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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2021~~2022

☐	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

Incorporation or Organization)

(IRS Employer

Identification No.)

11440 West Bernardo Court, Suite 300

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 ☒ 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 ☒ 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	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		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 ☒

Securities registered pursuant to Section 12(b) of the Act: None

The number of shares of common stock, par value $0.01 per share, outstanding on ~~November~~May 1020, ~~2021~~2022 was 347,~~236~~962,~~158~~742.

Table of Contents

IMAGEWARE SYSTEMS, INC.

INDEX

		Page	~~Page~~
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements		2
	Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020		2
	Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	1
	Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2021 and 2020 (unaudited)		3
	Condensed Consolidated Statements of Loss for the three months ended March 31, 2022 and 2021 (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020 (unaudited)		4
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2022 and 2021 (unaudited)	3
	Condensed Consolidated Statements of Shareholders’ Deficit for the three and nine months ended September 30, 2021 and 2020 (unaudited)		5
	Condensed Consolidated Statements of Shareholders’ Deficit for the three months ended March 31, 2022 and 2021 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)		7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)	6
	Notes to unaudited Condensed Consolidated Financial Statements	7	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23	30
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	31	43
ITEM 4.	Controls and Procedures	32	44
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	33	45
ITEM1A.	Risk Factors	33	45
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44	57
ITEM 3.	Defaults Upon Senior Securities	44	57
ITEM 4.	Mine Safety Disclosures	44	57
ITEM 5.	Other Information	44	57
ITEM 6.	Exhibits	44	57
SIGNATURES		45	58

- i -

Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "“Quarterly Report"”) contains forward-looking statements. The words or phrases "“would be," "“will allow," "“intends to," "“will likely result," "“are expected to," "“will continue," "“is anticipated," "“estimate," "“project," or similar expressions are intended to identify "“forward-looking statements." Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including those risks factors contained in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021, previously filed with the Securities and Exchange Commission ("“SEC"”) on April 515, ~~2021~~2022 is incorporated herein by reference. Statements made herein are as of the date of the filing of this Report with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events, or circumstances after the date of such statement.

- 1 -

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, except for share and per share data)

	September 30,			December 31,
	March 31,			December 31,
	2021			2020
	2022			2021
	(Unaudited)
ASSETS	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	~~1,672~~832		$	81,~~345~~202
Accounts receivable, net of allowance for doubtful accounts of $5 at September 30, 2021 and December 31, 2020.		443			577
Accounts receivable, net of allowance for doubtful accounts of $25 at March 31, 2022 and December 31, 2021.		314			383
Inventory		85			40
Inventory, net		24			25
Other current assets		~~398~~110			~~196~~215
Total Current Assets		21,~~598~~280			91,~~158~~825
Property and equipment, net		8774			~~155~~79
Other assets		~~162~~149			~~458~~149
Operating lease right-of-use assets		~~1,278~~808			~~1,557~~847
Intangible assets, net of accumulated amortization		49			58
Goodwill		3,416			3,416
Total Assets	$	75,~~590~~727		$	146,~~802~~316
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	~~691~~937		$	~~1,007~~837
Deferred revenue		~~1,205~~955			~~903~~1,204
Accrued expense		1,~~002~~555			1,~~130~~518
Operating lease liabilities, current portion		~~494~~495			~~421~~496
Derivative liabilities		76,~~486~~024			245,~~128~~292
Note payable, current portion		—1,603			~~918~~524
Total Current Liabilities		1011,~~878~~569			289,~~507~~871
Other long-term liabilities		—			65
Other long-term liabilities:
Note payable, net of current portion		—			653
Operating lease liabilities, net of current portion		686			802
Lease liabilities, net of current portion		915			1,297
Pension obligation		1,955			1,976
Pension obligation		2,572			2,531
Total Liabilities		14,210			12,649
Total Liabilities		14,365			33,053
Mezzanine Equity:
Series D Convertible Redeemable Preferred Stock, $0.01 par value, designated 26,000 shares, 23,611 and 22,863 shares issued at September 30, 2021 (unaudited) and December 31, 2020, respectively and 22,965 and 22,863 shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively; liquidation preference $22,965 and $22,863 at September 30, 2021 (unaudited) and December 31, 2020, respectively.		6,973			1,572
Series D Convertible Redeemable Preferred Stock, $0.01 par value, 26,000 shares designated; 24,115 and 23,862 issued at March 31, 2022 (unaudited) and December 31, 2021, respectively, and 23,469 and 23,216 shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively; liquidation preference of $23,469 and $23,216 at March 31, 2022 (unaudited) and December 31, 2021, respectively.		10,478			8,759
Shareholders’ Deficit:
Preferred stock, authorized 5,000,000 shares:
Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued at September 30, 2021 (unaudited) and December 31, 2020, and 0 and 14,911 shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively; liquidation preference $0 and $14,911 at September 30, 2021 (unaudited) and December 31, 2020, respectively.		—			—
Series B Convertible Redeemable Preferred Stock, $0.01 par value, 750,000 shares designated; 389,400 shares issued and 239,400 shares outstanding at March 31, 2022 (unaudited) and December 31, 2021; liquidation preference $620 and $607 at March 31, 2022 (unaudited) and December 31, 2021, respectively.		2			2
Series A-1 Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued at September 30, 2021 (unaudited) and December 31, 2020, and 0 and 14,782 shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively; liquidation preference $0 and $14,782 at September 30, 2021 (unaudited) and December 31, 2020, respectively.		—			—
Common Stock, $0.01 par value, 2,000,000,000 shares authorized; 347,281,946 and 347,240,045 shares issued at March 31, 2022 (unaudited) and December 31, 2021, respectively, and 347,275,242 and 347,233,341 shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively.		3,471			3,471
Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively; liquidation preference $620 at September 30, 2021 (unaudited) $608 at December 31, 2020, respectively.		2			2
Additional paid-in capital		185,956			187,148
Common Stock, $0.01 par value, 2,000,000,000 shares authorized; 347,200,961 and 180,096,317 shares issued at September 30, 2021 (unaudited) and December 31, 2020, respectively, and 347,194,257 and 180,089,613 shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively.		3,471			1,801
Additional paid-in capital		188,404			193,652
Treasury stock, at cost 6,704 shares		(64	)		(64	)
Accumulated other comprehensive loss		(1,~~925~~375	)		(1,~~989~~396	)
Accumulated deficit		(~~203~~206,~~636~~951	)		(~~213~~204,~~225~~253	)
Total Shareholders’ Deficit		(1318,~~748~~961	)		(1915,~~823~~092	)
Total Liabilities, Mezzanine Equity and Shareholders’ Deficit	$	75,~~590~~727		$	146,~~802~~316

