NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND DESCRIPTION OF
BUSINESS
Overview
As
used in this Quarterly 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 the
products are integrated into the IWS Biometric
Engine.
Recent Developments
In
May 2019, the Company completed a registered direct offering of
5,954,545 shares of its Common Stock at a price of $1.10 per share,
resulting in gross proceeds to the Company of approximately $6.55
million. Net proceeds to the Company were approximately $6.125
million after payment of offering expenses. The Company intends to
use the net proceeds received from the sale of the common stock for
general corporate purposes.
The shares of common stock described above were
offered by the Company pursuant to a shelf registration statement
previously filed with the Securities and Exchange Commission
(“
SEC
”) on June 28, 2018 and declared effective
on July 10, 2018.
Liquidity, Going Concern and Management’s Plan
Historically, our principal sources of cash have
included customer payments from the sale of our products, proceeds
from the issuance of common and preferred stock and proceeds from
the issuance of debt. Our principal uses of cash have included cash
used in operations, product development, and payments relating to
purchases of property and equipment. We expect that our principal
uses of cash in the future will be for product development,
including customization of identity management products for
enterprise and consumer applications, further development of
intellectual property, development of Software-as-a-Service
(“
SaaS
”) capabilities for existing products as
well as general working capital and capital expenditure
requirements. Management expects that, as our revenue grows, 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 revenue to achieve and sustain
income from operations.
Going Concern
At
March 31, 2019, we had negative working capital of approximately
$329,000. Our principal sources of liquidity at March 31, 2019
consisted of approximately $2,925,000 of cash and cash
equivalents.
Considering
the common stock financing completed in May 2019, as well as 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
a
mounts
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.
These
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, 2018, 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, 2018, which are included in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2018 that was filed with the SEC on March 28,
2019.
Operating
results for the three months ended March 31, 2019 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2019, or any other future
periods.
Certain prior period amounts have been
reclassified to conform with current period presentation. Pursuant
to the Company’s adoption of Accounting Standards Update
2017-07 -
Compensation –
Retirement Benefits (Topic 715): Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost
(“
ASU
2017-07
”), the Company is
presenting certain elements of periodic pension expense as a
separate line item “Other components of net periodic pension
expense” outside the loss from operations, in the
Company’s condensed Consolidated Statements of Operations.
These
reclassifications have no impact on net
loss.
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, 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 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
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,
deferred tax asset valuation allowances, recoverability of
goodwill, 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 C Preferred
Financing, assumptions used in the application of revenue
recognition policies, assumptions used in the derivation of the
Company’s incremental borrowing rate used in the computation
of the Company’s operating lease liabilities and assumptions
used in the application of fair value methodologies to calculate
the fair value of pension assets and obligations. Actual results
could differ from estimates.
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, “
Inventory
,” below.
Property, Equipment and Leasehold Improvements
Property
and equipment, consisting of furniture and equipment, are stated at
cost and are being depreciated on a straight-line basis over the
estimated useful lives of the assets, which generally range from
three to five years. Maintenance and repairs are charged to expense
as incurred. Major renewals or improvements are capitalized. When
assets are sold or abandoned, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain
or loss is recognized. Expenditures for leasehold improvements are
capitalized. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining
lease term or the estimated useful lives of the
improvements.
Fair Value of Financial Instruments
For
certain of the Company’s financial instruments, including
accounts receivable, accounts payable, accrued expense, and
deferred revenue, the carrying amounts approximate fair value due
to their relatively short maturities.
Lease Liabilities and Operating Lease Right-of-Use
Assets
The
Company is a party to certain contractual arrangements for office
space which meet the definition of leases under Accounting
Standards Codification (“
ASC
”) Topic 842 – Leases
(“
ASC 842
”). In
accordance with ASC 842, the Company has determined that such
arrangements are operating leases and accordingly the Company has,
as of January 1, 2019, recorded operating lease right-of-use assets
and related lease liability for the present value of the lease
payments over the lease terms using the Company’s estimated
weighted-average incremental borrowing rate of approximately 14.5%.
