The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND OPERATIONS
Overview
As used in this Quarterly Report, “we”, “us”, “our”, “ImageWare”, “ImageWare Systems” or the “Company” refers to ImageWare Systems, Inc. and all of its subsidiaries. ImageWare Systems, Inc. is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is the patented IWS Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses, and all the products are integrated into the IWS Biometric Engine.
The Company's common stock, par value $0.01 per share (the "Common Stock"), trades under the symbol "IWSY" on the OTCQB Marketplace.
Recent Developments
As reported in the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the "SEC") on August 23, 2021, on August 12, 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. No assurances can be given that the Company will be successful in consummating any or a combination of such alternatives. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders, and may result in the loss of your entire investment. In the event the Company is unable to consummate one or more transactions, the Company may not be able to continue as a going concern.
Going Concern and Management’s Plan
Historically, our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern. Due to the Company’s deteriorating liquidity, management has determined that there is substantial doubt about the Company’s ability to continue as a going concern.
At September 30, 2021 and December 31, 2020, we had negative working capital of $8,280,000 and $19,349,000, respectively. Included in our negative working capital as of September 30, 2021 are $7,486,000 of derivative liabilities which are not required to be settled in cash except in the event of the consummation of a change of control or at any time after the fourth anniversary of the Series D Preferred issuance, at which time the holders of the Series D Preferred may require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Series D Liquidation Preference Amount. At September 30, 2021 the Liquidation Preference Amount totaled $22,965. Considering the financings consummated in 2020 and 2021, as well as our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash will be insufficient to satisfy our cash requirements for the next twelve months from the date of this filing. At November 4, 2021, cash on hand approximated $1,243,000. Based on the Company’s rate of cash consumption in the first three quarters of 2021 and the last quarter of 2020, the Company estimates it will need additional capital in the first quarter of 2022 and its prospects for obtaining that capital are uncertain. As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
To address our working capital requirements, management has instituted several cost cutting measures and has utilized cash proceeds available under the purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to satisfy its working capital requirements (“LPC Purchase Agreement”). In addition, as reported in the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the "SEC") on August 23, 2021, on August 12, 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. Other than the LPC Purchase Agreement with Lincoln Park, there are currently no financing arrangements to support our projected cash shortfall, and available capital under the LPC Purchase Agreement will be insufficient to address our working capital needs. We currently have no other 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. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders.
In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital, generate positive cash flows from operations, or otherwise consummate a transaction that addresses the Company’s working capital requirements. 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, consummate a transaction that addresses its liquidity concerns, or operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2020, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on April 5, 2021.
Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or any other future periods.
Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly-owned subsidiaries are: XImage Corporation, a California Corporation; ImageWare Systems ID Group, Inc., a Delaware corporation (formerly Imaging Technology Corporation); I.W. Systems Canada Company, a Nova Scotia unlimited liability company; ImageWare Digital Photography Systems, LLC, a Nevada limited liability company (formerly Castleworks LLC); Digital Imaging International GmbH, a company formed under German laws; and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Preferred Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
Accounts Receivable
In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.
Inventories
Finished goods inventories are stated at the lower of cost, determined using the average cost method, or net realizable value. See Note 4.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, and deferred revenue, the carrying amounts approximate fair value due to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use Assets
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% using a capital asset pricing model. The Company has utilized the practical expedient regarding lease and nonlease components and has combined such items into a single combined component. The Company has also utilized the practical expedient regarding leases of twelve months or less and has excluded such leases from its computation of lease liability and related right-of-use assets.
Revenue Recognition
In accordance with ASC 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:
|
|
1.
|
Identify the contract with the customer;
|
|
|
2.
|
Identify the performance obligation in the contract;
|
|
|
3.
|
Determine the transaction price;
|
|
|
4.
|
Allocate the transaction price to the performance obligations in the contract; and
|
|
|
5.
|
Recognize revenue when (or as) each performance obligation is satisfied.
|
At contract inception, we assess the goods and services promised in a contract with a customer and identify as a performance obligation each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) that is distinct, or (ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. We recognize revenue only when we satisfy a performance obligation by transferring a promised good or service to a customer.
Determining the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations requires judgement.
We disclose disaggregation of our customer revenue by classes of similar products and services as follows:
|
|
•
|
Software licensing and royalties;
|
|
|
•
|
Sales of computer hardware and identification media;
|
|
|
•
|
Post-contract customer support.
|
Software Licensing and Royalties
Software licenses consist of revenue from the sale of software for identity management applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer. We recognize revenue from software licensing at a point in time upon delivery, provided all other revenue recognition criteria are met.
Royalties consist of revenue from usage-based arrangements and guaranteed minimum-based arrangements. We recognize revenue for royalty arrangements at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied.
Computer Hardware and Identification Media
We generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer, provided all other revenue recognition criteria are met.
Services
Services revenue is comprised primarily of software customization services, software integration services, system installation services and customer training. Revenue is generally recognized upon completion of services and customer acceptance provided all other revenue recognition criteria are met.
Post-Contract Customer Support (“PCS”)
Post contract customer support consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.
Arrangements with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and post-contract customer support on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service, and (ii) the percent discount off of list price approach.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. At September 30, 2021 and December 31, 2020, we had capitalized incremental costs of obtaining a contract with a customer of approximately $0 and $65,000, respectively. We recorded no additional contract costs during the three and nine months ended September 30, 2021. Additionally, we recognized approximately $121,000 and $366,000 in revenue during the three and nine months ended September 30, 2021, respectfully, that was related to contract costs at the beginning of the period.
Other Items
We do not offer rights of return for our products and services in the normal course of business.
Sales tax collected from customers is excluded from revenue.