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 2 1-

Table of Contents

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME (~~LOSS)

(In Thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31
	2021			2020			2021			2020
	2022			2021
Revenue:
Product	$	~~145~~210		$	~~1,858~~56		$	~~475~~		$	~~2,129~~
Maintenance		~~633~~635			~~613~~677			~~1,977~~			~~1,870~~
		778			2,471			2,452			3,999
		845			733
Cost of revenue:
Product		6932			~~715~~9			~~134~~			~~781~~
Maintenance		87100			~~123~~110			~~276~~			~~328~~
Gross profit		~~622~~713			~~1,633~~614			~~2,042~~			~~2,890~~
Operating expense:
General and administrative		1,~~228~~176			~~953~~1,347			~~4,147~~			~~2,875~~
Sales and marketing		~~747~~626			~~615~~724			~~2,217~~			~~2,239~~
Research and development		~~1,073~~868			1,~~117~~168			~~3,456~~			~~4,503~~
Depreciation and amortization		116			18			43			54
		3,059			2,703			9,863			9,671
		2,676			3,257
Loss from operations		(21,~~437~~963	)		(12,~~070~~643	)		~~(7,821~~	)		~~(6,781~~	)
Interest expense (income), net		—			56			—			131
Interest expense, net		53			—
Other (income) expense, net		(5	)		3			(5	)		4
(Gain) loss on change in fair value of derivative liabilities		667			(1,172	)
(Gain) on change in fair value of derivative liabilities		(1,342	)		(535	)		(16,558	)		(369	)
Loss on extinguishment of derivative liabilities		—			335
(Gain) on extinguishment of derivative liabilities and debt		(1,616	)		—			(1,270	)		—
Other (income) expense, net		(5	)		25
Other components of net periodic pension expense		3620			3154			~~141~~			~~106~~
Income (loss) before income taxes		490			(625	)		9,871			(6,653	)
Loss before income taxes		(2,698	)		(1,885	)
Income tax expense (income)		—			1—			—			(1	)
Net income (loss)		490			(626	)		9,871			(6,652	)
Net loss		(2,698	)		(1,885	)
Preferred dividends, preferred stock discount accretion and deemed dividends from preferred stock exchange		(1,~~935~~797	)		(2,~~529~~255	)		~~(6,260~~	)		~~(5,275~~	)
Net income (loss) available to common shareholders	$	(1,445	)	$	(3,155	)	$	3,611		$	(11,927	)
Net loss available to common shareholders	$	(4,495	)	$	(4,140	)
Basic income (loss) per common share – see Note 3:
Basic and diluted loss per common share – see Note 3:
Basic income (loss) per share available to common shareholders	$	(0.00	)	$	(0.02	)	$	0.01		$	(0.09	)
Basic and diluted loss per share available to common shareholders	$	(0.01	)	$	(0.02	)
Basic weighted-average shares outstanding		340,384,468			133,341,134			326,458,778			125,558,524
Basic and diluted weighted-average shares outstanding		347,257,550			245,829,914
Diluted income (loss) per common share – see Note 3:
Diluted income (loss) per share available to common shareholders	$	(0.00	)	$	(0.02	)	$	0.01		$	(0.09	)
Diluted weighted-average shares outstanding		340,384,468			133,341,134			412,320,909			125,558,524

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME (~~LOSS)

(In Thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2021			2020			2021		2020
	2022			2021
Net income (loss)	$	490		$	(626	)	$	9,871	$	(6,652	)
Net loss	$	(2,698	)	$	(1,885	)
Other comprehensive income (loss):
Foreign currency translation adjustment		2521			~~(41~~54	)		64		~~(74~~	)
Comprehensive income (loss)	$	515		$	(667	)	$	9,935	$	(6,726	)
Comprehensive loss	$	(2,677	)	$	(1,831	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 4 3-

Table of Contents

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(In Thousands, except share amounts)

(Unaudited)

