Quarterly Report (10-q)

Date : 08/14/2019 @ 9:13PM
Source : Edgar (US Regulatory)
Stock : Imageware Systems, Inc. (QB) (IWSY)
Quote : 0.4  -0.02 (-4.76%) @ 9:30PM

Quarterly Report (10-q)

 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
[X]
QUARTERLY   REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from _________ to _________
 
Commission file number 001-15757
 
IMAGEWARE SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
33-0224167
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation or Organization)
 
Identification No.)
 
13500 Evening Creek Drive N., Suite 550
San Diego, CA 92127
(Address of Principal Executive Offices)
 
(858) 673-8600
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No [   ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [X]    No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
[   ]
Accelerated filer
[X]
Non-accelerated filer
[   ]
Smaller reporting company
[X]
 
 
Emerging growth company
[   ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-12 of the Exchange Act).  Yes [   ]    No [X]
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
IWSY
OTCQB Marketplace
 
The number of shares of common stock, par value $0.01 per share, outstanding on August 7, 2019 was 106,545,685 .
 
 
 
 

 
 
 
IMAG E WARE S YSTEMS, INC.
 
INDEX
 
 
 
Page
 
 
 
 
 
 
1
 
 
1
 
 
2
 
 
3
 
 
4
 
 
6
 
 
7
 
22
 
34
 
34
 
 
 
 
 
 
 
 
 
 
35
 
35
 
35
 
35
 
35
 
35
 
35
 
 
 
 
36
 
 
 
 
 
 
P A R T I
ITEM 1.  FINANCIAL STATEMENTS
 
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except for share and per share data)
 
 
 
June 30,
2019
 
 
December 31,
2018
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
  $ 6,734  
  $ 5,694  
Accounts receivable, net of allowance for doubtful accounts of $7 at June 30, 2019 and $0 at December 31, 2018.
    376  
    968  
Inventory, net
    319  
    29  
Other current assets
    271  
    233  
Total Current Assets
    7,700  
    6,924  
 
       
       
Property and equipment, net
    222  
    244  
Other assets
    286  
    332  
Operating lease right-of-use assets
    2,060  
     
Intangible assets, net of accumulated amortization
    76  
    82  
Goodwill
    3,416  
    3,416  
Total Assets
  $ 13,760  
  $ 10,998  
 
       
       
LIABILITIES AND SHAREHOLDERS’ DEFICIT
       
       
 
       
       
Current Liabilities:
       
       
Accounts payable
  $ 552  
  $ 678  
Deferred revenue
    1,073  
    1,215  
Accrued expense
    1,346  
    888  
Operating lease liabilities, current portion
    239  
     
Derivative liabilities
    1,008  
    1,065  
Total Current Liabilities
    4,218  
    3,846  
 
       
       
Other long-term liabilities
    118  
    147  
Lease liabilities, net of current portion
    1,942  
     
Pension obligation
    1,928  
    1,876  
Total Liabilities
    8,206  
    5,869  
 
       
       
Mezzanine Equity:
       
       
Series C Convertible Redeemable Preferred Stock, $0.01 par value, designated 1,000 shares, 1,000 shares issued and outstanding at June 30, 2019 and December 31, 2018; liquidation preference $10,000 at June 30, 2019 and December 31, 2018.
    8,526  
    8,156  
 
       
       
Shareholders’ Equity (Deficit):
       
       
Preferred stock, authorized 4,000,000 shares:
       
       
Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and outstanding at June 30, 2019 (unaudited) and December 31, 2018, respectively; liquidation preference $37,467 at June 30, 2019 (unaudited) and December 31, 2018, respectively.
     