The Company has utilized the practical expedient regarding lease
and nonlease components and has combined such items into a single
combined component. The Company has also utilized the practical
expedient regarding leases of twelve months or less and has
excluded such leases from its computation of lease liability and
related right-of-use assets. The Company has also elected the
optional transition package of practical expedients which
include:
A
package of practical expedient to not reassess:
●
Whether a contract
is or contains a lease
Revenue Recognition
Effective January 1, 2018, we adopted ASC 606,
Revenue from Contracts with Customers (“
ASC 606
”), using the modified retrospective
transition method.
In
accordance with ASC 606, revenue is recognized when control of the
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services.
The
core principle of the standard is that we should recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which we expect to
be entitled in exchange for those goods or services. To achieve
that core principle, we apply the following five step
model:
1.
Identify
the contract with the customer;
2.
Identify
the performance obligation in the contract;
3.
Determine
the transaction price;
4.
Allocate
the transaction price to the performance obligations in the
contract; and
5.
Recognize
revenue when (or as) each performance obligation is
satisfied.
At
contract inception, we assess the goods and services promised in a
contract with a customer and identify as a performance obligation
each promise to transfer to the customer either: (i) a good or
service (or a bundle of goods or services) that is distinct, or
(ii) a series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the
customer. We recognize revenue only when we satisfy a performance
obligation by transferring a promised good or service to a
customer.
Determining
the timing of the satisfaction of performance obligations as well
as the transaction price and the amounts allocated to performance
obligations requires judgement.
We
disclose disaggregation of our customer revenue by classes of
similar products and services as follows:
●
Software
licensing and royalties;
●
Sales
of computer hardware and identification media;
●
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.
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
adoption of ASC 606 as of January 1, 2018 resulted in a cumulative
positive adjustment to beginning accumulated deficit and accounts
receivable of approximately $96,000. The following table sets forth
our disaggregated revenue for the three months ended March 31, 2019
and 2018:
|
Three
Months Ended
March
31,
|
Net
Revenue
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Software and
royalties
|
$
111
|
$
84
|
Hardware and
consumables
|
11
|
1
|
Services
|
156
|
12
|
Maintenance
|
653
|
619
|
Total
revenue
|
$
931
|
$
716
|
Customer Concentration
For the
three months ended March 31, 2019, two customers accounted for
approximately 46% or $424,000 of our total revenue and had trade
receivables at March 31, 2019 of $651,000.
For
the three months ended March 31, 2018, two customers accounted
for approximately 38% or $275,000 of our total revenue and had
trade receivables at March 31, 2018 of $74,000.
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 ASU No.
2016-13
. In June 2016, the FASB
issued Accounting Standard Update No. 2016-13,
Financial
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. 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 adoption of this
standard did not have a material effect on the Company’s
condensed consolidated financial statements.
FASB ASU No. 2018-07.
In June 2018, the FASB issued
ASU 2018-07, “
Shared-Based Payment Arrangements with
Nonemployees
”
(Topic
505)
, which simplifies the accounting for share-based
payments granted to nonemployees for goods and services. Under the
ASU, most of the guidance on such payments to nonemployees will be
aligned with the requirements for share-based payments granted to
employees. Under the ASU 2018-07, the measurement of
equity-classified nonemployee share-based payments will be fixed on
the grant date, as defined in ASC 718, and will use the term
nonemployee vesting period, rather than requisite service period.
The amendments in this update are effective for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early adoption is permitted if financial
statements have not yet been issued. The adoption of this standard
did not have a material effect on the Company’s condensed
consolidated financial statements.
FASB ASU No.
2018-13
. In August 2018, the
FASB issued ASU 2018-13,
“Fair Value Measurement
(Topic 820) —Disclosure Framework —Changes to the
Disclosure Requirements for Fair Value
Measurement”
(“
ASU 2018-13
”). The amendments in this update improve
the effectiveness of fair value measurement disclosures. ASU
2018-13 is effective for fiscal years ending after December 15,
2019. Early adoption is permitted. The adoption of this standard
should be applied to all periods presented. The adoption of this
standard will not have a material impact on the Company’s
consolidated financial statements.