	Series A Convertible,						Series A-1 Convertible,						Series B Convertible,																	Accumulated
	Series A						Series A-1						Series B
	Convertible,						Convertible,						Convertible,																	Accumulated
	Redeemable						Redeemable						Redeemable														Additional			Other
	Preferred						Preferred						Preferred				Common Stock				Treasury Stock						Paid-In			Comprehensive			Accumulated
	Shares			Amount			Shares			Amount			Shares		Amount		Shares		Amount		Shares			Amount			Capital			Loss			Deficit			Total
Balance at December 31, 2020		14,911		$	-			14,782		$	-			239,400	$	2		180,096,317	$	1,801		(6,704	)	$	(64	)	$	193,652		$	(1,989	)	$	(213,225	)	$	(19,823	)
Balance at December 31, 2021		-		$	(0	)		-		$	(0	)		239,400	$	2		347,240,045	$	3,471		(6,704	)	$	(64	)	$	187,148		$	(1,396	)	$	(204,253	)	$	(15,092	)
Accretion of Preferred Stock discount		-			-			-			-			-		-		-		-		-			-			(1,~~817~~531	)		-			-			(1,~~817~~531	)
Stock-based compensation expense		-			-			-			-			-		-		~~161~~41,~~168~~901		2-		-			-			76592			-			-			78592
Issuance of common stock in lieu of cash		-			-			-			-			-		-		242,647		2		-			-			19			-			-			21
Dividends on Series D Preferred stock, $(10.90)/share		-			-			-			-			-		-		-		-		-			-			(253	)		-			-			(253	)
Issuance of common stock pursuant to warrant exercise		-			-			-			-			-		-		400		-		-			-			0			-			-			-
Foreign currency translation adjustment		-			-			-			-			-		-		-		-		-			-			-			21			-			21
Conversion of Series A Preferred to Common Stock		(8,762	)		-			-			-			-		-		43,819,500		438		-			-			(438	)		-			-			-
Net loss		-			-			-			-			-		-		-		-		-			-			-			-			(2,698	)		(2,698	)
Conversion of Series A-1 Preferred to Common Stock		-			-			(8,860	)		0			-		-		44,300,000		443		-			-			(443	)		-			-			-
Balance at March 31, 2022		-		$	-			-		$	-			239,400	$	2		347,281,946	$	3,471		(6,704	)	$	(64	)		185,956		$	(1,375	)	$	(206,951	)	$	(18,961	)
Conversion of Series D Preferred to Common Stock		-			-			-			-			-		-		6,115,324		59		-			-			630			-			(2	)		687
Foreign currency translation adjustment		-			-			-			-			-		-		-		-		-			-			-			54			-			54
Dividends on Series A preferred stock, $(10.50)/share		-			-			-			-			-		-		1,050,826		11		-			-			81			-			(92	)		-
Dividends on Series A-1 preferred stock, $(9.75)/share		-			-			-			-			-		-		963,266		10		-			-			73			-			(83	)		-
Dividends on Series D Preferred stock, $(90.90)/share		-			-			-			-			-		-		-		-		-			-			(248	)		-			-			(248	)
Net loss		-			-			-			-			-		-		-		-		-			-			-			-			(1,885	)		(1,885	)
Balance at March 31, 2021		6,149			-			5,922			-			239,400		2		276,749,448		2,766		(6,704	)		(64	)		191,585			(1,935	)		(215,287	)		(22,933	)
Accretion of Preferred Stock discount		-			-			-			-			-		-		-		-		-			-			(1,732	)		-			-			(1,732	)
Stock-based compensation expense and RSU issuance		-			-			-			-			-		-		656,410		7		-			-			301			-			-			308
Issuance of common stock in lieu of cash		-			-			-			-			-		-		1,000,000		10		-			-			90			-			-			100
Issuance of common stock as issuance costs		-			-			-			-			-		-		1,000,000		10		-			-			60			-			-			70
Conversion of Series A Preferred to Common Stock		(3,819	)		-			-			-			-		-		19,095,500		191		-			-			(191	)		-			-			-
Conversion of Series A-1 Preferred to Common Stock		-			-			(3,683	)		0			-		-		18,416,000		184		-			-			(184	)		-			-			-
Conversion of Series D Preferred to Common Stock		-			-			-			-			-		-		858,291		8		-			-			51			-			-			59
Foreign currency translation adjustment		-			-			-			-			-		-		-		-		-			-			-			(15	)		-			(15	)
Issuance of common stock in lieu of cash		-			-			-			-			-		-		178,571		2		-			-			11			-			-			13
Dividends on Series A preferred stock, $(8.32)/share		-			-			-			-			-		-		750,925		8		-			-			30			-			(38	)		-
Dividends on Series A-1 preferred stock, $(8.32)/share		-			-			-			-			-		-		720,978		7		-			-			29			-			(36	)		-
Dividends on Series B Preferred stock, $(0.05)/share		-			-			-			-			-		-		-		-		-			-			-			-			(25	)		(25	)
Dividends on Series D Preferred stock, $(87.31)/share		-			-			-			-			-		-		-		-		-			-			(251	)		-			-			(251	)
Net income		-			-			-			-			-		-		-		-		-			-			-			-			11,266			11,266
Balance at June 30, 2021		2,330			-			2,239			-			239,400		2		319,426,123		3,193		(6,704	)		(64	)		189,799			(1,950	)		(204,120	)		(13,140	)
Accretion of Preferred Stock discount		-			-			-			-			-		-		-		-		-			-			(1,665	)		-			-			(1,665	)
Stock-based compensation expense and RSU issuance		-			-			-			-			-		-		43,151		0		-			-			556			-			-			556
Conversion of Series A Preferred to Common Stock		(2,330	)		-			-			-			-		-		11,647,000		116		-			-			(116	)		-			-			-
Conversion of Series A-1 Preferred to Common Stock		-			-			(2,239	)		-			-		-		11,194,000		112		-			-			(112	)		-			-			-
Conversion of Series D Preferred to Common Stock		-			-			-			-			-		-		4,175,508		43		-			-			167			-			-			210
Foreign currency translation adjustment		-			-			-			-			-		-		-		0		-			-			-			25			-			25
Issuance of common stock in lieu of cash		-			-			-			-			-		-		500,000		5		-			-			20			-			-			25
Dividends on Series A preferred stock, $(0.52)/share		-			-			-			-			-		-		109,836		1		-			-			2			-			(3	)		-
Dividends on Series A-1 preferred stock, $(0.52)/share		-			-			-			-			-		-		105,343		1		-			-			2			-			(3	)		-
Dividends on Series D Preferred stock, $(85.70)/share		-			-			-			-			-		-		-		-		-			-			(249	)		-			-			(249	)
Net income		-			-			-			-			-		-		-		-		-			-			-			-			490			490
Balance at September 30, 2021		-			-			-			-			239,400		2		347,200,961		3,471		(6,704	)		(64	)		188,404			(1,925	)		(203,636	)		(13,748	)

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~ -4-

- 5 -

Table of Contents

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(In Thousands, except share amounts)

(Unaudited)