The following table sets forth our disaggregated revenue for the three and nine months ended September 30, 2021 and 2020:
|
Net Revenue
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
(dollars in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and royalties
|
|
$
|
40
|
|
|
$
|
587
|
|
|
$
|
301
|
|
|
$
|
780
|
|
|
Hardware and consumables
|
|
|
20
|
|
|
|
13
|
|
|
|
76
|
|
|
|
75
|
|
|
Services
|
|
|
85
|
|
|
|
1,258
|
|
|
|
98
|
|
|
|
1,274
|
|
|
Maintenance
|
|
|
633
|
|
|
|
613
|
|
|
|
1,977
|
|
|
|
1,870
|
|
|
Total revenue
|
|
$
|
778
|
|
|
$
|
2,471
|
|
|
$
|
2,452
|
|
|
$
|
3,999
|
|
Customer Concentration
For the three months ended September 30, 2021, two customers accounted for approximately 53% or $411,000 of our total revenue and had trade receivables at September 30, 2021 of $93,000. For the nine months ended September 30, 2021, two customers accounted for approximately 44% or $1,078,000 of our total revenue and had trade receivables at September 30, 2021 of $223,000.
For the three months ended September 30, 2020, two customers accounted for approximately 82% or $2,037,000 of our total revenue and had trade receivables at September 30, 2020 of $193,000. For the nine months ended September 30, 2020, two customers accounted for approximately 65% or $2,588,000 of our total revenue and had trade receivables at September 30, 2020 of $193,000.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06 “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
NOTE 3. NET INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period, adjusted to include, if dilutive, potential dilutive shares consisting of convertible preferred stock, stock options and warrants, calculated using the treasury stock and if-converted methods. For diluted income (loss) per share calculation purposes, the net income (loss) available to common shareholders is adjusted to add back any preferred stock dividends and any interest on convertible debt reflected in the condensed consolidated statement of income (loss) for the respective periods.
The table below presents the computation of basic and diluted income (loss) per share:
|
(Amounts in thousands except share and per share amounts)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Numerator for basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
490
|
|
|
$
|
(626
|
)
|
|
$
|
9,871
|
|
|
$
|
(6,652
|
)
|
|
Preferred dividends, deemed dividends and accretion
|
|
|
(1,935
|
)
|
|
|
(2,529
|
)
|
|
|
(6,260
|
)
|
|
|
(5,275
|
)
|
|
Net income (loss)available to common shareholders
|
|
$
|
(1,445
|
)
|
|
$
|
(3,155
|
)
|
|
$
|
3,611
|
|
|
$
|
(11,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends, deemed dividends and accretion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders after assumed conversions
|
|
|
(1,445
|
)
|
|
|
(3,155
|
)
|
|
|
3,611
|
|
|
|
(11,927
|
)
|
|
Denominator for basic income (loss) per share – weighted-average shares outstanding
|
|
|
340,384,468
|
|
|
|
133,341,134
|
|
|
|
326,458,778
|
|
|
|
125,558,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
|
|
82,942,500
|
|
|
|
—
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
2,919,631
|
|
|
|
—
|
|
|
Convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Denominator for diluted income (loss) – adjusted weighted average shares and assumed conversions
|
|
|
340,384,468
|
|
|
|
133,341,134
|
|
|
|
412,320,909
|
|
|
|
125,558,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share available to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.09
|
)
|
|
Diluted income (loss) per share available to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.09
|
)
|
The following table sets forth Common share equivalents at September 30, 2021 and December 31, 2020:
|
Potential Dilutive Securities:
|
|
Common Share Equivalents at
September 30, 2021
|
|
|
Common Share Equivalents at
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock - Series A
|
|
|
-
|
|
|
|
74,555,000
|
|
|
Convertible redeemable preferred stock - Series A-1
|
|
|
-
|
|
|
|
73,910,000
|
|
|
Convertible redeemable preferred stock - Series B
|
|
|
47,001
|
|
|
|
46,029
|
|
|
Convertible redeemable preferred stock - Series D
|
|
|
393,917,667
|
|
|
|
392,166,023
|
|
|
Stock options
|
|
|
83,144,875
|
|
|
|
2,585,500
|
|
|
Restricted stock units (RSUs)
|
|
|
83,802
|
|
|
|
845,106
|
|
|
Warrants
|
|
|
3,150,000
|
|
|
|
753,775
|
|
|
Total Potential Dilutive Securities
|
|
|
480,343,345
|
|
|
|
544,861,433
|
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $85,000 as of September 30, 2021 were comprised of work in process of $27,000, representing direct labor costs on in-process projects and finished goods of $58,000 net of reserves for obsolete and slow-moving items of $3,000.
Inventories of $40,000 as of December 31, 2020 were comprised of work in process of $26,000, representing direct labor costs on in-process projects and finished goods of $14,000 net of reserves for obsolete and slow-moving items of $3,000.
Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value and required reserve levels.
Intangible Assets
The carrying amounts of the Company’s patent intangible assets were $49,000 and $58,000 as of September 30, 2021 and December 31, 2020, respectively, which includes accumulated amortization of $610,000 and $601,000 as of September 30, 2021 and December 31, 2020, respectively. Amortization expense for patent intangible assets was $3,000 and $9,000 for the three and nine months ended September 30, 2021 and 2020, respectively. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately 4.08 years. There was no impairment of the Company’s intangible assets during the three and nine months ended September 30, 2021 and 2020.
The estimated intangible amortization expense for the next five fiscal years is as follows:
|
Fiscal Year Ended December 31,
|
|
Estimated
Amortization
Expense
($ in thousands)
|
|
|
2021 (three months)
|
|
$
|
3
|
|
|
2022
|
|
|
12
|
|
|
2023
|
|
|
12
|
|
|
2024
|
|
|
12
|
|
|
2025
|
|
|
10
|
|
|
Total
|
|
$
|
49
|
|
Goodwill
The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The provisions of ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts, will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only one reporting unit, Identity Management which, at September 30, 2021, had a negative carrying amount of approximately $13,748,000. Based on the results of the Company's impairment testing, the Company determined that its goodwill was not impaired as of September 30, 2021 and December 31, 2020.