     
Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 outstanding at June 30, 2019 (unaudited) and December 31, 2018, respectively; liquidation preference $607 at June 30, 2019 (unaudited) and December 31, 2018, respectively.
    2  
    2  
Common Stock, $0.01 par value, 175,000,000 shares authorized; 106,552,389 and 98,230,336 shares issued at June 30, 2019 (unaudited) and December 31, 2018, respectively, and 106,545,685 and 98,223,632 shares outstanding at June 30, 2019  (unaudited) and December 31, 2018, respectively.
    1,065  
    981  
Additional paid-in capital
    192,565  
    184,130  
Treasury stock, at cost 6,704 shares
    (64 )
    (64 )
Accumulated other comprehensive loss
    (1,433 )
    (1,428 )
Accumulated deficit
    (195,107 )
    (186,648 )
Total Shareholders’ Deficit
    (2,972 )
    (3,027 )
Total Liabilities, Mezzanine Equity and Shareholders’ Deficit
  $ 13,760  
  $ 10,998  
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
IMA G EWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except share and per share amounts)
(Unaudited)
 
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Product
  $ 160  
  $ 1,182  
  $ 438  
  $ 1,279  
Maintenance
    652  
    703  
    1,305  
    1,322  
 
    812  
    1,885  
    1,743  
    2,601  
Cost of revenue:
       
       
       
       
Product
    34  
    139  
    117  
    165  
Maintenance
    106  
    167  
    226  
    390  
Gross profit
    672  
    1,579  
    1,400  
    2,046  
 
       
       
       
       
Operating expense:
       
       
       
       
General and administrative
    894  
    970  
    2,001  
    2,141  
Sales and marketing
    934  
    816  
    1,939  
    1,680  
Research and development
    1,840  
    1,865  
    3,614  
    3,664  
Depreciation and amortization
    17  
    11  
    36  
    24  
 
    3,685  
    3,662  
    7,590  
    7,509  
Loss from operations
    (3,013 )
    (2,083 )
    (6,190 )
    (5,463 )
 
       
       
       
       
Interest expense (income), net
    (31 )
    184  
    (53 )
    356  
Other expense
    1  
     
    1  
     
Change in fair value of derivative liabilities
    (481 )
     
    (57 )
     
Other components of net periodic pension expense
    45
    17  
    78  
    49  
Loss before income taxes
    (2,547 )
    (2,284 )
    (6,159 )
    (5,868 )
Income tax expense
    1  
     
    1  
    1  
Net loss
    (2,548 )
    (2,284 )
    (6,160 )
    (5,869 )
Preferred dividends and preferred stock discount accretion
    (1,374 )
    (720 )
    (2,668 )
    (1,489 )
Net loss available to common shareholders
  $ (3,922 )
  $ (3,004 )
  $ (8,828 )
  $ (7,358 )
 
       
       
       
       
 
       
       
       
       
Basic and diluted loss per common share - see Note 3:
       
       
       
       
Net loss
  $ (0.03 )
  $ (0.02 )
  $ (0.06 )
  $ (0.06 )
Preferred dividends and preferred stock discount accretion
    (0.01 )
    (0.01 )
    (0.03 )
    (0.02 )
Basic and diluted loss per share available to common shareholders
  $ (0.04 )
  $ (0.03 )
  $ (0.09 )
  $ (0.08 )
Basic and diluted weighted-average shares outstanding
    103,431,623  
    95,161,570  
    100,928,835  
    94,749,904  
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
  
 
 
  IM A GEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
(Unaudited)
  
 
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Net loss
  $ (2,548 )
  $ (2,284 )
  $ (6,160 )
  $ (5,869 )
Other comprehensive income (loss): 
       
       
       
       
Foreign currency translation adjustment
    (20 )
    43  
    (5 )
    15  
Comprehensive loss
  $ (2,568 )
  $ (2,241 )
  $ (6,615 )
  $ (5,854 )
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
IMAG E WARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(In Thousands, except share amounts)
(Unaudited)
 
Three and Six Months Ended June 30, 2019
 
 
Series A
Series B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible,
Convertible,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Accumulated
 
 
 
 
 
 
 
 
Redeemable
Redeemable
 
 
 
 
 
 
 
 
 
 
 
 
 
 Additional
 
 
 Other
 
 
 
 
 
 
 
 
Preferred
Preferred
 
 Common Stock
 
 
 Treasury Stock
 
 
 Paid-In
 
 
 Comprehensive
 
 
 Accumulated
 
 
 
 
 