	Series A Convertible, Redeemable Preferred					Series A-1 Convertible, Redeemable Preferred					Series B Convertible, Redeemable Preferred				Common Stock				Treasury Stock						Additional Paid-In			Accumulated Other Comprehensive			Accumulated
	Shares			Amount		Shares			Amount		Shares		Amount		Shares		Amount		Shares			Amount			Capital			Loss			Deficit			Total
Balance at December 31, 2019		37,467		$	-		-		$	-		239,400	$	2		113,353,176	$	1,133		(6,704	)	$	(64	)	$	195,079		$	(1,741	)	$	(203,171	)	$	(8,762	)
Balance at December 31, 2020		14,911		$	-		14,782		$	-		239,400	$	2		180,096,317	$	1,801		(6,704	)	$	(64	)	$	193,652		$	(1,989	)	$	(213,225	)	$	(19,823	)
Accretion of Preferred Stock discount		-			-		-			-		-		-		-		-		-			-			(~~175~~1,817	)		-			-			(~~175~~1,817	)
Issuance of common stock net of financing costs		-			-		-			-		-		-		10,000,000		100		-			-			1,287			-			-			1,387
Stock-based compensation expense		-			-		-			-		-		-		161,168		2		-			-			76			-			-			78
Stock-based compensation expense		-			-		-			-		-		-		-		-		-			-			124			-			-			124
Issuance of common stock in lieu of cash		-			-		-			-		-		-		242,647		2		-			-			19			-			-			21
Common stock issued in exchange for unexercised options		-			-		-			-		-		-		400,000		4		-			-			58			-			-			62
Issuance of common stock pursuant to warrant exercise		-			-		-			-		-		-		400		-		-			-			0			-			-			-
Foreign currency translation adjustment		-			-		-			-		-		-		-		-		-			-			-			31			-			31
Conversion of Series A Preferred to Common Stock		(8,762	)		-		-			-		-		-		43,819,500		438		-			-			(438	)		-			-			-
Dividends on Series A preferred stock, $(25.01)/share		-			-		-			-		-		-		-		-		-			-			-			-			(937	)		(937	)
Conversion of Series A-1 Preferred to Common Stock		-			-		(8,860	)		0		-		-		44,300,000		443		-			-			(443	)		-			-			-
Dividends on Series C preferred stock, $(250.00)/share		-			-		-			-		-		-		-		-		-			-			-			-			(250	)		(250	)
Conversion of Series D Preferred to Common Stock		-			-		-			-		-		-		6,115,324		59		-			-			630			-			(2	)		687
Net loss		-			-		-			-		-		-		-		-		-			-			-			-			(3,124	)		(3,124	)
Foreign currency translation adjustment		-			-		-			-		-		-		-		-		-			-			-			54			-			54
Balance at March 31, 2020		37,467			-		-			-		239,400		2		123,753,176		1,237		(6,704	)		(64	)		196,373			(1,710	)		(207,482	)		(11,644	)
Dividends on Series A preferred stock, $(10.50)/share		-			-		-			-		-		-		1,050,826		11		-			-			81			-			(92	)		-
Accretion of Preferred Stock discount		-			-		-			-		-		-		-		-		-			-			(172	)		-			-			(172	)
Dividends on Series A-1 preferred stock, $(9.75)/share		-			-		-			-		-		-		963,266		10		-			-			73			-			(83	)		-
Issuance of common stock net of financing costs		-			-		-			-		-		-		2,500,000		25		-			-			215			-			-			240
Dividends on Series D Preferred stock, $(90.90)/share		-			-		-			-		-		-		-		-		-			-			(248	)		-			-			(248	)
Issuance of common stock for financing facility		-			-		-			-		-		-		2,500,000		25		-			-			375			-			-			400
Net loss		-			-		-			-		-		-		-		-		-			-			-			-			(1,885	)		(1,885	)
Stock-based compensation expense		-			-		-			-		-		-		-		-		-			-			40			-			-			40
Balance at March 31, 2021		6,149		$	-		5,922		$	-		239,400	$	2		276,749,448	$	2,766		(6,704	)	$	(64	)	$	191,585		$	(1,935	)	$	(215,287	)	$	(22,933	)
Common stock issued in exchange for unexercised options		-			-		-			-		-		-		288,695		3		-			-			93			-			-			96
Foreign currency translation adjustment		-			-		-			-		-		-		-		-		-			-			-			(64	)		-			(64	)
Additional minimum pension liability		-			-		-			-		-		-		-		-		-			-			-			-			-			-
Dividends on Series A preferred stock, $(25.01)/share		-			-		-			-		-		-		-		-		-			-			-			-			(937	)		(937	)
Dividends on Series B preferred stock, $(0.11)/share		-			-		-			-		-		-		-		-		-			-			-			-			(25	)		(25	)
Dividends on Series C preferred stock, $(250.00)/share		-			-		-			-		-		-		-		-		-			-			-			-			(250	)		(250	)
Net loss		-			-		-			-		-		-		-		-		-			-			-			-			(2,902	)		(2,902	)
Balance at June 30, 2020		37,467			-		-			-		239,400		2		129,041,871		1,290		(6,704	)		(64	)		196,924			(1,774	)		(211,596	)		(15,218	)
Accretion of Preferred Stock discount		-			-		-			-		-		-		-		-		-			-			(170	)		-			-			(170	)
Issuance of common stock net of financing costs		-			-		-			-		-		-		3,200,000		32		-			-			601			-			-			633
Modification of Series A Preferred Stock from issuance of Series A-1 Preferred Stock		(18,550	)		-		18,550			-		-		-		-		-		-			-			1,849			-			-			1,849
Stock-based compensation expense		-			-		-			-		-		-		74,448		1		-			-			121			-			-			122
Common stock issued in exchange for unexercised options		-			-		-			-		-		-		12,750		-		-			-			5			-			-			5
Foreign currency translation adjustment		-			-		-			-		-		-		-		-		-			-			-			(41	)		-			(41	)
Conversion of Preferred Series A-1 to common stock		-			-		(350	)		-		-		-		538,452		5		-			-			(5	)		-			-			-
Dividends on Series A preferred stock, $(1.17)/share		-			-		-			-		-		-		219,374		2		-			-			22			-			-			24
Dividends on Series C preferred stock, $(75.00)/share		-			-		-			-		-		-		5,176,734		52		-			-			523			-			(75	)		500
Net loss		-			-		-			-		-		-		-		-		-			-			-			-			(626	)		(626	)
Balance at September 30, 2020		18,917		$	-		18,200		$	-		239,400	$	2		138,263,629	$	1,382		(6,704	)	$	(64	)		199,870		$	(1,815	)	$	(212,297	)	$	(12,922	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 6 5-

