Board of Directors
may determine.
Series A Convertible Preferred Stock
On
September 15, 2017, the Company filed the Certificate of
Designations of the Series A Preferred with the Delaware Secretary
of State, designating 31,021 shares of the Company’s
preferred stock, par value $0.01 per share, as Series A Preferred.
Shares of Series A Preferred accrue dividends at a rate of 8% per
annum if the Company chooses to pay accrued dividends in cash, and
10% per annum if the Company chooses to pay accrued dividends in
shares of Common Stock. Each share of Series A Preferred has a
liquidation preference of $1,000 per share and is convertible, at
the option of the holder, into that number of shares of the
Company’s Common Stock equal to the Liquidation Preference,
divided by $1.15. Each holder of the Series A Preferred is entitled
to vote on all matters, together with the holders of Common Stock,
on an as converted basis.
Holders of Series A Preferred may elect to convert
shares of Series A Preferred into Conversion Shares at any time. In
the event the volume-weighted average price
(“
VWAP
”) of the Company’s Common Stock is at
least $2.15 per share for at least 20 consecutive trading days, the
Company may elect to convert one-half of the shares of Series A
Preferred issued and outstanding, on a pro-rata basis, into
Conversion Shares, or, if the VWAP of the Company’s Common
Stock is at least $2.15 for 80 consecutive trading days, the
Company may convert all issued and outstanding shares of Series A
Preferred into Conversion Shares. In addition, in the event of a
Change of Control, the Company will have the option to redeem all
issued and outstanding shares of Series A Preferred for 115% of the
Liquidation Preference per share.
On
September 18, 2017, the Company offered and sold a total of 11,000
shares of Series A Preferred at a purchase price of $1,000 per
share. The total net proceeds to the Company from the Series A
Financing were approximately $10.9 million.
Concurrently with the Series A Financing, the
Company entered into Exchange Agreements with holders of all
outstanding shares of the Company's Series E Convertible Preferred
Stock, all outstanding shares of the Company's Series F Convertible
Preferred Stock and all outstanding shares of the Company's Series
G Convertible Preferred Stock (collectively
“
Exchanged
Preferred
”) pursuant to
which the holders thereof agreed to cancel their respective shares
of Exchanged Preferred in exchange for shares of Series A
Preferred. As a result of the Preferred Stock Exchange, the Company
issued to the holders of the Exchanged Preferred an aggregate total
of 20,021 shares of Series A
Preferred.
The Company evaluated the Preferred Stock Exchange
and determined that the Preferred Stock Exchange was both an
induced conversion and an extinguishment transaction. Using the
guidance in ASC 260-10-S99-2,
Earnings Per Share – SEC
Materials – SEC Staff Announcement: The Effect on the
Calculations of Earnings Per Share for a Period That Includes the
Redemption or Induced Conversion of Preferred Stock and
ASC 470-50,
Debt – Modifications and
Extinguishments,
the Company
recorded the fair value differential of the Exchanged Preferred as
adjustments within Shareholders’ Deficit and in the
computation of Net Loss Available to Common Shareholders in the
computation of basic and diluted loss per share. The Company
utilized the services an independent third-party valuation firm to
perform the computation of the fair value of the Exchanged
Preferred. Based on the fair value using these methodologies, the
Company recorded approximately $1,245,000 in fair value
differential as adjustments within Shareholders’ Deficit in
the Company’s Consolidated Balance Sheet for the year ended
December 31, 2017 and in the computation of basic and diluted loss
per share in the Company’s Consolidated Statement of
Operations for the year ended December 31,
2017.
The Company had 31,021 shares and 0 shares of
Series A Preferred outstanding as of December 31, 2017 and December
31, 2016, respectively. At December 31, 2017, the
Company had cumulative undeclared dividends of $0. There
were no conversions of Series A Preferred into Common Stock during
the year ended December 31, 2017.
During the year ended
December 31, 2017, t
he Company issued the
holders of Series A Preferred 585,058 shares of Common Stock as
payment of dividends due.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B
Convertible Redeemable Preferred Stock (“
Series B
Preferred
”) outstanding
as of December 31, 2017 and 2016. At December 31, 2017 and 2016,
the Company had cumulative undeclared dividends of approximately
$8,000 ($0.03 per share). There were no conversions of Series B
Preferred into Common Stock during the years ended December 31,
2017, 2016 and 2015. The Company paid dividends of approximately
$51,000 to the holders of our Series B Preferred in 2017, 2016 and
2015.