Other Assets
In conjunction with the 2021 LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2021, 1,000,000 shares of Common Stock as consideration for entering into the Purchase Agreement. Pursuant to this issuance, the Company recorded $70,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under this Purchase Agreement. At September 30, 2021, the Company had approximately $70,000 in deferred stock issuance costs included in the caption “Other assets” in its condensed consolidated balance sheets. During the three and nine months ended September 30, 2021, there were 0 shares and 1,000,000 shares of Common Stock sold by the Company under the 2021 LPC Purchase Agreement. The 2021 LPC Purchase Agreement supersedes and terminates the previous agreement between the Company and Lincoln Park entered into on June 11, 2020.
In conjunction with a securities purchase agreement entered into with 2020 LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2020, 2,500,000 shares of Common Stock as consideration for entering into the 2020 LPC Purchase Agreement. Pursuant to this issuance, the Company recorded $400,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under the 2020 LPC Purchase Agreement.
Due to the termination of the 2020 LPC Purchase Agreement, effectuated by the consummation of the 2021 LPC Purchase Agreement, the Company wrote-off and recorded operating expense of approximately $364,000 representing the unamortized capitalized deferred stock issuance costs remaining under the 2020 LPC Purchase Agreement during the nine months ended September 30, 2021.
NOTE 5. LEASES
The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 - Leases. In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% as the discount rates implicit in the Company’s leases cannot be readily determined. At December 31, 2020, such assets and liabilities aggregated approximately $1,557,000 and $1,718,000, respectively. At September 30, 2021, such assets and liabilities aggregated approximately $1,278,000 and $1,409,000, respectively. The Company determined that it had no arrangements representing finance leases.
Our corporate headquarters is located in San Diego, California, where we now occupy approximately 500 square feet of office space at a cost of approximately $2,000 per month. We entered into this facility’s lease in February 2021, with the new lease commencing on March 1, 2021 on a month-to-month basis. In addition to our corporate headquarters, we also occupied the following spaces at September 30, 2021:
|
|
●
|
9,720 square feet in Portland, Oregon, at a cost of approximately $23,000 per month until the expiration of the lease on February 28, 2023.
|
Prior to entering into our current lease agreement in January 2021 and moving our corporate headquarters to a new location, we occupied 8,511 square feet of office space in San Diego, at a cost of approximately $28,000 per month. In January 2021, we entered in a subleasing agreement for our previously occupied corporate headquarters located in San Diego, California. The term of the sublease commenced on April 1, 2021 and expires on April 30, 2025 coterminous with the expiration of the Company’s master lease. Sublease payments due the Company approximate $26,000 per month over the term of the sublease.
The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases.
For the three months ended September 30, 2021 and 2020, the Company recorded approximately $162,000 and $169,000, respectively, in lease expense using the straight-line method. For the nine months ended September 30, 2021 and 2020, the Company recorded approximately $492,000 and $508,000 respectively, in lease expense using the straight-line method. Under the provisions of ASC 842, lease expense is comprised of the total lease payments under the lease plus any initial direct costs incurred less any lease incentives received by the lessor amortized ratably using the straight-line method over the lease term. The weighted-average remaining lease term of the Company’s operating leases as of September 30, 2021 is 1.7 years. Cash payments under operating leases aggregated approximately $165,000 and $504,000, respectively, for the three and nine months ended September 30, 2021 and $162,000 and $485,000, respectively, for the comparable periods in 2020, and are included in operating cash flows.
The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as its term is less than 12 months.
At September 30, 2021, future minimum undiscounted lease payments are as follows:
|
($ in thousands)
|
|
|
|
|
|
2021 (three months)
|
|
$
|
161
|
|
|
2022
|
|
|
652
|
|
|
2023
|
|
|
424
|
|
|
2024
|
|
|
387
|
|
|
2025
|
|
|
132
|
|
|
Total
|
|
|
1,756
|
|
|
Present Value effect on future minimum undiscounted lease payments at September 30, 2021
|
|
|
(347
|
)
|
|
Lease liability at September 30, 2021
|
|
|
1,409
|
|
|
Less current portion
|
|
|
(494
|
)
|
|
Non-current lease liability at September 30, 2021
|
|
$
|
915
|
|
NOTE 6. MEZZANINE EQUITY
Series C Convertible Redeemable Preferred Stock
On September 18, 2018, the Company filed the Series C Certificate with the Secretary of State for the State of Delaware designating 1,000 shares of the Company’s preferred stock, par value $0.01 per shares, as Series C Preferred, each share with a stated value of $10,000 per share. The Company noted that the Series C Preferred instruments were hybrid instruments that contained several embedded features. The Company evaluated the identified embedded features of the Series C Preferred host instrument and determined that certain features met the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument. The Company has bifurcated from the Series C Preferred host instrument the conversion options, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $833,000 at issuance and were recorded by the Company as a discount to the Series C Preferred.
For the three and nine months ended September 30, 2020, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $170,000 and $517,000, respectively. Concurrently with the issuance of Series D Convertible Redeemable Preferred Stock (described below), all holders of Series C exchanged their shares for shares of Series D Preferred.
Series D Convertible Redeemable Preferred Stock
On November 12, 2020, the Company filed the Series D Certificate with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred, and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities, and are to be paid at the rate of 4% of the Stated Value (as defined in the Series D Certificate) per share per annum in the form of shares of Series D Preferred. Holders of Series D Preferred shall vote together with holders of Common Stock on an as-converted basis, and not as a separate class, except (i) the holders of Series D Preferred, voting as a separate class, shall be entitled to elect two directors, (ii) the holders of Series D Preferred have the right to vote as a separate class regarding the waiver of certain protective provisions set forth in the Series D Certificate, and (iii) as otherwise required by law.
The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into Common Stock at any time that is at least ninety days following the issuance date, at the conversion price calculated by dividing the Stated Value by the conversion price of $0.0583 per share of Common Stock, subject to adjustments as set forth in Section 5(e) of the Series D Certificate. The shares of Common Stock issuable upon conversion of the Series D Preferred shall be subject to the following registration rights: (i) one demand registration starting three months after the Closing, (ii) two demand registrations starting one year after the Closing, and (iii) unlimited piggy-back and Form S-3 registration rights with reasonable and customary terms.