Table of Contents

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2021			2020
	2022			2021
Cash flows from operating activities
Net income (loss)	$	9,871		$	(6,652	)
Net loss	$	(2,698	)	$	(1,885	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		436			5418
Loss on disposal of fixed assets		82			—
Amortization of debt discount		29			—
Stock-based compensation		942			449
Loss on disposal of fixed assets		—			82
Issuance of common stock as compensation in lieu of cash		46			—
Stock-based compensation		592			78
Deferred stock issuance costs		364			—
Issuance of common stock as compensation in lieu of cash		—			21
Application of rent deposit in lieu of cash payments		—			89
Loss on extinguishment of derivative liability, net		—			335
Gain on extinguishment of debt and derivative liability, net		(1,270	)		—
Change in fair value of derivative liabilities		667			(1,172	)
Change in fair value of derivative liabilities		(16,558	)		(369	)
Change in assets and liabilities:
Accounts receivable		~~133~~69			~~184~~84
Inventory		~~(45~~1	)		~~593~~(48	)
Other assets		~~(264~~104	)		36(495	)
Operating lease right-of-use assets		(3178	)		(1310	)
Accounts payable		~~(304~~100	)		~~863~~(33	)
Deferred revenue		~~302~~(249	)		(~~374~~129	)
Accrued expense		~~(116~~37	)		37(123	)
Pension obligation		41(21	)		~~124~~(13	)
Net cash used in operating activities		(6,764	)		(4,979	)
Total adjustments		1,257			(1,405	)
Net cash used in operating activities		(1,441	)		(3,290	)
Cash flows from investing activities
Purchase of property and equipment		~~(48~~—	)		—(53	)
Net cash used in investing activities		~~(48~~—	)		—(53	)
Cash flows from financing activities
Proceeds from issuance of Common Stock, net		100			2,296
Proceeds from issuance of notes payable		1,050			—
Proceeds from issuance of related party notes payable		—			900
Net cash provided by financing activities		1,050			—
Proceeds from issuance of note payable to bank		—			3,758
Effect of exchange rate changes on cash and cash equivalents		21			54
Dividends paid		(25	)		(25	)
Net decrease in cash and cash equivalents		(370	)		(3,289	)
Proceeds from exercised stock options		—			—
Cash and cash equivalents at beginning of period		1,202			8,345
Net cash provided by financing activities		75			6,929
Cash and cash equivalents at end of period	$	832		$	5,056
Effect of exchange rate changes on cash and cash equivalents		64			(74	)
Net increase (decrease) in cash and cash equivalents		(6,673	)		1,876
Cash and cash equivalents at beginning of period		8,345			1,030
Cash and cash equivalents at end of period	$	1,672		$	2,906
Supplemental disclosure of cash flow information:
Cash paid for interest	$	—		$	35—
Cash paid for income taxes	$	—		$	—
Summary of non-cash investing and financing activities:
Issuance of common stock for financing facility	$	70		$	400
Stock dividends on Series A Convertible Redeemable Preferred Stock	$	—		$	92
Stock dividends on Series A Convertible Preferred Stock	$	150		$	25
Stock dividends on Series A-1 Convertible Redeemable Preferred Stock	$	—		$	83
Stock dividends on Series A-1 Convertible Preferred Stock	$	108		$	—
Stock dividends on Series D Convertible Redeemable Preferred Stock	$	253			248
Stock dividends on Series C Convertible Redeemable Preferred Stock	$	—		$	575
Accretion of discount on Series D Convertible Redeemable Preferred Stock	$	1,531		$	1,817
Stock dividends on Series D Convertible Redeemable Preferred Stock	$	748		$	—
Conversion of Series A Convertible Redeemable Preferred Stock into Common Stock	$	—			438
Conversion of Series A-1 into Common Stock	$	—		$	5
Conversion of Series A-1 Convertible Redeemable Preferred Stock into Common Stock	$	—			443
Accretion of discount on Series C Convertible Redeemable Preferred Stock	$	—		$	517
Accretion of discount on Series D Convertible Redeemable Preferred Stock	$	3,549		$	—
Preferred stock exchange	$	—		$	2,272
Conversion of Series A Convertible Preferred Stock into Common Stock	$	745		$	—
Conversion of Series A-1 Convertible Preferred Stock into Common Stock	$	739		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IMAGEWARE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. DESCRIPTION OF BUSINESS AND OPERATIONS

Overview

As used in this ~~Quarterly~~ Report, “we”, “us”, “our”, “~~ImageWare~~Imageware”, “~~ImageWare~~Imageware Systems” or the “Company” refers to ~~ImageWare~~Imageware Systems, Inc. and all of its subsidiaries. ~~ImageWare~~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~~our 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~~our ~~IWS~~ Biometric Engine.

The Company's common stock, par value $0.01 per share (the "“Common Stock"”), trades under the symbol "“IWSY" on the OTCQB Marketplace.

~~Recent~~Liquidity, ~~Developments~~Going Concern and Management’s Plans

AsAt March ~~reported~~31, in2022 ~~the~~and December ~~Company’s~~31, ~~Quarterly~~2021, ~~Report~~we onhad ~~Form~~negative ~~10-Q~~working ~~filed~~capital ~~with~~of ~~the~~$10,289,000 ~~Securities~~ and ~~Exchange Commission (the "SEC") on August 23~~$8, ~~2021~~046,000, ~~on August~~respectively. ~~12,~~Included ~~2021,~~in ~~the~~our ~~Company~~negative ~~retained~~working ancapital ~~investment~~as ~~bank~~of March to31, ~~initiate~~2022 aare ~~review~~$6,024,000 of ~~available~~derivative ~~alternatives~~liabilities towhich ~~maximize~~are ~~shareholder~~not ~~value,~~required ~~which may~~to ~~include,~~be ~~among~~settled ~~other~~in ~~alternatives,~~cash ~~(i)~~except ain ~~merger,~~the ~~consolidation,~~event orof ~~other~~the ~~business~~consummation ~~combination~~of or a ~~purchase~~change ~~involving~~of ~~all~~control or aat ~~substantial~~any ~~amount~~time ofafter the ~~business,~~fourth ~~securities~~anniversary ~~or assets~~ of the ~~Company, and/or (ii) the~~ private placement of ~~securities~~our toSeries ~~meet~~D ~~its~~Convertible ~~working~~Preferred ~~capital~~Stock, ~~requirements~~par orvalue ~~otherwise~~$0.01 as("Series ~~necessary~~D Preferred"), consummated in November ~~connection~~and December, ~~with~~2020 (the ~~consummation~~“Series ofD ~~any~~Financing”), ofat which anniversary the ~~above~~holders ~~transactions. No~~of ~~assurances~~the ~~can~~Series beD ~~given~~Preferred may ~~that~~require the Company ~~will~~to beredeem ~~successful~~ in ~~consummating~~cash any or aall ~~combination~~ of ~~such~~the ~~alternatives.~~holder’s ~~The~~outstanding ~~consummation~~Series ofD aPreferred ~~transaction~~at ~~will~~an ~~likely~~amount ~~involve~~equal ~~substantial dilution~~ to the ~~Company’s~~liquidation ~~stockholders,~~preference ~~and may~~of ~~result in~~ the ~~loss~~Series ofD ~~your entire investment~~Preferred. InAt March ~~the~~31, ~~event~~2022 the ~~Company~~liquidation ispreference ~~unable~~totaled ~~to consummate one or more transactions~~$23, ~~the Company may not be able to continue as a going concern~~469,000.