 
Shares
 
 
 Amount
 
 
Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
 Loss
 
 
 Deficit
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
    37,467  
  $ -  
    239,400  
  $ 2  
    98,230,336  
  $ 981  
    (6,704 )
  $ (64 )
  $ 184,130  
  $ (1,428 )
  $ (186,648 )
  $ (3,027 )
 
       
       
       
       
       
       
       
       
       
       
       
       
Accretion of Series A Preferred Stock discount
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (186 )
    -  
    -  
    (186 )
Issuance of Common Stock pursuant to option exercises
    -  
    -  
    -  
    -  
    286,834  
    3  
    -  
    -  
    103  
    -  
    -  
    106  
Stock-based compensation expense
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    166  
    -  
    -  
    166  
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    15  
    -  
    15  
Dividends on preferred stock
    -  
    -  
    -  
    -  
    749,748  
    8  
    -  
    -  
    1,087  
    -  
    (1,095 )
    -  
Net loss
    -  
    -  
    -  
    -  
  -
    -  
    -  
    -  
    -  
    -  
    (3,612 )
    (3,612 )
Balance at March 31, 2019
    37,467  
  $ -  
    239,400  
  $ 2  
    99,266,918  
  $ 992  
    (6,704 )
  $ (64 )
  $ 185,300  
  $ (1,413 )
  $ (191,355 )
  $ (6,538 )
 
       
       
       
       
       
       
       
       
       
       
       
       
Accretion of Series A Preferred Stock discount
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (184 )
    -  
    -  
    (184 )
Issuance of Common Stock net of financing costs
    -  
    -  
    -  
    -  
    5,954,545  
    60  
    -  
    -  
    6,035  
    -  
    -  
    6,095  
Issuance of Common Stock pursuant to option exercises
    -  
    -  
    -  
    -  
    64,500  
    1  
    -  
    -  
    59  
    -  
    -  
    60  
Stock-based compensation expense
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    181  
    -  
    -  
    181  
Issuance of Common Stock warrants as compensation
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    8  
    -  
    -  
    8  
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (20 )
    -  
    (20 )
Dividends on preferred stock
    -  
    -  
    -  
    -  
    1,266,426  
    12  
    -  
    -  
    1,166  
    -  
    (1,204 )
    (26 )
Net loss
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (2,548 )
    (2,548 )
Balance at June 30, 2019
    37,467  
  $ -  
    239,400  
  $ 2  
    106,552,389  
  $ 1,065  
    (6,704 )
  $ (64 )
  $ 192,565  
  $ (1,433 )
  $ (195,107 )
  $ (2,972 )
 
 

 
 
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Thousands, except share amounts)
(Unaudited)
 
Three and Six Months Ended June 30, 2018
 
 
Series A        
Series B        
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible,        
Convertible,        
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Accumulated
 
 
 
 
 
 
 
 
Redeemable        
Redeemable        
 
 
 
 
 
 
 
 
 
 
 
 
 
 Additional
 
 
 Other
 
 
 
 
 
 
 
 
Preferred        
Preferred        
 
 Common Stock
 
 
 Treasury Stock
 
 
 Paid-In
 
 
 Comprehensive
 
 
 Accumulated
 
 
 
 
 
 
Shares
 
 
 Amount
 
 
Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
 Loss
 
 
 Deficit
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
    31,021  
  $ -  
    239,400  
  $ 2  
    94,174,540  
  $ 941  
    (6,704 )
  $ (64 )
  $ 172,414  
  $ (1,664 )
  $ (170,481 )
  $ 1,148  
 
       
       
       
       
       
       
       
       
       
       
       
       