If, on any date that is at least five (5) years following the Issuance Date, (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common Shares issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common Shares will be either (A) covered by an effective registration statement under the Securities Act, which is then available for the immediate resale of such Common Shares by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.
On the fourth anniversary of the Issuance Date, or in the event of the consummation of a Change of Control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.
On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of 11,560 shares of its Series D Preferred, resulting in gross proceeds to the Company of $11.56 million, less fees and expenses. The gross proceeds include approximately $2.2 million in principal amount due and payable under the terms of certain term loans issued by the Company on September 29, 2020 (“Bridge Note”), which Bridge Notes were converted into Series D Preferred at Closing (the “Conversion”). The issuance and sale of the Series D Preferred was made pursuant to that certain Securities Purchase Agreement, dated September 28, 2020 (the "Series D Purchase Agreement"), by and between the Company and the Investors, for the purchase price of $1,000 per share of Series D Preferred. The Conversion and Series D Financing was undertaken pursuant to Section 3(a)(9) and/or Rule 506 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). On December 23, 2020, the Company sold an additional 500 shares of Series D Preferred resulting in gross proceeds to the Company of $500,000 less fees and expenses.
On the Closing Date, the Company exchanged approximately $661,000 of liabilities of the Company for 6613 shares of Series D Preferred, and received notice from the holders of a majority of the Series C Preferred (the “Series C Exchange Notice”) of their election to convert all of their shares of Series C Preferred into Series D Preferred, and further exercising their right to require all other holders of Series C Preferred to convert their shares of Series C Preferred into Series D Preferred (the “Series C Exchange”). Upon the consummation of the Series C Exchange in accordance with the terms of the Series C Exchange Notice, the Company issued an additional 10,000 shares of Series D Preferred in exchange for all 1,000 issued and outstanding shares of the Company’s Series C Preferred.
On December 31, 2020, the Company issued 142 shares of Series D Preferred Stock as payment of dividends due to the Series D Preferred stockholders. During the nine months ended September 30, 2021, the Company issued 748 shares of Series D Preferred Stock as payment of dividends due to the Series D Preferred stockholders. During the nine months ended September 30, 2021, certain holders of Series D Preferred converted 646 shares of Series D into 11,149,123 shares of Common Stock which includes 70,221 shares of common stock issued for dividends up to the date of conversion.
Guidance for accounting for freestanding financial instruments that contain characteristics of both liabilities and equity are contained in ASC 480, Distinguishing Liabilities From Equity and Accounting Series Release 268 (“ASR 268”) Redeemable Preferred Stocks. The Company evaluated the provisions of the Series D Preferred and determined that the provisions of the Series D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series D Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control, the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.
The Company noted that the Series D Preferred instruments were hybrid instruments that contain several embedded features. In November 2014, the FASB issued ASU 2014-16 to amend ASC 815, “Derivatives and Hedging”, (“ASC 815”) and require the use of the whole instrument approach (described below) to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity.
The whole instrument approach requires an issuer or investor to consider the economic characteristics and risks of the entire hybrid instrument, including all of its stated and implied substantive terms and features. Under this approach, all stated and implied features, including the embedded feature being evaluated for bifurcation, must be considered. Each term and feature should be weighed based on the relevant facts and circumstances to determine the nature of the host contract. This approach results in a single, consistent determination of the nature of the host contract, which is then used to evaluate each embedded feature for bifurcation. That is, the host contract does not change as each feature is evaluated.
The revised guidance further clarifies that the existence or omission of any single feature, including an investor-held, fixed-price, noncontingent redemption option, does not determine the economic characteristics and risks of the host contract. Instead, an entity must base that determination on an evaluation of the entire hybrid instrument, including all substantive terms and features.
However, an individual term or feature may be weighed more heavily in the evaluation based on facts and circumstances. An evaluation of all relevant terms and features, including the circumstances surrounding the issuance or acquisition of the equity share, as well as the likelihood that an issuer or investor is expected to exercise any options within the host contract, to determine the nature of the host contract, requires judgement.
Using the whole instrument approach, the Company concluded that the host instrument of the Series D Preferred was more akin to debt than equity as the majority of identified features contain more characteristics of debt.
The Company evaluated the identified embedded features of the Series D Preferred host instrument and determined that certain features meet the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument.
The Company has bifurcated from the Series D Preferred host instrument the conversion options, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $26,011,000 at issuance and have been recorded as a discount to the Series D. During the three and nine months ended September 30, 2021, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $1,665,000 and $5,214,000, respectfully, using the effective interest rate method as a deemed dividend.
The following table summarizes the share activity of Series D Preferred for the three months ended March 31, 2021, three months ended June 30, 2021 and the three months ended September 30, 2021:
|
|
|
Series D
Convertible Redeemable Preferred
|
|
|
|
|
|
|
|
|
Total shares of Series D Preferred Stock - December 31, 2020
|
|
|
22,863
|
|
|
Conversion of Series D Preferred into Common Stock
|
|
|
(354
|
)
|
|
Issuance of Series D Preferred as payment of dividends due
|
|
|
248
|
|
|
Total shares of Series D Preferred Stock - March 31, 2021
|
|
|
22,757
|
|
|
Conversion of Series D Preferred into Common Stock
|
|
|
(50
|
)
|
|
Issuance of Series D Preferred as payment of dividends due
|
|
|
251
|
|
|
Total shares of Series D Preferred Stock - June 30, 2021
|
|
|
22,958
|
|
|
Conversion of Series D Preferred into Common Stock
|
|
|
(242
|
)
|
|
Issuance of Series D Preferred as payment of dividends due
|
|
|
249
|
|
|
Total shares of Series D Preferred Stock - September 30, 2021
|
|
|
22,965
|
|
The carrying value of the Company’s Series D Preferred was approximately $6,973,000 and $1,572,000 net of discount of approximately $15,992,000 and $21,291,000 as of September 30, 2021 and December 31, 2020, respectively.