~~Going~~Historically, ~~Concern~~our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management’s ~~Plan~~expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically, the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern.

~~Historically,~~To address our ~~principal~~working ~~sources~~capital ~~of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt~~requirements, ~~and,~~management tois aactively ~~lesser~~seeking ~~extent,~~additional ~~customer payments from the sale of our products. Our principal uses of cash have included cash used in operations~~financing, ~~product development, and payments relating to purchases~~ of ~~property~~which ~~and~~no ~~equipment.~~assurances Wecan ~~expect~~be given that ~~our~~we ~~principal uses of cash in the future~~ will be ~~for~~successful. In ~~product development~~addition, ~~including~~the ~~customization~~Company ofhas ~~identity~~instituted ~~management~~several ~~products~~cost ~~for~~cutting ~~enterprise~~measures and ~~consumer~~has ~~applications,~~utilized ~~further~~cash ~~development~~proceeds ofavailable ~~intellectual~~under ~~property,~~the ~~development~~Credit ofFacility ~~Software-as-a-Service~~ (~~“SaaS”~~defined below) ~~capabilities~~with ~~for~~certain ~~existing~~funds ~~products~~and asseparate ~~well~~accounts asmanaged ~~general~~by ~~working~~Nantahala ~~capital~~Capital ~~requirements.~~ Management ~~expects that~~, asLLC ~~our revenue grows, our sales~~ and ~~marketing~~other ~~and~~lenders ~~research and development expense will continue to grow~~(collectively, ~~albeit~~the ~~at a slower rate and~~“Lenders”), ~~as a result, we will need to generate significant net revenue to achieve~~ and ~~sustain~~under ~~positive cash flows from operations. Historically~~ the ~~Company~~purchase ~~has~~agreement ~~not~~with ~~been~~Lincoln ~~able~~Park toCapital ~~generate sufficient net revenue to achieve and sustain positive cash flows from operations. As a result~~Fund, ~~the~~LLC ~~Company~~(“Lincoln ~~has~~Park”) ~~been dependent on equity and debt financings~~ to satisfy its working capital requirements ~~and~~(“LPC ~~continue~~Purchase ~~as a going concern~~Agreement”). ~~Due to the Company’s deteriorating liquidity, management has determined that there is substantial doubt about the Company’s ability to continue as a going concern.~~

~~- 8~~During - 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. In the event the Company is unable to consummate one or more of the above transactions, the Company will not be able to continue as a going concern. The Company continues to evaluate indications of interest as well as options to address its projected working capital requirements, and those discussions are ongoing, including discussions with the Company’s largest shareholder with whom the Company has entered a Term Loan and Security Agreement to provide up to $2,500,000 (the “Credit Facility”). As of May 20, 2022 approximately $342,000 remains available under the Credit Facility in such Lender’s discretion, and no assurances can be given that the Lenders will consent to the release of the additional $342,000 under the Credit Facility. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.

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~~At September~~To 30date, ~~2021~~the ~~and December~~Board ~~31, 2020, we had negative working capital~~ of ~~$8,280,000~~Directors ~~and~~(“Board”) ~~$19,349,000,~~has ~~respectively. Included in our negative working capital as of September 30, 2021 are $7,486,000 of derivative liabilities which are~~ not ~~required~~entered tointo beany ~~settled~~financing ~~in cash except in the event of the consummation of a change of control~~ or atother ~~any time after the fourth anniversary of the Series D Preferred issuance~~arrangements, atother ~~which~~than ~~time~~ the ~~holders~~Credit ofFacility ~~the~~and ~~Series D Preferred may require~~ the ~~Company~~LPC toPurchase ~~redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Series D Liquidation Preference Amount. At September 30~~Agreement, ~~2021 the Liquidation Preference Amount totaled $22,965. Considering the financings consummated in 2020~~ and ~~2021,~~no asassurances ~~well~~can asbe ~~our~~given ~~projected~~that ~~cash requirements, and assuming~~ we ~~are unable to generate incremental revenue, our available cash~~ will be ~~insufficient~~successful toin ~~satisfy~~raising ~~our~~additional ~~cash~~capital ~~requirements~~through ~~for~~ the ~~next~~issuance ~~twelve months from the date~~ of ~~this~~debt ~~filing.~~and/or ~~At November~~equity 4,securities ~~2021,~~or ~~cash~~entering oninto ~~hand~~any ~~approximated~~other ~~$1,243,000.~~transaction ~~Based~~that onaddresses ~~the~~our ~~Company’s~~ability ~~rate~~to ofcontinue ~~cash~~as ~~consumption~~a ingoing ~~the~~concern. The ~~first~~consummation ~~three quarters~~ of ~~2021~~a ~~and~~transaction ~~the last quarter of 2020, the Company estimates it~~ will ~~need~~likely ~~additional~~involve ~~capital~~substantial indilution ~~the~~to ~~first quarter of 2022 and its prospects for obtaining that capital are uncertain. As a result of~~ the Company’s ~~historical~~stockholders ~~losses~~ and may ~~financial~~result ~~condition,~~in ~~there is substantial doubt about~~ the ~~Company’s~~loss ~~ability~~of toyour ~~continue~~entire ~~as a going concern~~investment.