Series E Convertible Preferred Stock
On
January 29, 2015, the Company filed the Certificate of Designations
of the Series E Preferred Stock with the Delaware Secretary of
State, designating 12,000 shares of the Company’s preferred
stock, par value $0.01 per share, as Series E Preferred. Shares of
Series E Preferred accrue dividends at a rate of 8% per annum if
the Company chooses to pay accrued dividends in cash, and 10% per
annum if the Company chooses to pay accrued dividends in shares of
Common Stock. Each share of Series E Preferred has a liquidation
preference of $1,000 per share and is convertible, at the option of
the holder, into that number of shares of the Company’s
Common Stock equal to the Liquidation Preference, divided by $1.90.
The Series E Preferred shall be subordinate to and rank junior to
the Company's Series A Preferred, Series B Preferred and all
indebtedness of the Company. Each holder of the Series E Preferred
is entitled to vote on all matters, together with the holders of
Common Stock, on an as converted basis.
Any time after the six-month period following the
issuance date, in the event the arithmetic average of the closing
sales price of the Company’s Common Stock is or was at least
$2.85 for twenty (20) consecutive trading days, the Company may
redeem all or a portion of the Series E Preferred outstanding upon
thirty (30) calendar day's prior written notice (the
“
Company's Redemption
Notice
”) in cash at a
price per share of Series E Preferred equal to 110% of the
liquidation preference amount plus all accrued and unpaid
dividends. Also, simultaneous with the occurrence of a
change of control transaction, the Company, at its option, shall
have the right to redeem all or a portion of the outstanding Series
E Preferred in cash at a price per share of Series E Preferred
equal to 110% of the liquidation preference amount plus all accrued
and unpaid dividends.
In
February 2015, the Company consummated a registered direct offering
conducted without an underwriter or placement agent. In connection
therewith, the Company issued 12,000 shares of Series E Preferred
to certain investors at a price of $1,000 per share, with each
share convertible into 526.32 shares of the Company’s Common
Stock at $1.90 per share.
On December 29, 2016, the Company filed Amendment
No. 1 to the Certificate of Designations, Preferences and Rights of
the Series E Convertible Preferred Stock (the
“
Series E
Amendment
”) with the
Delaware Division of Corporations. The Series E Amendment made the
following changes to the Certificate of Designations, Preferences
and Rights of the Series E Convertible Preferred Stock: (i) the
Company may only make dividend payments in cash received from
positive cash flow from operations; (ii) beginning on July 1, 2017,
in the event the Company pays accrued dividend payments in shares
of Common Stock for more than four consecutive quarterly periods,
holders of shares of Series E Preferred will have the right to
immediately appoint two designees to the Company’s Board of
Directors (the “
Director Appointment
Provision
”); (iii)
dividend payments incurred on December 31, 2016 and March 31, 2017
may be paid in shares of Common Stock, without triggering the
Director Appointment Provision; and (iv) the term Permitted
Indebtedness (as defined in the Series E Certificate of
Designations) was revised to cover permitted borrowings of up to
$6.0 million.
The
Company had 0 shares of Series E Preferred outstanding as of
December 31, 2017 as a result of the Preferred Stock Exchange, and
12,000 shares of Series E Preferred outstanding at December 31,
2016. At December 31, 2017 and December 31, 2016, the
Company had cumulative undeclared dividends of $0. There
were no conversions of Series E Preferred into Common Stock during
the years ended December 31, 2017 and 2016. For the year ended
December 31, 2017, the Company has issued the holders of Series E
Preferred 822,122 shares of Common Stock as payment of dividends
due. With the payment of the quarterly dividends due September 30,
2017 to the holders of Series E Preferred in shares of Common
Stock, the Director Appointment Provision became effective as of
that date resulting in the Company adding two Board members as of
September 15, 2017.
Series F Convertible Preferred Stock
In September 2016, we filed the Certificate of
Designations, Preferences, and Rights of the Series F Convertible
Preferred Stock (the “
Certificate of
Designations
”) with the
Delaware Division of Corporations, designating 2,000 shares of our
preferred stock as Series F Convertible Preferred Stock
(“
Series F
Preferred
”). Shares of
Series F Preferred rank junior to shares of Series A Preferred,
Series B Preferred and Series E Preferred, as well as our existing
indebtedness, and accrue dividends at a rate of 10% per annum,
payable on a quarterly basis in shares of Common
Stock.
Each share of Series F Preferred has a liquidation
preference of $1,000 per share (“
Liquidation
Preferenc
e”), and is
convertible, at the option of the holder, into that number of
shares of the Company’s Common Stock equal to the Series F
Liquidation Preference, divided by $1.50 (the
“
Series F
Conversion
Shares
”).