FASB ASU No.
2018-14
. In August 2018, the
FASB issued ASU 2018-14,
“Compensation
—Retirement Benefits —Defined Benefit Plans
—General (Subtopic 715-20) —Disclosure Framework
—Changes to the Disclosure Requirements for Defined Benefit
Plans”
(“
ASU 2018-14
”). The amendments in this update remove
defined benefit plan disclosures that are no longer considered
cost-beneficial, clarify the specific requirements of disclosures,
and add disclosure requirements identified as relevant. ASU 2018-14
is effective for fiscal years ending after December 15, 2020. Early
adoption is permitted. The adoption of this standard should be
applied to all periods presented. The adoption of this standard
will not have a material impact on the Company’s consolidated
financial statements.
FASB ASU No.
2018-15
. In August 2018, the
FASB issued ASU 2018-15,
“Intangibles
—Goodwill and Other —Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service
Contract”
(“
ASU 2018-15
”). The amendments in this update align the
requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software (and hosting arrangements
that include an internal-use software license). ASU 2018-15 is
effective for fiscal years ending after December 15, 2019. Early
adoption is permitted. The adoption of this standard is not
expected to have a material impact on the Company’s
consolidated financial statements.
NOTE 3. NET LOSS PER COMMON SHARE
Basic
loss per common share is calculated by dividing net loss available
to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted loss
per common share is calculated by dividing net loss available to
common shareholders for the period by the weighted-average number
of common shares outstanding during the period, adjusted to
include, if dilutive, potential dilutive shares consisting of
convertible preferred stock, convertible related party lines of
credit, stock options and warrants, calculated using the treasury
stock and if-converted methods. For diluted loss per share
calculation purposes, the net loss available to common shareholders
is adjusted to add back any preferred stock dividends and any
interest on convertible debt reflected in the condensed
consolidated statement of operations for the respective
periods.
The
table below presents the computation of basic and diluted loss per
share:
(Amounts
in thousands except share and per share amounts)
|
Three Months Ended
March
31,
|
|
|
|
Numerator for basic
and diluted loss per share:
|
|
|
Net
loss
|
$
(3,612
)
|
$
(3,583
)
|
Preferred dividends
and preferred stock discount accretion
|
(1,294
)
|
(769
)
|
Net loss available
to common shareholders
|
$
(4,906
)
|
$
(4,352
)
|
|
|
|
Denominator for
basic and dilutive loss per share — weighted-average shares
outstanding
|
98,398,239
|
94,333,663
|
Net
loss
|
$
(0.04
)
|
$
(0.04
)
|
Preferred dividends
and preferred stock discount accretion
|
(0.01
)
|
(0.01
)
|
Basic and diluted
loss per share available to common shareholders
|
$
(0.05
)
|
$
(0.05
)
|
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
|
Three Months Ended
March
31,
|
|
|
|
|
|
|
Related party lines
of credit
|
—
|
5,325,651
|
Convertible
redeemable preferred stock
|
42,626,980
|
26,630,458
|
Stock
options
|
7,225,421
|
7,273,431
|
Warrants
|
1,813,856
|
230,000
|
Total potential
dilutive securities
|
51,666,257
|
39,459,540
|
NOTE 4. SELECT BALANCE SHEET DETAILS
Inventory
Inventories of $105,000 as of March 31, 2019 were comprised of work
in process of $94,000 representing direct labor costs on in-process
projects and finished goods of $11,000 net of reserves for obsolete
and slow-moving items of $3,000.
Inventories of $29,000 as of December 31, 2018 were comprised of
work in process of $21,000 representing direct labor costs on
in-process projects and finished goods of $8,000 net of reserves
for obsolete and slow-moving items of $3,000.
Intangible Assets
The
carrying amounts of the Company’s patent intangible assets
were $79,000 and $82,000 as of March 31, 2019 and December 31,
2018, respectively, which includes accumulated amortization of
$580,000 and $577,000 as of March 31, 2019 and December 31, 2018,
respectively. Amortization expense for patent intangible
assets was $3,000 for the three months ended March 31, 2019 and
2018. Patent intangible assets are being amortized on a
straight-line basis over their remaining life of approximately 7.25
years. There was no impairment of the Company’s intangible
assets during the three months ended March 31, 2019 and
2018.