Issuance of Common Stock pursuant to Series A Preferred Stock conversions
    (450 )
    -  
    -  
    -  
    391,304  
    4  
    -  
    -  
    (4 )
    -  
    -  
    -  
Cumulative effect of ASC 606 adoption
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    96  
    96  
Issuance of Common Stock pursuant to option exercises
    -  
    -  
    -  
    -  
    83,169  
    1  
    -  
    -  
    87  
    -  
    -  
    88  
Recognition of beneficial conversion feature on convertible debt
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    12  
    -  
    -  
    12  
Stock-based compensation expense
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    335  
    -  
    -  
    335  
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (27 )
    -  
    (27 )
Dividends on preferred stock
    -  
    -  
    -  
    -  
    472,562  
    4  
    -  
    -  
    750  
    -  
    (754 )
    -  
Net loss
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (3,583 )
    (3,583 )
Balance at March 31, 2018
    30,571  
  $ -  
    239,400  
  $ 2  
    95,121,575  
  $ 950  
    (6,704 )
  $ (64 )
  $ 173,594  
  $ (1,691 )
  $ (174,722 )
  $ (1,931 )
Issuance of Common Stock pursuant to option exercises
    -  
    -  
    -  
    -  
    65,588  
    1  
    -  
    -  
    60
    -  
    -  
    61
Recognition of beneficial conversion feature on convertible debt
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
  9
    -  
    -  
  9
Stock-based compensation expense
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    373
    -  
    -  
    373
Issuance of Common Stock warrants as compensation 
       -
    -
    -
    -
    -
  -
    -
      -
    9
 
  -
  9
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    42  
    -  
    42  
Dividends on preferred stock
    -  
    -  
    -  
    -  
    648,696  
    6  
    -  
    -  
    704
    -  
    (737 )
    (27 )
Net loss
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    -  
    (2,284 )
    (2,284 )
Balance at June 30, 2018
    30,571  
  $ -  
    239,400  
  $ 2  
    95,835,859  
  $ 957  
    (6,704 )
  $ (64 )
  $ 174,749  
  $ (1,649 )
  $ (177,743 )
  $ (3,748 )
 
 
 
 
IM AG E WARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
 
 
Six Months Ended
 June 30,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities
 
 
 
 
 
 
Net loss
  $ (6,160 )
  $ (5,869 )
Adjustments to reconcile net loss to net cash used by operating activities:
       
       
  Depreciation and amortization
    36  
    24  
Amortization of debt issuance costs and beneficial conversion feature
     
    122  
  Stock-based compensation
    347  
    708  
  Warrants issued in lieu of cash as compensation for services
  8
    9  
 Change in fair value of derivative liabilities
    (57 )
     
  Change in assets and liabilities:
       
       
     Accounts receivable
    592  
    (118 )
     Inventory
    (290 )
    60  
     Other assets
    8  
    (44 )
     Operating lease right-of-use assets
    106  
     
     Accounts payable
    (127 )
    (67 )
     Deferred revenue
    (142 )
    (464 )
     Accrued expense
    473
    389  
     Contract costs
    (29 )
     
     Pension obligation
    52  
    14  
Total adjustments
    977  
    633  
Net cash used in operating activities
    (5,183 )
    (5,236 )
 
       
       
Cash flows from investing activities
       
       
Purchase of property and equipment
    (8 )
    (7 )
Net cash used in investing activities
    (8 )
    (7 )
 
       
       
Cash flows from financing activities
       
       
Proceeds from issuance of Common Stock, net of financing costs
    6,095  
     
Dividends paid
    (25 )
    (25 )
Proceeds from exercised stock options
    166  
    149  
Net cash provided by financing activities
    6,236  
    124  
 
       
       
Effect of exchange rate changes on cash and cash equivalents
    (5 )
    15  
Net increase (decrease) in cash and cash equivalents
    1,040  
    (5,104 )
 
       
       
Cash and cash equivalents at beginning of period
    5,694  
    7,317  
 
       
       
Cash and cash equivalents at end of period
  $ 6,734  
  $ 2,213  
 
       
       
Supplemental disclosure of cash flow information:
       
       
Cash paid for interest
  $  
  $  
Cash paid for income taxes
  $  
  $  
Summary of non-cash investing and financing activities:
       
       
Beneficial conversion feature on convertible related party lines of credit
  $  
  $ 21  
Stock dividends on Series A Convertible Preferred Stock
  $ 1,794  
  $ 1,464  
Stock dividends on Series C Convertible Redeemable Preferred Stock
  $ 479  
  $  
Accretion of discount on Series C Convertible Redeemable Preferred Stock
  $ 370  
  $  
Recognition of operating lease right-of-use assets from adoption of ASC 842
  $ 2,265  
  $  
Recognition of lease liabilities from adoption of ASC 842
  $ (2,280 )
  $  
   Conversion of Convertible Preferred Stock into Common Stock
  $  
  $ 4  
 
 
  The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
I M AGEWARE SYSTEMS, INC.
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, $0.01 par value (“ Common Stock ”) at a price of $1.10 per share, resulting in gross proceeds to the Company of approximately $6,550,000. Net proceeds to the Company were approximately $6,095,000 after recognition of offering expenses.
 