Any
time after the six-month period following the issuance date, in the
event the arithmetic average of the closing sales price of the
Company’s Common Stock is or was at least $2.50 for twenty
(20) consecutive trading days, the Company may redeem all or a
portion of the Series F Preferred outstanding upon thirty (30)
calendar days prior written notice in cash at a price per share of
Series F Preferred equal to 110% of the Series F Liquidation
Preference, plus all accrued and unpaid dividends. Also,
simultaneous with the occurrence of a Change of Control transaction
(as defined in the Certificate of Designations), the Company, at
its option, shall have the right to redeem all or a portion of the
outstanding Series F Preferred in cash at a price per share of
Series F Preferred equal to 110% of the Liquidation Preference
Amount plus all accrued and unpaid dividends.
In September 2016, the Company offered and sold
2,000 shares of Series F Preferred for $1,000 per share (the
“
Series F
Financing
”), resulting in
gross proceeds to the Company of $2,000,000 net of issuance costs
of approximately $21,000.
The Company had 0 shares of Series F Preferred
outstanding as of
December
31, 2017 as a result of
the Preferred Stock Exchange, and 2,000 shares of Series F
Preferred at December 31, 2016
. At December 31, 2017 and December 31,
2016, the Company had cumulative undeclared dividends of $0. There
were no conversions of Series F Preferred into Common Stock during
the years ended December 31, 2017 and 2016. For the year ended
December 31, 2017, the Company has issued the holders of Series F
Preferred 135,855 shares of Common Stock as payment of dividends
due.
Series G Convertible Preferred Stock
In December 27, 2016, the Company filed the
Certificate of Designations, Preferences, and Rights of the Series
G Convertible Preferred Stock with the Delaware Division of
Corporations, designating 6,120 shares of the Company’s
preferred stock, par value $0.01 per share, as Series G Convertible
Preferred Stock (“
Series G
Preferred
”). Shares of
Series G Preferred rank junior to the Company’s Series A
Preferred, Series B Preferred, Series E Preferred, Series F
Preferred as well as the Company’s existing indebtedness, and
accrue dividends at a rate of 10% per annum, payable on a quarterly
basis in shares of the Company’s common stock, par value
$0.01 per share. Each share of Series G Preferred has a liquidation
preference of $1,000 per share (“
Series G Liquidation
Preferenc
e”), and is
convertible, at the option of the holder, into that number of
shares of the Company’s Common Stock equal to the Series G
Liquidation Preference, divided by $1.50.
Any
time after the six-month period following the issuance date, in the
event the arithmetic average of the closing sales price of the
Company’s Common Stock is or was at least $2.50 for twenty
(20) consecutive trading days, the Company may redeem all or a
portion of the Series G Preferred outstanding upon thirty (30)
calendar days prior written notice in cash at a price per share of
Series G Preferred equal to 110% of the Series G Liquidation
Preference, plus all accrued and unpaid dividends. Also,
simultaneous with the occurrence of a Change of Control transaction
(as defined in the Certificate of Designations), the Company, at
its option, shall have the right to redeem all or a portion of the
outstanding Series G Preferred in cash at a price per share of
Series G Preferred equal to 110% of the Liquidation Preference
Amount plus all accrued and unpaid dividends.
On December 29, 2016, the Company accepted
subscription forms from certain accredited investors to purchase a
total of 1,625 shares of Series G Preferred for $1,000 per share
(the “
Series G
Financing
”), resulting in
gross proceeds to the Company of $1,625,000, net of issuance cost
of approximately $11,000. In addition, the Company also received
executed exchange agreements from the Investors pursuant to which
the Company exchanged an aggregate total of 3,383,830 shares of
common stock held by the Investors for an aggregate total of 4,396
shares of Series G Preferred.
The
Company had 0 shares of Series G Preferred outstanding as of
December 31, 2017 as a result of the Preferred Stock Exchange, and
6,021 shares of Series G Preferred at December 31,
2016. At December 31, 2017 and December 31, 2016, the
Company had cumulative undeclared dividends of $0. There
were no conversions of Series G Preferred into Common Stock during
the years ended December 31, 2017 and 2016. For the year ended
December 31, 2017, the Company has issued the holders of Series G
Preferred 409,002 shares of Common Stock as payment of dividends
due.