The
estimated acquired intangible amortization expense for the next
five fiscal years is as follows:
Fiscal
Year Ended December 31,
|
Estimated
Amortization
Expense
($ in thousands)
|
2019 (nine
months)
|
$
9
|
2020
|
12
|
2021
|
12
|
2022
|
12
|
2023
|
12
|
Thereafter
|
22
|
Totals
|
$
79
|
Goodwill
The Company annually, or more frequently if events or circumstances
indicate a need, tests the carrying amount
of goodwill for impairment. The Company performs its
annual impairment test in the fourth quarter of each year. In
December 2018, the Company adopted the provisions of ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.” The
provisions of ASU 2017-04 eliminate the requirement to calculate
the implied fair value of goodwill to measure
a goodwill impairment charge. Instead, entities will record an
impairment charge based on the excess of a reporting unit’s
carrying amount over its fair value. Entities that have reporting
units with zero or negative carrying amounts, will no longer be
required to perform a qualitative assessment assuming they pass the
simplified impairment test. The Company continues to have only
one reporting unit, Identity Management which, at March 31, 2019,
had a negative carrying amount of approximately $6,574,000. Based
on the results of the Company’s impairment testing, the
Company determined that its goodwill was not impaired
during the three months ended March 31, 2019 and December 31,
2018.
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, 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%. Such assets and liabilities aggregated
approximately $2,265,000 and $2,280,000 as of January 1, 2019,
respectively. The Company determined that it had no arrangements
representing finance leases.
The
Company’s operating leasing arrangements are summarized
below:
●
The
Company’s corporate headquarters is located in San Diego,
California, where it occupies 8,511 square feet of office space at
an average cost of approximately $28,000 per month. This
facility’s lease was entered into by the Company in July
2018. This new lease commenced on November 1, 2018 and terminates
on April 30, 2025.
●
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;
●
9,720
square feet in Portland, Oregon, at a cost of approximately $23,000
per month until the expiration of the lease on February 28, 2023;
and
●
183
square feet of office space in Mexico City, Mexico, at a cost of
approximately $2,000 per month until September 30,
2019.
The
above leases contain no residual value guarantees provided by the
Company and there are no options to either extend or terminate the
leases. The Company is not a party to any subleasing
arrangements.
For the
three months ended March 31, 2019 the Company recorded
approximately $154,000 in lease expense using the straight-line
method. Lease expense is comprised of the total lease payments
under the lease plus any initial direct costs incurred less any
lease incentives received by the lessor amortized ratably using the
straight-line method over the lease term. The weighted-average
remaining lease term of the Company’s operating leases as of
March 31, 2019 is 5.16 years. Cash payments under operating leases
aggregated approximately $117,000 for the three months ended March
31, 2019 and are included in operating cash flows.
The
Company’s lease liability was computed using the present
value of future lease payments. The Company has utilized the
practical expedient regarding lease and non-lease components and
combined such components into a single combined component in the
determination of the lease liability. The Company has excluded the
lease of its office space in Mexico City, Mexico in the
determination of the lease liability as of January 1, 2019 as its
term is less than 12 months.