ToIn ~~address~~view ~~our~~of ~~working~~the ~~capital~~matters ~~requirements,~~described ~~management~~in ~~has instituted several cost cutting measures and has utilized cash proceeds available under~~ the ~~purchase~~preceding ~~agreement with Lincoln Park Capital Fund~~paragraph, ~~LLC~~recoverability ~~(“Lincoln~~of ~~Park”)~~a tomajor ~~satisfy~~portion ~~its~~of ~~working~~the ~~capital~~recorded ~~requirements~~asset ~~(“LPC~~amounts ~~Purchase~~shown ~~Agreement”). In addition, as reported~~ in the ~~Company’s~~accompanying ~~Quarterly~~condensed ~~Report~~consolidated onbalance ~~Form~~sheet ~~10-Q~~is ~~filed~~dependent ~~with~~upon ~~the~~continued ~~Securities~~operations ~~and~~of ~~Exchange Commission (~~the ~~"SEC") on August 23, 2021, on August 12, 2021, the~~ Company ~~retained an investment bank to initiate a review of available alternatives to maximize shareholder value~~, which ~~may include~~, ~~among~~in ~~other alternatives~~turn, ~~(i)~~is adependent ~~merger,~~upon ~~consolidation, or other business combination or a purchase involving all or a substantial amount of~~ the ~~business, securities or assets of the~~ Company,’s ~~and/or (ii)~~ability ~~the~~to ~~private~~continue ~~placement of securities~~ to ~~meet~~raise ~~its working~~ capital ~~requirements~~and orgenerate ~~otherwise~~positive ascash ~~necessary~~flows infrom ~~connection with the consummation of any of the above transactions~~operations. ~~Other~~ ~~than~~However, the ~~LPC~~Company ~~Purchase~~operates ~~Agreement~~in ~~with~~markets ~~Lincoln~~that ~~Park, there~~ are ~~currently~~emerging noand ~~financing~~highly ~~arrangements~~competitive. toThere ~~support~~is ~~our~~no ~~projected~~assurance ~~cash~~that ~~shortfall, and available capital under~~ the ~~LPC~~Company ~~Purchase Agreement~~ will be ~~insufficient~~able to ~~address~~obtain ~~our~~additional ~~working~~ capital, ~~needs.~~operate Weat ~~currently~~a ~~have~~profit ~~no other commitments to purchase additional debt and/~~or ~~equity~~generate ~~securities,~~positive orcash ~~other~~flows ~~agreements, and no assurances can be given that we will be successful~~ in ~~raising~~the ~~additional~~future. ~~debt~~Therefore, ~~and/or~~management’s ~~equity~~plans ~~securities,~~do ornot ~~entering~~alleviate ~~into~~the ~~any~~substantial ~~other~~doubt ~~transaction~~of ~~that~~the ~~addresses~~Company’s ~~our~~ ability to continue as a going concern. ~~The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders.~~

In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital, generate positive cash flows from operations, or otherwise consummate a transaction that addresses the Company’s working capital requirements. However, the Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will be able to obtain additional capital, consummate a transaction that addresses its liquidity concerns, or operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

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NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation

The accompanying condensed consolidated balance sheet as of ~~December~~March 31, ~~2020~~2022, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, ~~2020~~2021, which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, ~~2020~~2021 as filed with the SEC on April 515, ~~2021~~2022.

Operating results for the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021~~2022, or any other future periods.

Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly-owned subsidiaries are: XImage Corporation, a California Corporation; ~~ImageWare~~Imageware Systems ID Group, Inc., a Delaware corporation (formerly Imaging Technology Corporation); I.W. Systems Canada Company, a Nova Scotia unlimited liability company; ~~ImageWare~~Imageware Digital Photography Systems, LLC, a Nevada limited liability company (formerly Castleworks LLC); Digital Imaging International GmbH, a company formed under German laws; and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D ~~Preferred~~ Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.

~~Accounts Receivable~~ - 8-

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.

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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 receivables 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 receivables are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.

Inventories

Finished goods inventories are stated at the lower of cost, determined using the average cost method, or net realizable value. See Note 4.

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, and deferred revenue, the carrying amounts approximate fair value due to their relatively short maturities.

Lease Liabilities and Operating Lease Right-of-Use Assets

The Company is a party to certain contractual arrangements for office space which meet the definition of leases under Accounting Standards Codification (“ASC”) Topic 842 - Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5% using a capital asset pricing model. The Company has utilized the practical expedient regarding lease and ~~nonlease~~non-lease 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 evaluates its operating lease right-of-use assets for impairment. Impairment is based on the excess of the carrying amount over the fair value, based on market value when available, or expected future economic benefits to the company from the operating lease right-of-use asset and is recorded in the period in which the determination is made. The Company recorded no impairment during the three months ended March 31, 2022.

Revenue Recognition

In accordance with ASC Topic 606 – Revenue from Contracts with Customers (“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~~ASC ~~standard~~606 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:

Identify the contract with the customer;

Identify the performance obligation in the contract;

Determine the transaction price;

Allocate the transaction price to the performance obligations in the contract; and

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. - 9-

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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 (“PCS”) 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~~PCS ~~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.

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Contract Costs

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. At ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, we had capitalized incremental costs of obtaining a contract with a customer of ~~approximately~~ $0 and ~~$65,000, respectively. We~~ recorded no additional contract costs during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022. Additionally, we recognized approximately $121,000 and $366,000 in revenue during the three and nine months ended September 30, 2021, respectfully, that was related to contract costs at the beginning of the period.

Other Items

We do not offer rights of return for our products and services in the normal course of business.

Sales tax collected from customers is excluded from revenue.