Common Stock
The
following table summarizes outstanding Common Stock activity for
the following periods:
|
|
|
|
Shares
outstanding at December 31, 2014
|
93,507,150
|
Shares issued pursuant to payment of stock dividend on Series E
Preferred
|
478,664
|
Shares issued pursuant to cashless warrants exercised
|
45,376
|
Shares issued pursuant to option exercises
|
39,705
|
Shares
outstanding at December 31, 2015
|
94,070,895
|
Shares issued pursuant to payment of stock dividend on Series E
Preferred
|
950,362
|
Shares issued pursuant to payment of stock dividend on Series F
Preferred
|
48,513
|
Shares issued pursuant to payment of stock dividend on
Series G Preferred
|
3,770
|
Shares issued pursuant to cashless warrants exercised
|
144,459
|
Shares issued pursuant to option exercises
|
12,626
|
Exchange of common shares for Series G
Preferred
|
(3,383,830
)
|
Shares
outstanding at December 31, 2016
|
91,846,795
|
Shares issued pursuant to payment of stock dividend on Series A
Preferred
|
585,058
|
Shares issued pursuant to payment of stock dividend on Series E
Preferred
|
822,122
|
Shares issued pursuant to payment of stock dividend on
Series F Preferred
|
135,855
|
Shares issued pursuant to payment of stock dividend on
Series G Preferred
|
409,002
|
Shares issued pursuant to option exercises
|
369,004
|
Shares
outstanding at December 31, 2017
|
94,167,836
|
Warrants
As of December 31, 2017, warrants to purchase
230,000
shares
of Common Stock at prices ranging from $0.80 to $1.17 were
outstanding. All warrants are exercisable as of December 31, 2017
and expire as of September 11, 2019, with the exception of an
aggregate of 150,000 warrants, which become exercisable only upon
the attainment of specified events.
The
following table summarizes warrant activity for the following
periods:
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
Balance
at December 31, 2014
|
977,778
|
$
1.22
|
Granted
|
—
|
$
0.00
|
Expired
/ Canceled
|
(419,444
)
|
$
1.86
|
Exercised
|
(108,334
)
|
$
1.01
|
Balance
at December 31, 2015
|
450,000
|
$
0.67
|
Exercised
|
(275,000
)
|
$
0.55
|
Balance
at December 31, 2016
|
175,000
|
$
0.84
|
Granted
|
80,000
|
$
1.13
|
Expired
/ Canceled
|
(25,000
)
|
$
1.10
|
Exercised
|
—
|
$
—
|
Balance
at December 31, 2017
|
230,000
|
$
0.91
|
During
the year ended December 31, 2017, the Company issued an aggregate
of 80,000 warrants to certain members of the Company’s
advisory board. The Company determined the grant date fair value of
these warrants using the Black-Scholes option valuation model and
recorded approximately $57,000 in expense for the year ended
December 31, 2017. The Company used the following assumptions in
the application of the Black-Scholes option valuation model: an
exercise price ranging between $1.09 and $1.17, a term of 2.0
years, a risk-free interest rate of 2.58%, a dividend yield of 0%
and volatility of 59%. Such expense is recorded in the
Company’s consolidated statement of operations as a component
of general and administrative expense. There were no warrants
exercised during the twelve months ended December 31, 2017 and
25,000 warrants expired unexercised during the 2017 year. The
intrinsic value of warrants outstanding as of December 31, 2017 was
approximately $155,000.
13. STOCK-BASED
COMPENSATION
Stock Options
As of December 31, 2017, the Company had one
active stock-based compensation plan: the 1999 Stock Option Plan
(the “
1999 Plan
”).
1999 Plan
The 1999 Plan was adopted by the Company’s
Board of Directors on December 17, 1999. Under the terms of the
1999 Plan, the Company could, originally, issue up to 350,000
non-qualified or incentive stock options to purchase Common Stock
of the Company. During the year ended December 31, 2014, the
Company subsequently amended and restated the 1999 Plan whereby it
increased the share reserve for issuance to approximately 7.0
million shares of the Company’s Common Stock. The
1999 Plan prohibits the grant of stock option or stock appreciation
right awards with an exercise price less than fair market value of
Common Stock on the date of grant. The 1999 Plan also generally
prohibits the “re-pricing” of stock options or stock
appreciation rights, although awards may be bought-out for a
payment in cash or the Company’s stock. The 1999 Plan permits
the grant of stock-based awards other than stock options, including
the grant of “full value” awards such as restricted
stock, stock units and performance shares. The 1999 Plan permits
the qualification of awards under the plan (payable in either stock
or cash) as “performance-based compensation” within the
meaning of Section 162(m) of the Internal Revenue Code. The number
of options issued and outstanding and the number of options
remaining available for future issuance are shown in the table
below. On July 1, 2014, the Company began soliciting written
consents from its shareholders to approve an amendment to the
Company’s 1999 Stock Option Plan to increase the number of
shares authorized for issuance thereunder from approximately 4.0
million to approximately 7.0 million (the
“
Amendment
”). As
of July 21, 2014, the Company had received written consents
approving the Amendment from over 50% of the Company’s
stockholders. As such, the Amendment was approved. The number of
authorized shares available under the plan for issuance at December
31, 2017 was 6,193,777. The number of available shares under the
plan for issuance at December 31, 2017 was
100,265.