At
March 31, 2019, future minimum undiscounted lease payments are as
follows:
($ in
thousands)
|
|
2019
(9 months)
|
$
376
|
2020
|
649
|
2021
|
642
|
2022
|
652
|
2023
|
425
|
Thereafter
|
519
|
Total
|
3,263
|
Short-term
leases not included in lease liability
|
(12
)
|
Present
Value effect on future minimum undiscounted lease payments at March
31, 2019
|
(1,034
)
|
Lease
liability at March 31, 2019
|
$
2,217
|
NOTE 6. MEZZANINE EQUITY
Series C Convertible Redeemable Preferred Stock
On September 10, 2018, the Company filed the
Certificate of Designations, Preferences, and Rights of Series C
Convertible Redeemable Preferred stock (the
“
Series C
COD
”) with the Secretary
of State for the State of Delaware – Division of
Corporations, designating 1,000 shares of the Company’s
preferred stock, par value $0.01 per share, as Series C Preferred,
each share with a stated value of $10,000 per share (the
“
Stated
Value
”). Shares of Series
C Preferred
accrue dividends
cumulatively and are payable quarterly at a rate of 8% per annum if
paid in cash, or 10% per annum if paid by the issuance of shares of
Common Stock. Each share of Series C Preferred has a liquidation
preference
equal to the
greater of (i) the Stated Value plus all accrued and unpaid
dividends, and (ii) such amount per share as would have been
payable had each share been converted into common stock immediately
prior to the occurrence of a Liquidation Event or Deemed
Liquidation Event. Each share of Series C Preferred is convertible
into that number of shares of the Company’s common stock
(“
Conversion
Shares
”) equal to the
Stated Value, divided by $1.00, which conversion rate is subject to
adjustment in accordance with the terms of the Series C COD.
Holders of Series C Preferred may elect to convert shares of Series
C Preferred into Conversion Shares at any time. Holders of the
Series C Preferred may also require the Company to redeem all or
any portion of such holder’s shares of Series C Preferred at
any time from and after the third anniversary of the issuance date
or in the event of the consummation of a Change of Control (as such
term is defined in the Series C COD). Subject to the terms and
conditions set forth in the Series C COD, in the event the
volume-weighted average price of the Company’s common stock
is at least $3.00 per share (subject to adjustment in accordance
with the terms of the Series C COD) for at least 20 consecutive
trading days, the Company may convert all, but not less than all,
issued and outstanding shares of Series C Preferred into Conversion
Shares. In addition, in the event of a Change of Control, the
Company will have the option to redeem all, but not less than all,
issued and outstanding shares of Series C Preferred for 115% of the
Liquidation Preference Amount per share. Holders of Series C
Preferred will have the right to vote, on an as-converted basis,
with the holders of the Company’s common stock on any matter
presented to the Company’s stockholders for their action or
consideration. Shares of Series C Preferred rank senior to the
Company’s common stock and Series A Preferred, and junior to
the Company’s Series B Preferred.
On September 10, 2018, the Company offered and
sold a total of 890 shares of Series C Preferred at a purchase
price of $10,000 per share, and on September 21, 2018, the Company
offered and sold an additional 110 shares of Series C Preferred at
a purchase price of $10,000 per share (the
“
Series C
Financing
”). The total
gross proceeds to the Company from the Series C Financing were
$10,000,000. Issuance costs incurred in conjunction with the Series
C Financing were approximately $1,211,000. Such costs have been
recorded as a discount on the Series C Preferred stock and will be
accreted to the point of earliest redemption which is the third
anniversary of the Series C Financing or September 10, 2021 using
the effective interest rate method. The accretion of these costs is
recorded as a deemed dividend.
The Company had 1,000 shares of Series C Preferred
outstanding as of March 31, 2019 and December 31, 2018.
The Company
issued the holders of Series C Preferred
157,945
shares of
common stock on March 31, 2019, as payment of dividends due on that
date.
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 C Preferred and determined that the
provisions of the Series C Preferred grant the holders of the
Series C Preferred a redemption right whereby the holders of the
Series C Preferred may, at any time after the third anniversary of
the Series C Preferred issuance, require the Company to redeem in
cash any or all of the holder’s outstanding Series C
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 C 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 C 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 C 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 C Preferred Stock instrument was a
hybrid instrument that contains 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 is 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 C
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.
Accordingly, 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 have been recorded as a discount to the Series C Preferred.
Such amount will be accreted
to the
point of earliest redemption which is the third anniversary of the
Series C Financing or September 10, 2021 using the effective
interest rate method. The accretion of these features is recorded
as a deemed dividend.
For the
three months ended March 31, 2019, the Company recorded the
accretion of debt issuance costs and derivative liabilities
aggregating approximately $186,000 using the effective interest
rate method. There was no Series C Preferred outstanding at any
time during the three months ended March 31,
2018.