NOTE 7. DERIVATIVE LIABILITIES
The Company accounts for its derivative instruments under the provisions of ASC 815, “Derivatives and Hedging”. Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contracts that qualify as derivative instruments and require bifurcation.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series D Preferred host instrument required bifurcation. The Company valued the bifurcatable features at fair value. Such liabilities aggregated approximately $7,486,000 and $24,128,000 at September 30, 2021 and December 31, 2020, respectively, and are classified as current liabilities on the Company’s condensed consolidated balance sheets under the caption “Derivative liabilities”. The Company will revalue these features at each balance sheet date and record any change in fair value in the determination of period net income or loss.
The change in fair value of such amounts are recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of income (loss). For the three and nine months ended September 30, 2021, the Company recorded a decrease to its derivative liabilities using fair value methodologies of approximately $1,342,000 and $16,558,000 related to Series D embedded derivatives. In conjunction with the conversion of 242 shares of Series D Preferred during the three months ended September 30, 2021, the Company recognized a gain of approximately $34,000. In conjunction with the conversion of 646 shares of Series D Preferred during the nine months ended September 30, 2021, the Company recognized a loss on the extinguishment of derivative liabilities of approximately $311,000.
The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series C Preferred host instrument required bifurcation. The Company valued these bifurcatable features at fair value and such liabilities aggregated approximately $0 at September 30, 2020. There is no Series C Preferred outstanding at September 30, 2021. The change in fair value of such amounts are recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. During the three and nine months ended September 30, 2020, the Company recorded a decrease to these derivative liabilities using fair value methodologies of approximately $535,000 and $369,000, respectively.
NOTE 8. NOTES PAYABLE
On May 4, 2020, the Company entered into a loan agreement (the “PPP Loan”) with Comerica Bank (“Comerica”) under the Paycheck Protection Program (the “PPP”), which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under the PPP, the Company received proceeds of approximately $1,571,000. In accordance with the requirements of the PPP, the Company utilized the proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, matures on May 4, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. In July 2021, the Company filed an application with the SBA requesting loan forgiveness. In September 2021, the Company received notification that the PPP Loan was forgiven in its entirety. Accordingly, the Company recorded a gain on debt extinguishment for the amount of the PPP Loan of $1,571,000 plus approximately $10,000 in accrued unpaid interest. Such amounts are recorded under the caption “(Gain) on extinguishment of derivative liabilities and debt” in the Company’s Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2021.
At December 31, 2020, the Company has recorded the current portion of the PPP Loan of approximately $918,000 as a current liability under the caption “Notes payable, current portion” in its condensed consolidated December 31, 2020 balance sheet. The remaining portion of approximately $653,000 is recorded as a long-term liability under the caption “Note payable, net of current portion” in its condensed consolidated December 31, 2020 balance sheet.
NOTE 9. EQUITY
The Company’s Certificate of Incorporation authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board of Directors may determine.
On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of 179 million to 350 million, consisting of 345 million shares of Common Stock and 5 million shares of Preferred Stock. On September 28, 2020, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 345 million shares to 1.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective October 13, 2020. On February 16, 2021, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 1.0 billion shares to 2.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective April 21, 2021.
Series A Convertible Preferred Stock
On September 15, 2017, the Company filed the Certificate of Designations of the Series A Preferred with the Delaware Secretary of State (the “Series A Certificate”), designating 38,000 shares of the Company’s preferred stock, par value $0.01 per share, as Series A Preferred. The Company had 37,467 shares of Series A Preferred outstanding as of December 31, 2019.
During July 2020, the Company entered into the Series A Exchange Agreement with the Series A Holders, pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred in consideration for their waiver of approximately $1,849,000 in dividends payable.
On September 28, 2020, the Company received executed written consents from (i) the requisite holders of the Company’s voting securities, voting on an as-converted basis, and (ii) the requisite holders of Series A Preferred, voting as a separate class, approving the Amended Series A Certificate, which, among other things, provides for (a) the automatic conversion of all Series A Preferred into Common Stock at a rate of 10% per month following the Closing of the Series D Financing, with the conversion price for such conversion reduced from $1.15 per share of Common Stock, to $0.20 per share of Common Stock, and (b) a reduction of the dividend rate from 8% of the stated Series A Liquidation Preference Amount if paid in cash and 10% of the stated Series A Liquidation Preference Amount if paid in Common Stock, to 4% of the Series A Liquidation Preference Amount, with the dividends being paid only in shares of Common Stock.
The Company had 0 and 14,911 shares of Series A Preferred outstanding as of September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, the Company had cumulative undeclared dividends of $0. During the three months ended September 30, 2021, the Company issued the holders of Series A Preferred 109,836 shares of Common Stock as payment of dividends due. During the nine months ended September 30, 2021, the Company issued the holders of Series A Preferred 1,789,587 shares of Common Stock as payment of dividends due.
During the three months ended September 30, 2021, the Company issued 11,647,000 shares of Common Stock upon the conversion of 2,330 shares of Series A Preferred Stock. During the nine months ended September 30, 2021 the Company issued 74,562,000 shares of Common Stock upon the conversion of 14,911 shares of Series A Preferred Stock.
Series A-1 Convertible Preferred Stock
In July 2020, the Company filed the Series A-1 Certificate with the Secretary of State for the State of Delaware - Division of Corporations, designating 31,021 shares of the Company’s Preferred Stock as Series A-1 Preferred. Shares of Series A-1 Preferred accrue cumulative dividends and are payable quarterly beginning September 30, 2021 at a rate of 8% per annum if paid in cash, or 10% per annum if paid by the issuance of shares of the Company’s Common Stock.
Shares of Series A-1 Preferred rank senior to the Company’s Common Stock, pari-passu to the Company's Series A Preferred, and are subordinate and rank junior to Series B Preferred and Series D Preferred.