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 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 income from operations.
 
Going Concern
 
At June 30, 2019, we had positive working capital of approximately $3,482,000. Our principal sources of liquidity at June 30, 2019 consisted of approximately $6,734,000 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 amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital and generate positive cash flows from operations. However, the Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will be able to obtain additional capital, operate at a profit or generate positive cash flows in the future.
  
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 and six months ended June 30, 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
 
Lease classification
 
Initial direct costs
 
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;
 
Services; and
 
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 and six months ended June 30, 2019 and 2018:
 
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
Net Revenue
 
2019
 
 
2018
 
 
2019
 
 
2018
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software and royalties
  $ 122  
  $ 871  
  $ 234  
  $ 955  
Hardware and consumables
    27  
    122  
    38  
    122  
Services
    11  
    189  
    166  
    202  
Maintenance
    652  
    703  
    1,305  
    1,322  
Total revenue
  $ 812  
  $ 1,885  
  $ 1,743  
  $ 2,601  
 
Customer Concentration
 
For the three months ended June 30, 2019, one customer accounted for approximately 27% or $216,000 of our total revenue and had trade receivables at June 30, 2019 of $0.  For the six months ended June 30, 2019, two customers accounted for approximately 41% or $717,000 of our total revenue and had trade receivables at June 30, 2019 of $161,000.
 
For the three months ended June 30, 2018, two customers accounted for approximately 60% or $1,133,000 of our total revenue and had trade receivables at June 30, 2018 of $213,000.  For the six months ended June 30, 2018, one customer accounted for approximately 43% or $1,121,000 of our total revenue and had trade receivables at June 30, 2018 of $0.
 
Recently Issued Accounting Standards
 
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“ FASB ”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
   
FASB 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. 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
June 30,
 
 
Six Months Ended
June 30,
 
 
 
  2019
 
 
2018
 
 
2019
 
 
2018
 
Numerator for basic and diluted loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
  $ (2,548 )
  $ (2,284 )
  $ (6,160 )
  $ (5,869 )
Preferred dividends and preferred stock discount accretion
    (1,374 )
    (720 )
    (2,668 )
    (1,489 )
 
       
       
       
       
Net loss available to common shareholders
  $ (3,922 )
  $ (3,004 )
  $ (8,828 )
  $ (7,358 )
 
       
       
       
       
Denominator for basic and dilutive loss per share – weighted-average shares outstanding
    103,431,623  
    95,161,570  
    100,928,835  
    94,749,904  
 
       
       
       
       
Net loss
  $ (0.03 )
  $ (0.02 )
  $ (0.06 )
  $ (0.06 )
Preferred dividends and preferred stock discount accretion
    (0.01 )
    (0.01 )
    (0.03 )
    (0.02 )
 
       
       
       
       
Basic and diluted loss per share available to common shareholders
  $ (0.04 )
  $ (0.03 )
  $ (0.09 )
  $ (0.08 )
 
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 and Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Related party lines of credit
     
    5,432,579  
Convertible redeemable preferred stock
    42,626,028  
    26,629,507  
Stock options
    7,232,346  
    7,341,093  
Warrants
    1,813,856  
    270,000  
Total potential dilutive securities
    51,672,230  
    39,673,179  
 