The
Company reflected the following in Mezzanine Equity for the Series
C Preferred Stock as of December 31, 2018 and March 31,
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in
thousands, except share amounts)
|
|
|
|
|
|
|
|
Total Series C
Preferred Stock as of December 31, 2018
|
1,000
|
$
8,156
|
$
8,156
|
|
|
|
|
Accretion of
discount – deemed dividend
|
|
186
|
186
|
|
|
|
|
Total Series C
Preferred Stock as of March 31, 2019
|
1,000
|
$
8,342
|
$
8,342
|
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 C Preferred host contract 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 C
Preferred host instrument required bifurcation. The Company valued
the bifurcatable features at fair value. Such liabilities
aggregated approximately $833,000 at inception and are classified
as current liabilities on the Company’s condensed
consolidated balance sheet under the caption “Derivative
liabilities.” The Company revalued these features at each
balance sheet date and has recorded any change in fair value in the
determination of period net income or loss. 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 months ended March 31,
2019, the Company recorded an increase to these derivative
liabilities using fair value methodologies of approximately
$424,000. See Note 9 to these condensed consolidated financial
statements for a reconciliation of amounts recorded at March 31,
2019.
NOTE 8. EQUITY
The
Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated
“Common Stock” and “Preferred Stock.” The
Preferred Stock may be divided into such number of series and with
the rights, preferences, privileges and restrictions as the Board
of Directors may determine.
Series A Convertible Preferred Stock
The Company had 37,467 shares of Series A
Preferred outstanding as of March 31, 2019 and December 31,
2018. At March 31, 2019 and December 31, 2018, the Company had
cumulative undeclared dividends of $0.
The Company issued the
holders of Series A Preferred
591,803
shares of common stock
on March 31, 2019 as payment of dividends due on that
date.
Series B Convertible Preferred Stock
The Company had 239,400 shares of Series B
Preferred stock, par value $0.01 per share
(“
Series B
Preferred
”), outstanding
as of March 31, 2019 and December 31, 2018. At March 31, 2019 and
December 31, 2018, the Company had cumulative undeclared dividends
of approximately $21,000 and $8,000, respectively. There were no
conversions of Series B Preferred into common stock during the
three months ended March 31, 2019 and 2018.
Warrants
The
following table summarizes warrant activity for the following
periods:
|
|
Weighted-
Average
Exercise
Price
|
Balance at December
31, 2018
|
1,813,856
|
$
0.19
|
Granted
|
—
|
—
|
Expired/Canceled
|
—
|
—
|
Exercised
|
—
|
—
|
Balance at March
31, 2019
|
1,813,856
|
$
0.19
|
As
of March 31, 2019, warrants to purchase 1,813,856 shares of common
stock at exercise prices ranging from $0.01 to $1.46 were
outstanding. All warrants are exercisable as of March 31, 2019
except for an aggregate of 1,643,856 warrants, which become
exercisable only upon the attainment of specified events, and
20,000 warrants that become exercisable on June 7, 2019. Such
warrants expire at various dates through September 2028. The
intrinsic value of warrants outstanding at March 31, 2019 was
approximately $141,000. The Company has excluded from this
computation any intrinsic value of the 1,493,856 warrants issued to
the Series A Preferred stockholders due to such warrants becoming
exercisable only upon conversion of Series A Preferred into shares
of Common Stock.
Stock-Based Compensation
The Company’s 1999 Stock Award 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. Subsequently,
in February 2018, the Company amended and restated the 1999 Plan,
whereby it increased the share reserve for issuance by an
additional 2.0 million shares. The 1999 Plan prohibits the
grant of stock option or stock appreciation right awards with an
exercise price less than fair market value of the Company’s
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. The number of authorized shares available for issuance under
the plan at March 31, 2019 was 445,670.
The Company estimates the fair value of its stock
options using a Black-Scholes option-valuation model, consistent
with the provisions of ASC No. 718
, Compensation – Stock
Compensation
. The fair value of
stock options granted is recognized to expense over the requisite
service period. Stock-based compensation expense is reported in
general and administrative, sales and marketing, engineering and
customer service expense based upon the departments to which
substantially all of the associated employees report and credited
to additional paid-in capital. Stock-based compensation expense
related to equity options was approximately $166,000 and $273,000
for the three months ended March 31, 2019 and 2018, respectively.