Each share of Series A-1 Preferred has a liquidation preference equal to the greater of (i) $1000 per share plus all accrued and unpaid dividends, or (ii) such amount per share as would have been payable had each such share been converted into Common Stock immediately prior to such liquidation, dissolution or winding up (the amount payable pursuant to the foregoing is referred to herein as the “Series A-1 Liquidation Preference Amount”) before any payment shall be made or any assets distributed to the holders of the Common Stock or any other classes and series of equity securities of the Company which by their terms rank junior to the Series A-1 Preferred.
Each share of Series A-1 Preferred was convertible into that number of shares of the Company’s Common Stock (“Series A-1 Conversion Shares”) equal to that number of shares of Series A-1 Preferred being converted multiplied by $1,000, divided by $0.65, or the conversion price as defined in the Series A-1 Certificate in effect as of the date the holder delivers to the Company their notice of election to convert. Holders of Series A-1 Preferred may elect to convert shares of Series A-1 Preferred into Common Stock at any time. In addition to the aforementioned holder conversion option, if the volume weighted average closing price ("VWAP") of the Company’s Common Stock is at least $1.00 per share for 20 consecutive trading days, then the Company has the right to convert one-half of the issued and outstanding shares of Series A-1 Preferred into Common Stock. In the event of a Change of Control, the Company will have the option to redeem all issued and outstanding shares of Series A-1 Preferred for 115% of the Liquidation Preference per share.
During July 2020, the Company entered into an Exchange Agreement, Consent and Waiver (“Exchange Agreement”) with certain holders of its Series A Preferred (the "Series A Holders"), pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred.
On September 28, 2020, the Company's holders of Common Stock and Preferred Stock voted to revise the Series A-1 Certificate by amending and restating the Series A-1 Certificate to, without limitation, provide for (i) the voluntary conversion of all outstanding shares of the Company's Series A-1 Preferred into shares of the Company’s Common Stock at a reduced conversion price of $0.20 per share of Common Stock, and (ii) the automatic conversion of all issued and outstanding shares of Series A Preferred and Series A-1 Preferred into shares of Common Stock at a rate of 10% per month, beginning on November 1, 2020, and ending on August 1, 2021, at the reduced conversion price of $0.20 per share of Common Stock.
The Company had 0 and 14,782 shares of Series A-1 Preferred outstanding as of September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021, the Company issued the holders of Series A-1 Preferred 105,343 shares of Common Stock as payment of dividends due. During the nine months ended September 30, 2021, the Company issued the holders of Series A-1 Preferred 1,789,587 shares of Common Stock as payment of dividends due.
During the three months ended September 30, 2021, the Company issued 11,194,000 shares of Common Stock upon the conversion of 2,239 shares of Series A-1 Preferred. During the nine months ended September 30, 2021, the Company issued 73,910,000 shares of Common Stock upon the conversion of 14,782 shares of Series A-1 Preferred.
Series B Convertible Redeemable Preferred Stock
The Company had 239,400 shares of Series B Convertible Preferred Stock (“Series B Preferred”) outstanding as of September 30, 2021 and December 31, 2020. At September 30, 2021 and December 31, 2020, the Company had cumulative undeclared dividends of approximately $8,000. There were no conversions of Series B Preferred into Common Stock during the three and nine months ended September 30, 2021 and 2020.
Common Stock
As of September 30, 2021, we had 347,200,961 and 347,194,257 shares of Common Stock issued and outstanding, respectively. Our authorized but unissued shares of Common Stock are available for issuance without action by our shareholders.
The following table summarizes outstanding Common Stock activity during the nine months ended September 30, 2021:
|
|
|
Common Stock
|
|
|
Shares outstanding at December 31, 2020
|
|
|
180,089,613
|
|
|
Shares issued pursuant to payment of stock dividend on Series A Preferred
|
|
|
1,911,587
|
|
|
Shares issued pursuant to payment of stock dividend on Series A-1 Preferred
|
|
|
1,789,587
|
|
|
Shares issued pursuant to Series D conversion to Common Stock
|
|
|
11,149,123
|
|
|
Shares issued pursuant to Series A conversion to Common Stock
|
|
|
74,562,000
|
|
|
Shares issued pursuant to Series A-1 conversion to Common Stock
|
|
|
73,910,000
|
|
|
Shares issued pursuant to warrant exercises
|
|
|
400
|
|
|
Shares issued to secure financing facility
|
|
|
1,000,000
|
|
|
Shares issued for cash
|
|
|
1,000,000
|
|
|
Shares issued as compensation in lieu of cash
|
|
|
921,218
|
|
|
Shares issued pursuant to RSU vesting
|
|
|
860,729
|
|
|
Shares outstanding at September 30, 2021
|
|
|
347,194,257
|
|
During the nine months ended September 30, 2021, the Company sold 1,000,000 shares of its Common Stock to Lincoln Park pursuant to the 2021 LPC Purchase Agreement for $0.10 per share resulting in proceeds to the Company of $100,000. Also in May 2021, the Company issued to Lincoln Park 1,000,000 shares of its Common Stock as consideration for entering into the Purchase Agreement. The Company has recorded this issuance as a deferred stock issuance cost in the amount of $70,000. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under this Purchase Agreement.
Warrants
As of September 30, 2021, warrants to purchase 3,904,470 shares of Common Stock at prices ranging from $0.01 to $0.80 were outstanding. All warrants expiring on September 19, 2028 were cancelled with the final Series A conversions to common on August 1, 2021. There are 600,000 warrants whose expiration date is April 15, 2028 and150,000 warrants whose expiration date is 3 years from initial vesting, such vesting based on certain events. There are also 400,000 warrants whose expiration date is July 11, 2028, 200,000 warrants whose expiration is August 3, 2028, and 1,800,000 warrants whose expiration is August 4, 2026. The intrinsic value of warrants outstanding at September 30, 2021 was $0.