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, 2014
|
4,057,296
|
$
1.06
|
6.8
|
Granted
|
2,110,000
|
$
1.63
|
—
|
Expired/Cancelled
|
(750,622
)
|
$
1.86
|
—
|
Exercised
|
(39,705
)
|
$
0.87
|
—
|
|
|
|
|
Balance
at December 31, 2015
|
5,376,969
|
$
1.17
|
6.9
|
Granted
|
1,264,000
|
$
1.34
|
—
|
Expired/Cancelled
|
(121,500
)
|
$
1.29
|
—
|
Exercised
|
(12,626
)
|
$
0.21
|
—
|
Balance
at December 31, 2016
|
6,506,843
|
$
1.21
|
6.6
|
Granted
|
112,500
|
$
1.39
|
—
|
Expired/Cancelled
|
(156,827
)
|
$
1.67
|
—
|
Exercised
|
(369,004
)
|
$
0.70
|
—
|
Balance
at December 31, 2017
|
6,093,512
|
$
1.23
|
5.8
|
At
December 31, 2017, a total of 6,093,512 options were outstanding of
which 5,051,016 were exercisable at a weighted average price of
$1.19 per share with a remaining weighted average contractual term
of approximately 5.3 years. The Company expects that, in
addition to the 5,051,016 options that were exercisable as of
December 31, 2017, another 1,042,496 will ultimately vest resulting
in a combined total of 6,093,512. Those 6,093,512 shares
have a weighted average exercise price of $1.23 and an aggregate
intrinsic value of approximately $2,595,000 as of December 31,
2017. Stock-based compensation expense related to equity options
was approximately $1,094,000, $1,162,000 and $744,000 for the years
ended December 31, 2017, 2016 and 2015, respectively.
The weighted-average
grant-date fair value per share of options granted to employees
during the years ended December 31, 2017, 2016 and 2015 was
$0.77
, $0.82 and $1.18,
respectively. At December 31, 2017, the total remaining
unrecognized compensation cost related to unvested stock options
amounted to approximately
$847,000
, which will be
amortized over the weighted-average remaining requisite service
period of 1.3 years.
During
the year ended December 31, 2017, there were 369,004 options
exercised for cash resulting in the issuance of 369,004 shares of
the Company’s Common Stock and proceeds of approximately
$259,000. During the year ended December 31, 2016,
there were 12,626 options exercised for cash resulting in the
issuance of 12,626 shares of the Company’s Common Stock and
proceeds of approximately $3,000.
The intrinsic value of options exercised during
the years ended December 31, 2017 and 2016 was approximately
$177,000 and $11,000, respectively. The intrinsic value of options
exercisable at December 31, 2017 and 2016 was approximately
$2,388,000
and $1,679,000,
respectively. The intrinsic value of options that vested
during 2017 was approximately $207,000. The aggregate intrinsic
value for all options outstanding as of December 31, 2017 and 2016
was approximately $2,595,000 and $1,744,000,
respectively.
In September 2015, the Company issued an aggregate
of 144,000 options to purchase shares of the Company’s Common
Stock to certain members of the Company’s Board of Directors
in return for their service from January 1, 2016 through December
31, 2016. Such options vest at the rate of 12,000 options per month
on the last day of each month during the 2016 year. The options
have an exercise price of $1.73 per share and a term of 10 years.
Pursuant to this issuance, the Company recorded compensation
expense of approximately $178,000 the twelve months ended December
31, 2016 based on the grant-date fair value of the options
determined using the Black-Scholes option-valuation
model.
In
May 2016, the Company issued an aggregate of 16,000 options to
purchase shares of the Company’s Common Stock to a new member
of the Company’s Board of Directors in return for their
service from May 2016 through December 31, 2016. Such options vest
at the rate of 2,000 options per month on the last day of each
month during the 2016 year. The options have an exercise price of
$1.29 per share and a term of 10 years. Pursuant to this issuance,
the Company recorded compensation expense of approximately $12,000
for the twelve months ended December 31, 2016 based on the
grant-date fair value of the options determined using the
Black-Scholes option-valuation model.