Stock-based compensation expense related to options to purchase
shares of the Company’s common stock issued to certain
members of the Company’s Board of Directors in return for
their service (disclosed more fully below) was approximately $0 and
$62,000 for the three months ended March 31, 2019 and 2018,
respectively.
ASC No. 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-valuation 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-valuation 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 the three months ended March 31, 2019 and 2018
ranged from 57% to 84%. The Company has elected to estimate the
expected life of an award based upon the SEC approved
“simplified method” noted under the provisions of Staff
Accounting Bulletin Topic 14. The expected term used by the Company
during the three months ended March 31, 2019 and 2018 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.
The interest rate used
in the Company’s Black-Scholes calculations for the three
months ended March 31, 2019 and 2018 was
2.6
%. Dividend yield is
zero, as the Company does not expect to declare any dividends on
the Company’s common stock in the foreseeable
future.
In
addition to the key assumptions used in the Black-Scholes model,
the estimated forfeiture rate at the time of valuation is a
critical assumption. The Company has estimated an 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.
A
summary of the activity under the Company’s stock option
plans is as follows:
|
|
Weighted-Average
Exercise
Price
|
Balance at December
31, 2018
|
7,227,248
|
$
1.34
|
Granted
|
345,000
|
$
0.92
|
Expired/Cancelled
|
(59,993
)
|
$
1.44
|
Exercised
|
(286,834
)
|
$
0.37
|
Balance at March
31, 2019
|
7,225,421
|
$
1.36
|
The intrinsic value of options exercisable at
March 31, 2019 was approximately $1,483,000. The aggregate
intrinsic value for all options outstanding as of March 31, 2019
was approximately $1,739,000.
The weighted-average grant-date per share fair
value of options granted during the three months ended March 31,
2019 was $0.47. The weighted-average grant-date per share fair
value of options granted during the three months ended March 31,
2018 was $0.99.
At March 31,
2019, the total remaining unrecognized compensation cost related to
unvested stock options amounted to approximately $980,000, which
will be recognized over a weighted-average period of 2.0
years.
Stock-based
compensation related to equity options, including options granted
to certain members of the Company’s Board of Directors, has
been classified as follows in the accompanying condensed
consolidated statements of operations (in thousands):
|
Three Months Ended
March 31,
|
|
|
|
Cost
of revenue
|
$
3
|
$
5
|
General
and administrative
|
93
|
216
|
Sales
and marketing
|
39
|
60
|
Research
and development
|
31
|
54
|
Total
|
$
166
|
$
335
|
NOTE 9. FAIR VALUE ACCOUNTING
The Company accounts for fair value measurements
in accordance with ASC 820, “
Fair Value Measurements and
Disclosures
,” which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
Level
2
|
Applies
to assets or liabilities for which there are inputs other than
quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
|
Level
3
|
Prices
or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
following table sets forth the Company’s financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
|
Fair Value at March 31, 2019
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$
1,699
|
$
—
|
$
—
|
$
1,699
|
Totals
|
$
1,699
|
$
—
|
$
—
|
$
1,699
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$
1,489
|
$
—
|
$
—
|
$
1,489
|
Totals
|
$
1,489
|
$
—
|
$
—
|
$
1,489
|
|
Fair Value at December 31, 2018
|
($ in thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
Pension
assets
|
$
1,733
|
$
—
|
$
—
|
$
1,733
|
Totals
|
$
1,733
|
$
—
|
$
—
|
$
1,733
|
Liabilities:
|
|
|
|
|
Derivative
liabilities
|
$
1,065
|
$
—
|
$
—
|
$
1,065
|
Totals
|
$
1,065
|
$
—
|
$
—
|
$
1,065
|
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 more
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.