The following table summarizes warrant activity for the following periods:
|
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
753,775
|
|
|
$
|
0.17
|
|
|
Granted
|
|
|
3,000,000
|
|
|
$
|
0.07
|
|
|
Expired / Canceled
|
|
|
(603,375
|
)
|
|
$
|
0.01
|
|
|
Exercised
|
|
|
(400
|
)
|
|
$
|
0.01
|
|
|
Balance at September 30, 2021
|
|
|
3,150,000
|
|
|
$
|
0.10
|
|
In April 2021, the Company created an advisory board to the Board of Directors comprised of 3 individuals. As compensation for advisory board services, the Company granted each member warrants to purchase 200,000 shares of the Company’s Common Stock. Such warrants have an exercise price of $0.07 per share and will vest over a one-year period beginning on April 19, 2021. In July 2021, the Company issued 400,000 warrants to our Chief Financial Officer. Such warrants have an exercise price of $0.06 per share and fully vested over a two-month period. In August 2021, the Company issued 200,000 and 1,800,000 warrants to a new advisory board member. Such warrants have an exercise price of $0.048 per share and $0.07 per share, respectively, and will vest over a one-year period beginning on August 5, 2021. During the three and nine months ended September 30, 2021, the Company recorded approximately $15,636 and $25,636 in expense related to the vesting of these warrants.
During the nine months ended September 30, 2021, 603,375 warrants were cancelled pursuant to the mandatory conversion of Series A Preferred Stock into Common Stock and 400 warrants were exercised at $0.01 per warrant.
NOTE 10. STOCK-BASED COMPENSATION
Stock Options
As of September 30, 2021, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).
2020 Omnibus Stock Incentive Plan
On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”). Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Code.
Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Plan and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan. The Company amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to 145.0 million shares. Such amendment became effective on April 21, 2021. As of September 30, 2021, there were 66,363,578 shares available for issuance under the 2020 Plan.
The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation - Stock Compensation”. The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.
ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14.
In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has adopted the provisions of ASU 2016-09 and will continue to use an estimated annualized forfeiture rate. The Company utilized estimated forfeiture rate of 25% for options granted during the three months ended September 30, 2021. Company is currently in the process of reviewing the expected forfeiture rate to determine if that percent is still reasonable based on recent historical experience.
A summary of the activity under the Company’s stock option plans is as follows:
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
|
Balance at December 31, 2020
|
|
|
2,585,500
|
|
|
$
|
0.19
|
|
|
|
9.2
|
|
|
Granted
|
|
|
99,260,000
|
|
|
$
|
0.06
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
(18,700,625
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Balance at September 30, 2021
|
|
|
83,144,875
|
|
|
$
|
0.06
|
|
|
|
6.7
|
|
During the three months ended September 30, 2021, the Company granted an aggregate of 33,540,000 options to purchase shares of Common Stock including 17,000,000 to certain officers and employees and 0 to certain members of the Company’s Board of Directors. Such options have an exercise price ranging from $0.048 to $0.06 and vest at various times through August 1, 2024.
During the nine months ended September 30, 2021, an aggregate of 18,700,625 options expired unexercised.
At September 30, 2021, a total of 83,144,875 options were outstanding, of which 15,424,688 were exercisable at a weighted average price of $0.06 per share with a remaining weighted average contractual term of 6.7 years. The Company expects that, in addition to the 15,424,688 options that were exercisable as of September 30, 2021, another 67,720,187 will ultimately vest resulting in a combined total of 83,144,875. Those 67,720,187 shares have a weighted average exercise price of $0.06 and an aggregate intrinsic value of approximately $0 as of September 30, 2021. Stock-based compensation expense related to equity options was approximately $794,411 for the nine months ended September 30, 2021.
The intrinsic value of options exercisable and outstanding at September 30, 2020 was $0. The aggregate intrinsic value for all options outstanding as of September 30, 2020 was $0. The weighted-average grant-date per share fair value of options granted during the nine months ended September 30, 2020 was $0.09. At September 30, 2020, the total remaining unrecognized compensation cost related to unvested stock options amounted to approximately $2,784,000, which will be recognized over a weighted-average period of 1.6 years.
The Company periodically issues Restricted Stock Units (“RSUs”) to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.
A summary of the activity related to RSUs is as follows:
|
|
|
RSU’s
|
|
|
Weighted-Average
Issuance Price
|
|
|
Balance at December 31, 2020
|
|
|
845,106
|
|
|
$
|
0.14
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
Expired/Cancelled
|
|
|
(540,576
|
)
|
|
$
|
0.13
|
|
|
Vested
|
|
|
(220,728
|
)
|
|
$
|
0.09
|
|
|
Balance at September 30, 2021
|
|
|
83,802
|
|
|
$
|
0.13
|
|
There were no RSUs granted to employees during the nine months ended September 30, 2021. During the nine months ended September 30, 2021, 220,728 RSUs vested with the remainder of outstanding RSUs vesting at various times through February 8, 2022.
During the three and nine months ended September 30, 2021, the Company recorded compensation expense of approximately $30,000 and $99,000, respectively related to RSUs. During the three and nine months ended September 30, 2020, the Company recorded compensation expense of approximately and $82,000 and $154,000, respectively related to RSUs. During the nine months ended September 30, 2021 and 2020, the Company issued 860,729 and 546,016 shares of its Common Stock pursuant to the vesting of RSUs. As part of the RSUs issued during the nine months ended September 30, 2021, were 555,000 shares of Common Stock pursuant to RSUs that vested in 2020 for which shares were not previously issued.