NOTE 4.  SELECT BALANCE SHEET DETAILS
 
Inventory
 
Inventories of $319,000 as of June 30, 2019 were comprised of work in process of $312,000 representing direct labor costs on in-process projects and finished goods of $7,000 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 $76,000 and $82,000 as of June 30, 2019 and December 31, 2018, respectively, which includes accumulated amortization of $583,000 and $577,000 as of June 30, 2019 and December 31, 2018, respectively. Amortization expense for patent intangible assets was $3,000 and $6,000 for the three and six months ended June 30, 2019 and 2018. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately 7.00 years. There was no impairment of the Company’s intangible assets during the three and six months ended June 30, 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 (six months)
  $ 6  
2020
    12  
2021
    12  
2022
    12  
2023
    12  
Thereafter
    22  
Totals
  $ 76  
 
Goodwill
 
The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The provisions of ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts, will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only one reporting unit, Identity Management, which at June 30, 2019, had a negative carrying amount of approximately $2,972,000. Based on the results of the Company’s impairment testing, the Company determined that its goodwill was not impaired as of June 30, 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 and six months ended June 30, 2019 the Company recorded approximately $182,000 and $349,000, respectively, 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 June 30, 2019 is 4.95 years. Cash payments under operating leases aggregated approximately $122,000 and $243,000 for the three and six months ended June 30, 2019, respectively, 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 June 30, 2019, future minimum undiscounted lease payments are as follows:
 
  ($ in thousands)
 
 
 
2019 (six months)
  $ 254  
2020
    649  
2021
    642  
2022
    652  
2023
    425  
Thereafter
    519  
Total
    3,141  
Short-term leases not included in lease liability
    (6 )
Present Value effect on future minimum undiscounted lease payments at June 30, 2019
    (954 )
Lease liability at June 30, 2019
  $ 2,181  
 
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 Delaware Secretary of State, 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 June 30, 2019 and December 31, 2018. The Company issued the holders of Series C Preferred 157,945 and 266,793 shares of Common Stock on March 31, 2019 and June 30, 2019, respectively, as payment of dividends due on these dates.
 
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 and six months ended June 30, 2019, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $184,000 and $370,000, respectively, using the effective interest rate method. There was no Series C Preferred outstanding at any time during the three and six months ended June 30, 2018.
 
 
 
The Company reflected the following in Mezzanine Equity for the Series C Preferred Stock as of December 31, 2018 and June 30, 2019:
 
 
 
Series C
 
 
 
 
 
 
 
 
 
Convertible,
 
 
 
 
 
 
 
 
 
Redeemable
 
 
 
 
 
 
 
 
 
Preferred
 
 
 
 
 
 
 
(amounts in thousands, except share amounts)
 
Shares
 
 
 Amount
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
Total Series C Preferred Stock as of December 31, 2018
    1,000  
  $ 8,156  
  $ 8,156  
 
       
       
       
Accretion of discount – deemed dividend for the three months ended March 31, 2019
     
    186  
    186  
 
       
       
       
Total Series C Preferred Stock as of March 31, 2019
    1,000  
    8,342  
    8,342  
 
       
       
       
Accretion of discount – deemed dividend for the three months ended June 30, 2019
     
    184  
    184  
 
       
       
       
Total Series C Preferred Stock as of June 30, 2019
    1,000  
  $ 8,526  
  $ 8,526  
 
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 and six months ended June 30, 2019, the Company recorded a decrease to these derivative liabilities using fair value methodologies of approximately 481,000 and $57,000, respectively. See Note 9 to these condensed consolidated financial statements for a reconciliation of amounts recorded at June 30, 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 June 30, 2019 and December 31, 2018. At June 30, 2019 and December 31, 2018, the Company had cumulative undeclared dividends of $0. The Company issued the holders of Series A Preferred 591,803 and 999,633 shares of Common Stock on March 31, 2019 and June 30, 2019, respectively, as payment of dividends due on these dates.
 
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 June 30, 2019 and December 31, 2018. At June 30, 2019 and December 31, 2018, the Company had cumulative undeclared dividends of approximately $8,000. There were no conversions of Series B Preferred into Common Stock during the three and six months ended June 30, 2019 and 2018.
 
 
 
Common Stock
 
 The following table summarizes Common Stock activity for the six months ended June 30, 2019:
 
 
 
Common Stock
 
Shares outstanding at December 31, 2018
    98,223,632  
Shares issued as payment of stock dividend on Series A Preferred
    1,591,436