In
September 2016, the Company issued an aggregate of 168,000 options
to purchase shares of the Company’s Common Stock to certain
members of the Company’s Board of Directors in return for
their service from January 1, 2017 through December 31, 2017. Such
options vested at the rate of 14,000 options per month on the last
day of each month during the 2017 year. The options have an
exercise price of $1.37 per share and a term of 10 years. The
Company began recognition of compensation based on the grant-date
fair value ratably over the 2017 requisite service period and
recorded approximately $140,000 in expense. Such expense is
recorded in the Company’s consolidated statement of
operations as a component of general and administrative
expense.
Restricted Stock Awards
There
were no restricted stock awards issued during the years ended
December 31, 2017 and 2016.
In
December 2014, the Company issued 94,116 shares of its Common Stock
to certain members of the Company’s Board of Directors as
compensation for services to be rendered through December
2015. Such shares vested monthly over the 12 months of
2015 with any unvested shares being forfeitable should the Board
members’ service be terminated during 2015. For the year
ended December 31, 2015, the Company recorded approximately
$216,000 as compensation expense related to this stock
issuance.
Stock-based Compensation
Stock-based
compensation related to equity options and restricted stock has
been classified as follows in the accompanying consolidated
statements of operations (in thousands):
|
|
|
|
|
|
Cost
of revenues
|
$
19
|
$
20
|
$
15
|
General
and administrative
|
655
|
714
|
618
|
Sales
and marketing
|
220
|
224
|
171
|
Research
and development
|
200
|
204
|
156
|
|
|
|
|
Total
|
$
1,094
|
$
1,162
|
$
960
|
Common Stock Reserved for Future Issuance
The
following table summarizes the Common Stock reserved for future
issuance as of December 31, 2017:
|
|
Convertible
preferred stock – Series A and Series B
|
27,020,812
|
Convertible
lines of credit
|
5,221,964
|
Stock options outstanding
|
6,093,512
|
Warrants
outstanding
|
230,000
|
Authorized for future grant under stock option
plans
|
100,265
|
14. EMPLOYEE BENEFIT PLAN
During 1995, the Company adopted a defined
contribution 401(k) retirement plan (the “
Plan
”). All U.S. based employees aged 21 years
and older are eligible to become participants after the completion
of 60 day's employment. The Plan provides for annual contributions
by the Company of 50% of employee contributions not to exceed 8% of
employee compensation. Effective April 1, 2009, the Plan
was amended to provide for Company contributions on a discretionary
basis. Participants may contribute up to 100% of the annual
contribution limitations determined by the Internal Revenue
Service.
Employees
are fully vested in their share of the Company’s
contributions after the completion of five years of
service. In 2015, the Company authorized contributions of
approximately $119,000 for the 2015 plan year of which $83,000 were
paid prior to December 31, 2015. In 2016, the Company authorized
contributions of approximately $150,000 for the 2016 plan year of
which $111,000 were paid prior to December 31, 2016. In 2017,
the Company authorized contributions of approximately $154,000 for
the 2017 plan year of which $115,000 were paid prior to December
31, 2017.
15. PENSION PLAN
One
of the Company’s dormant foreign subsidiaries maintains a
defined benefit pension plan that provides benefits based on length
of service and final average earnings. The following table sets
forth the benefit obligation, fair value of plan assets, and the
funded status of the Company’s plan; amounts recognized in
the Company’s consolidated financial statements; and the
assumptions used in determining the actuarial present value of the
benefit obligations as of December 31:
($ in thousands)
|
|
|
|
Change in benefit obligation:
|
|
|
|
Benefit
obligation at beginning of year