The Series C Preferred host instrument (issued in
September 2018) had embedded features contained in the host
instrument that qualified for derivative liability
treatment. The recorded fair market value of these
features at March 31, 2019 and December 31, 2018 was approximately
$1,489,000 and $1,065,000, respectively which is reflected as a
current liability in the condensed consolidated balance sheets as
of March 31, 2019 and December 31, 2018. The fair value of the
Company’s derivative liabilities is classified
within Level 3 of the fair value hierarchy because they are valued
using pricing models that incorporate management assumptions that
cannot be corroborated with observable market data. The
Company uses the lattice framework, Monte-Carlo simulations and
other fair value methodologies in the determination of the fair
value of
derivative liabilities.
Some
of the aforementioned fair value methodologies are affected by the
Company’s stock price as well as assumptions regarding the
expected stock price volatility over the term of the
derivative liabilities in addition to the probability of
future events.
The
Company monitors the activity within each level and any changes
with the underlying valuation techniques or inputs utilized to
recognize if any transfers between levels are
necessary. That determination is made, in part, by
working with outside valuation experts for Level 3 instruments and
monitoring market related data and other valuation inputs for Level
1 and Level 2 instruments.
A
reconciliation of the Company’s pension assets measured at
fair value on a recurring basis using significant unobservable
inputs (Level 3) is as follows for the three months ended March 31,
2019:
($
in thousands)
|
|
|
|
Balance at
December 31, 2018
|
$
1,733
|
Return on plan
assets
|
15
|
Company
contributions and benefits paid, net
|
(11
)
|
Effect of rate
changes
|
(38
)
|
Balance at March
31, 2019
|
$
1,699
|
A
reconciliation of the Company’s pension assets measured at
fair value on a recurring basis using significant unobservable
inputs (Level 3) is as follows for the three months ended March 31,
2018:
($
in thousands)
|
|
|
|
Balance at
December 31, 2017
|
$
1,806
|
Return on plan
assets
|
11
|
Company
contributions and benefits paid, net
|
(21
)
|
Effect of rate
changes
|
56
|
Balance at March
31, 2018
|
$
1,852
|
A
reconciliation of the Company’s liabilities measured at fair
value on a recurring basis using significant unobservable inputs
(Level 3) is as follows for the three months ended March 31,
2019:
($
in thousands)
|
|
|
|
Balance at
December 31, 2018
|
$
1,065
|
Change in fair
value included in earnings
|
424
|
Balance at March
31, 2019
|
$
1,489
|
There
were no derivative liabilities at either December 31, 2017 nor at
any time during the three months ended March 31, 2018. The Company
is not a party to any hedge arrangements, commodity swap agreement
or any other derivative financial instruments.
NOTE 10. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018, the
Company entered into a professional services agreement with a firm
whose managing director is also a member of the Company’s
Board of Directors. During the three months ended March 31, 2019,
the Company recorded and paid the remaining one-half of the
aggregate fee of $50,000 related to this professional services
agreement.
During the three months ended March 31,
2018, the Company had Convertible Lines of Credit outstanding with
two members of the Company’s Board of Directors. At March 31,
2018, aggregate borrowing under the Lines of Credit were
approximately $5,821,000 net of discount. Such Lines of Credit and
all accrued unpaid interest were converted into shares of the
Company’s Series A Preferred in September 2018, at which
times the Lines of Credit were deemed satisfied in full and
terminated.
NOTE 11. CONTINGENT LIABILITIES
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.
Effective
September 15, 2017, 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, and on January 30,
2019, both agreements were amended again to further extend the term
of each executive officer’s employment until December 31,
2019.
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 12. SUBSEQUENT EVENTS
In
May 2019, the Company completed a registered direct offering of
5,954,545 shares of its common stock at a price of $1.10 per share,
resulting in gross proceeds to the Company of approximately $6.55
million. Net proceeds to the Company were approximately $6.125
million after payment of offering expenses. The Company intends to
use the net proceeds received from the sale of the common stock for
general corporate purposes.
The
shares of common stock described above were offered by the Company
pursuant to a shelf registration statement previously filed with
the SEC on June 28, 2018 and declared effective on July 10,
2018.
In May
2019, the Company issued 4,500 shares of its common stock pursuant
to the exercise of stock options, resulting in proceeds to the
Company of approximately $3,000.