Stock-Based Compensation
Stock-based compensation related to equity options, RSUs and warrants has been classified as follows in the accompanying consolidated statements of income (loss) (in thousands):
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Cost of revenue
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
18
|
|
|
$
|
6
|
|
|
General and administrative
|
|
|
303
|
|
|
|
83
|
|
|
|
511
|
|
|
|
240
|
|
|
Sales and marketing
|
|
|
122
|
|
|
|
19
|
|
|
|
214
|
|
|
|
120
|
|
|
Research and development
|
|
|
121
|
|
|
|
23
|
|
|
|
199
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
557
|
|
|
$
|
127
|
|
|
$
|
942
|
|
|
$
|
449
|
|
NOTE 11. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
|
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
Fair Value at September 30, 2021
|
|
|
($ in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets
|
|
$
|
1,780
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,780
|
|
|
Totals
|
|
$
|
1,780
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,780
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
7,486
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,486
|
|
|
Totals
|
|
$
|
7,486
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,486
|
|
|
|
|
Fair Value at December 31, 2020
|
|
|
($ in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets
|
|
$
|
1,881
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,881
|
|
|
Totals
|
|
$
|
1,881
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,881
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
24,128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,128
|
|
|
Totals
|
|
$
|
24,128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,128
|
|
The Company’s German pension plan is funded by insurance contract policies whereby the insurance company guarantees a fixed minimum return. The Company has determined that the pension assets are appropriately classified within Level 3 of the fair value hierarchy because they are valued using actuarial valuation methodologies which approximate cash surrender value that cannot be corroborated with observable market data. All plan assets are managed in a policyholder pool in Germany by outside investment managers. The investment manager is responsible for the investment strategy of the insurance premiums that Company submits and does not hold individual assets per participating employer. The German Federal Financial Supervisory oversees and supervises the insurance contracts.
As of September 30, 2021, the Company had embedded features contained in the Series D Preferred host instrument that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $7,486,000 and $24,128,000 at September 30, 2021 and December 31, 2020, respectively, and are classified as a current liability in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. The fair value of the Company’s derivative liabilities is classified within Level 3 of the fair value hierarchy because they are valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The Company uses Monte-Carlo simulations in the determination of the fair value of derivative liabilities.
Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events. Significant assumptions used in the fair value methodologies during the nine months ended September 30, 2021 are a risk-free rate of 0.58%, equity volatility of 112.9%, effective life of 3.25 years and a preferred stock dividend rate of 4.0%. These assumptions incorporate management’s estimate of the probability of future financings (Series D Financing) and the timing of potential change of control events. The primary assumptions impacted by Series D Financing were the effective life of 3.25 years and equity volatility.
The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.
The reconciliations of Level 3 pension assets measured at fair value during the three and nine months ended September 30, 2021 and 2020 are presented below:
|
($ in thousands)
|
|
Three months ended
September 30, 2021
|
|
|
Three months ended
September 30, 2020
|
|
|
Nine months ended
September 30, 2021
|
|
|
Nine months ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
|
$
|
1,819
|
|
|
$
|
1,711
|
|
|
$
|
1,881
|
|
|
$
|
1,713
|
|
|
Return on plan assets
|
|
|
21
|
|
|
|
19
|
|
|
|
51
|
|
|
|
49
|
|
|
Company contributions and benefits paid, net
|
|
|
(14
|
)
|
|
|
(28
|
)
|
|
|
(31
|
)
|
|
|
(61
|
)
|
|
Effect of exchange rate changes
|
|
|
(46
|
)
|
|
|
83
|
|
|
|
(121
|
)
|
|
|
84
|
|
|
Fair value at end of period
|
|
$
|
1,780
|
|
|
$
|
1,785
|
|
|
$
|
1,780
|
|
|
$
|
1,785
|
|
The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three and nine months ended September 30, 2021 is presented below:
|
($ in thousands)
|
|
Three months ended
September 30, 2021
|
|
|
Three months ended
September 30, 2020
|
|
|
Nine months ended
September 30, 2021
|
|
|
Nine months ended
September 30, 2020
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
|
$
|
8,925
|
|
|
$
|
535
|
|
|
$
|
24,128
|
|
|
$
|
369
|
|
|
Derivative liability from issuance of Preferred Series C
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Decrease in derivative liability from conversions of Preferred Series C
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Derivative liability from issuance of Preferred Series D
|
|
|
84
|
|
|
|
-
|
|
|
|
500
|
|
|
|
-
|
|
|
Decrease in derivative liability from conversions of Preferred Series D
|
|
|
(181
|
)
|
|
|
-
|
|
|
|
(584
|
)
|
|
|
-
|
|
|
Change in fair value included in earnings
|
|
|
(1,342
|
)
|
|
|
(535
|
)
|
|
|
(16,558
|
)
|
|
|
(369
|
)
|
|
Fair value at end of period
|
|
$
|
7,486
|
|
|
$
|
-
|
|
|
$
|
7,486
|
|
|
$
|
-
|
|
NOTE 12. RELATED PARTY TRANSACTIONS
Professional Services Agreement
During the year ended December 31, 2020, the Company entered into professional services agreement with a firm affiliated with a member of the Company’s Board of Directors at the time the parties entered into the agreement. The Company made no payments pursuant to this agreement during the twelve months ended December 31, 2020 and made payment of approximately $34,000 during nine months ended September 30, 2021. The Company has the right to terminate the agreement on thirty days written notice at any time.
NOTE 13. CONTINGENT LIABILITIES
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024. The Company may terminate the agreement with or without cause. Subject to the conditions and other limitations set forth in the employment agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the employment agreement) by the Company or by the executive:
Under the terms of the agreement, if employment is terminated by the Company without cause or there is a change of control, then the Executive shall be entitled to severance payments equal to the Executive’s annual salary and shall remain enrolled in the Company’s health, dental, and life insurance plans for the lesser of twelve (12) months or the remaining period prior to expiration of the Employment Period plus the Executive shall be entitled to any bonus due as of the effective date of such termination.
Litigation
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
NOTE 14. SUBSEQUENT EVENTS
During the period October 1, 2021 through November 10, 2021, the Company issued an aggregate 41,901 shares of its Common Stock pursuant to RSUs vesting.
Subsequent to September 30, 2021, the Company offered to exchange with its employees, contractors, and Board members approximately 80 million options granted under the 2020 Omnibus Stock Option Plan for an equivalent number of RSUs effective 10/1/2021. The RSUs are scheduled to vest 50% on April 1, 2022 with the remainder vesting ratably over an 18-month period ending October 1, 2023. The Company anticipates a large majority of these individuals to participate in the exchange.
Effective October 1, 2021, three Board members were each granted 1,500,000 RSUs and these are scheduled to vest over the same period described above.