|
$
3,540
|
$
3,068
|
$
3,488
|
Service
cost
|
—
|
—
|
—
|
Interest
cost
|
64
|
75
|
70
|
Actuarial
(gain) loss
|
(167
)
|
542
|
(123
)
|
Effect
of exchange rate changes
|
473
|
(114
)
|
(356
)
|
Effect
of curtailment
|
—
|
—
|
—
|
Benefits
paid
|
(80
)
|
(31
)
|
(11
)
|
Benefit
obligation at end of year
|
3,830
|
3,540
|
3,068
|
|
|
|
|
Change
in plan assets:
|
|
|
|
Fair
value of plan assets at beginning of year
|
1,645
|
1,557
|
1,654
|
Actual
return of plan assets
|
7
|
142
|
40
|
Company
contributions
|
12
|
28
|
34
|
Benefits
paid
|
(80
)
|
(31
)
|
—
|
Effect
of exchange rate changes
|
222
|
(51
)
|
(171
)
|
Fair
value of plan assets at end of year
|
1,806
|
1,645
|
1,557
|
Funded
status
|
(2,024
)
|
(1,895
)
|
(1,511
)
|
Unrecognized
actuarial loss (gain)
|
1,629
|
1,831
|
1,413
|
Unrecognized
prior service (benefit) cost
|
—
|
—
|
—
|
Additional
minimum liability
|
(1,629
)
|
(1,831
)
|
(1,413
)
|
Unrecognized
transition (asset) liability
|
—
|
—
|
—
|
Net
amount recognized
|
$
(2,024
)
|
$
(1,895
)
|
$
(1,511
)
|
|
|
|
|
Plan
Assets
|
|
|
|
Pension
plan assets were comprised of the following asset categories at
December 31,
|
|
|
|
Equity
securities
|
5.7
%
|
5.7
%
|
5.0
%
|
Debt
securities
|
86.7
%
|
87.2
%
|
89.3
%
|
Other
|
7.6
%
|
7.1
%
|
5.7
%
|
Total
|
100
%
|
100
%
|
100
%
|
|
|
|
|
Components
of net periodic benefit cost are as follows:
|
|
|
|
Service
cost
|
$
—
|
$
—
|
$
—
|
Interest
cost on projected benefit obligations
|
64
|
75
|
70
|
Expected
return on plan assets
|
(70
)
|
(63
)
|
(61
)
|
Amortization
of prior service costs
|
—
|
—
|
—
|
Amortization
of actuarial loss
|
104
|
73
|
80
|
Net
periodic benefit costs
|
$
98
|
$
85
|
$
89
|
|
|
|
|
The
weighted average assumptions used to determine net periodic benefit
cost for the years ended December 31, were
|
|
|
|
Discount
rate
|
1.9
%
|
1.7
%
|
2.4
%
|
Expected
return on plan assets
|
3.2
%
|
4.0
%
|
4.0
%
|
Rate
of pension increases
|
2.0
%
|
2.0
%
|
2.0
%
|
Rate
of compensation increase
|
N/A
|
N/A
|
N/A
|
|
|
|
|
The
following discloses information about the Company’s defined
benefit pension plan that had an accumulated benefit obligation in
excess of plan assets as of December 31,
|
|
|
|
Projected
benefit obligation
|
$
3,830
|
$
3,540
|
$
3,068
|
Accumulated
benefit obligation
|
$
3,830
|
$
3,540
|
$
3,068
|
Fair
value of plan assets
|
$
1,806
|
$
1,645
|
$
1,557
|
As
of December 31, 2017, the following benefit payments are expected
to be paid as follows (in thousands):
2018
|
$
86
|
2019
|
$
87
|
2020
|
$
88
|
2021
|
$
103
|
2022
|
$
105
|
2023
— 2027
|
$
676
|
The
Company made contributions to the plan of approximately $12,000
during year 2017, $28,000 during year 2016 and approximately
$34,000 during 2015.
The
investment objectives for the plan are the preservation of capital,
current income and long-term growth of capital. The Company’s
pension assets are classified within Level 1 of the fair value
hierarchy, as defined under ASC 820, because they are valued using
market prices. The pension assets are primarily comprised of the
cash surrender value of insurance contracts. All plan assets are
managed in a policyholder pool in Germany by outside investment
managers. The measurement date used to determine the benefit
information of the plan was January 1, 2018.
16. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive income is the
combination of the additional minimum liability related to the
Company’s defined benefit pension plan, recognized pursuant
to ASC 715-30, “
Compensation - Retirement
Benefits - Defined Benefit Plans – Pension
” and the accumulated gains or losses from
foreign currency translation adjustments. The Company translates
foreign currencies of its German, Canadian and Mexican subsidiaries
into U.S. dollars using the period end exchange rate. Revenue and
expenses were translated using the weighted-average exchange rates
for the reporting period. All items are shown net of
tax.
As
of December 31, 2017, 2016 and 2015, the components of accumulated
other comprehensive loss were as follows:
($ in thousands)
|
|
|
|
|
|
|
|
Additional
minimum pension liability
|
$
(1,353
)
|
$
(1,338
)
|
$
(991
)
|
Foreign
currency translation adjustment
|
(311
)
|
(205
)
|
(204
)
|
Ending
balance
|
$
(1,664
)
|
$
(1,543
)
|
$
(1,195
)
|
17. QUARTERLY INFORMATION (UNAUDITED)
The
following table sets forth selected quarterly financial data for
2017, 2016 and 2015 (in thousands, except share and per share
data):
|
2017 (by quarter
)
|
|
1
|
2
|
3
|
4
|
|
|
|
|
|
Revenues
|
$
928
|
$
1,060
|
$
1,084
|
$
1,221
|
Cost
of sales
|
262
|
250
|
231
|
248
|
Operating
expenses
|
3,290
|
3,240
|
3,136
|
3,363
|
Loss
from operations
|
(2,624
)
|
(2,430
)
|
(2,283
)
|
(2,390
)
|
Interest
expense (income), net
|
100
|
164
|
178
|
149
|
Other
expense (income), net
|
-
|
(50
)
|
(75
)
|
-
|
Income
tax expense (benefit)
|
3
|
3
|
4
|
(134
)
|
Net
loss
|
$
(2,727
)
|
$
(2,547
)
|
$
(2,390
)
|
$
(2,405
)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Net
loss
|
(0.03
)
|
(0.03
)
|
(0.03
)
|
(0.03
)
|
Preferred
dividends
|
(0.01
)
|
-
|
-
|
-
|
Preferred
stock exchange
|
-
|
-
|
(0.01
)
|
-
|
Basic
loss per share to common shareholders
|
(0.04
)
|
(0.03
)
|
(0.04
)
|
(0.03
)
|
Basic
weighted-average shares outstanding
|
91,864,174
|
92,539,230
|
93,197,689
|
93,642,074
|
|
|
|
1
|
2
|
3
|
4
|
|
|
|
|
|
Revenues
|
$
1,043
|
$
996
|
$
848
|
$
925
|
Cost
of Sales
|
279
|
275
|
232
|
284
|
Operating
expenses
|
3,028
|
2,995
|
2,955
|
3,226
|
Loss
from Operations
|
(2,264
)
|
(2,274
)
|
(2,339
)
|
(2,585
)
|
Interest
expense (income), net
|
11
|
36
|
89
|
109
|
Other
expense (income), net
|
(1
)
|
(200
)
|
-
|
-
|
Income
tax expense (benefit)
|
3
|
4
|
3
|
11
|
Net
loss
|
$
(2,277
)
|
$
(2,114
)
|
$
(2,431
)
|
$
(2,705
)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Net
loss
|
$
(0.03
)
|
$
(0.02
)
|
$
(0.03
)
|
$
(0.03
)
|
Preferred
dividends
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.00
)
|
$
(0.00
)
|
Basic
loss per share to common shareholders
|
$
(0.03
)
|
$
(0.03
)
|
$
(0.03
)
|
$
(0.03
)
|
Basic
weighted-average shares outstanding
|
94,073,367
|
94,298,567
|
94,550,721
|
94,779,243
|
|
|
|
1
|
2
|
3
|
4
|
|
|
|
|
|
Revenues
|
$
991
|
$
1,695
|
$
1,181
|
$
902
|
Cost
of Sales
|
286
|
798
|
321
|
539
|
Operating
expenses
|
2,641
|
2,660
|
2,813
|
2,921
|
Loss
from Operations
|
(1,936
)
|
(1,763
)
|
(1,953
)
|
(2,558
)
|
Interest
expense (income), net
|
437
|
(2
)
|
1
|
11
|
Other
expense (income), net
|
(46
)
|
—
|
(99
)
|
—
|
Income
tax expense (benefit)
|
3
|
6
|
3
|
10
|
Net
loss
|
$
(2,330
)
|
$
(1,767
)
|
$
(1,858
)
|
$
(2,579
)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Net
loss
|
$
(0.03
)
|
$
(0.02
)
|
$
(0.02
)
|
$
(0.03
)
|
Preferred
dividends
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.00
)
|
Basic
loss per share to common shareholders
|
$
(0.03
)
|
$
(0.02
)
|
$
(0.02
)
|
$
(0.03
)
|
Basic
weighted-average shares outstanding
|
93,515,640
|
93,674,349
|
93,876,339
|
94,070,895
|
18. SUBSEQUENT
EVENTS
On
February 8, 2018, the Company filed with the Secretary of State of
the State of Delaware a Certificate of Amendment to its Certificate
of Incorporation, as amended, to increase the authorized number of
shares of its Common Stock to 175,000,000 from 150,000,000
shares.
On
January 4, 2018, the Company amended its 1999 Stock Option Plan to
increase the number of shares authorized for issuance thereunder
from approximately 6.2 million to 8.2 million
Subsequent to
December 31, 2017, the Company issued an aggregate of 1,289,000
options to purchase Common Stock at an exercise price of $1.75 per
share as follows: (i) 414,000 options issued to certain members of
the Board of Directors, (ii) 650,000 options issued to certain
members of senior management and (iii) 225,000 options issued to
certain employees. In addition, t
he Company issued
61,669 shares of Common Stock pursuant to the exercise of 61,669
options resulting in cash proceeds to the Company of approximately
$65,000.