The following table sets forth our disaggregated revenue for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021:

Net Revenue

Three Months Ended ~~September~~March 3031,

~~Nine Months Ended September 30,~~

(dollars in thousands)

~~2021~~2022

~~2020~~2021

~~2021~~

~~2020~~

Software and royalties

40141

~~587~~39

~~301~~

~~780~~

Hardware and consumables

2043

Services

8526

~~1,258~~4

~~1,274~~

Maintenance

~~633~~635

~~613~~677

~~1,977~~

~~1,870~~

Total revenue

~~778~~845

~~2,471~~733

~~2,452~~

~~3,999~~

Customer Concentration

For the three months ended ~~September~~March 3031, ~~2021~~2022, two customers accounted for approximately 5337% or $~~411~~314,000 of our total revenue and had trade receivables at ~~September~~March 3031, ~~2021~~2022 of $9335,000. ~~For the nine months ended September 30, 2021, two customers accounted for approximately 44% or $1,078,000 of our total revenue and had trade receivables at September 30, 2021 of $223,000.~~

For the three months ended ~~September~~March 3031, ~~2020~~2021, two customers accounted for approximately 8245% or $2333,~~037,~~000 of our total revenue and had trade receivables ~~at September 30, 2020~~ of $~~193~~249,000. ~~For the nine months ended September 30, 2020, two customers accounted for approximately 65% or $2,588,000 of our total revenue and had trade receivables~~ at ~~September~~March 3031, ~~2020 of $193,000~~2021.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.

FASB Accounting Standards Update (“ASU”) No. 2020-06. In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. ~~This~~(“ASU 2020-06"). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ~~The~~ ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ~~The~~ ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas. ~~This~~ ASU 2020-06 is effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.

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NOTE 3. NET ~~INCOME (~~LOSS) PER COMMON SHARE

Basic ~~income (~~loss) per common share is calculated by dividing net ~~income (~~loss) available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted ~~income (~~loss) per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period, adjusted to include, if dilutive, potential dilutive shares consisting of convertible preferred stock, stock options and warrants, calculated using the treasury stock and if-converted methods. For diluted ~~income (~~loss) per share calculation purposes, the net ~~income (~~loss) available to common shareholders is adjusted to add back any preferred stock dividends and any interest on convertible debt reflected in the condensed consolidated statement of ~~income (~~loss) for the respective periods.

The table below presents the computation of basic and diluted ~~income (~~loss) per share:

(Amounts in thousands except share and per share amounts)	Three Months Ended ~~September~~March 3031,						~~Nine Months Ended September 30,~~
	2021			2020			2021			2020
	2022			2021
Numerator for basic and diluted income (loss) per share:
Numerator for basic and diluted loss per share:
Net income (loss)	$	490		$	(626	)	$	9,871		$	(6,652	)
Net loss	$	(2,698	)	$	(1,885	)
Preferred dividends, deemed dividends and accretion		(1,935	)		(2,529	)		(6,260	)		(5,275	)
Preferred dividends and preferred stock discount accretion		(1,797	)		(2,255	)
Net income (loss)available to common shareholders	$	(1,445	)	$	(3,155	)	$	3,611		$	(11,927	)
Net loss available to common shareholders	$	(4,495	)	$	(4,140	)
Effective of dilutive securities:
Denominator for basic loss per share – weighted-average shares outstanding		347,275,242			245,829,914
Preferred dividends, deemed dividends and accretion		—			—			—			—
Basic and diluted loss per share available to common shareholders	$	(0.01	)	$	(0.02	)
Net income (loss) available to common shareholders after assumed conversions		(1,445	)		(3,155	)		3,611			(11,927	)
Denominator for basic income (loss) per share – weighted-average shares outstanding		340,384,468			133,341,134			326,458,778			125,558,524
Effect of dilutive securities:
Options		—			—			82,942,500			—
Warrants		—			—			2,919,631			—
Convertible preferred stock		—			—			—			—
Denominator for diluted income (loss) – adjusted weighted average shares and assumed conversions		340,384,468			133,341,134			412,320,909			125,558,524
Basic income (loss) per share available to common shareholders	$	(0.00	)	$	(0.02	)	$	0.01		$	(0.09	)
Diluted income (loss) per share available to common shareholders	$	(0.00	)	$	(0.02	)	$	0.01		$	(0.09	)

The following potential ~~table~~dilutive ~~sets~~securities ~~forth~~have ~~Common~~been ~~share~~excluded ~~equivalents~~from ~~at September~~the ~~30,~~computations ~~2021~~of ~~and December~~diluted 31weighted-average shares outstanding, ~~2020~~as their effect would have been antidilutive:

Potential Dilutive Securities:	Common Share Equivalents at ~~September~~March 3031, ~~2021~~2022		Common Share Equivalents at December 31, ~~2020~~2021
Convertible redeemable preferred stock - Series A		-		74,555,000
Convertible redeemable preferred stock – Series A		—		30,743,500
Convertible redeemable preferred stock - Series A-1		-		73,910,000
Convertible redeemable preferred stock – Series A-1		—		29,610,000
Convertible redeemable preferred stock - Series B		47,001		46,029
Convertible redeemable preferred stock – Series B		46,980		46,980
Convertible redeemable preferred stock - Series D		393,917,667		392,166,023
Convertible redeemable preferred stock – Series D		402,562,607		390,348,199
Stock options		834,~~144~~818,~~875~~876		2,~~585~~574,~~500~~669
Restricted stock units (RSUs)		83,802		845,106
Restricted stock units (“RSUs”)		81,019,401		618,004
Warrants		3,150,000		~~753~~393,~~775~~589
Total Potential Dilutive Securities		~~480~~491,~~343~~597,~~345~~864		~~544~~454,~~861~~334,~~433~~941

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NOTE 4. SELECT BALANCE SHEET DETAILS

Inventory

Inventories of $8524,000 as of ~~September~~March 3031, ~~2021~~2022 were comprised of work in process of $277,000, representing direct labor costs on in-process projects and finished goods of $5817,000 net of reserves for obsolete and slow-moving items of $3,000.

Inventories of $4025,000 as of December 31, ~~2020~~2021 were comprised of work in process of $267,000, representing direct labor costs on in-process projects and finished goods of $1418,000 net of reserves for obsolete and slow-moving items of $3,000.

Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value and required reserve levels.

~~Intangible Assets~~ - 12-

The carrying amounts of the Company’s patent intangible assets were $49,000 and $58,000 as of September 30, 2021 and December 31, 2020, respectively, which includes accumulated amortization of $610,000 and $601,000 as of September 30, 2021 and December 31, 2020, respectively. Amortization expense for patent intangible assets was $3,000 and $9,000 for the three and nine months ended September 30, 2021 and 2020, respectively. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately 4.08 years. There was no impairment of the Company’s intangible assets during the three and nine months ended September 30, 2021 and 2020.

The estimated intangible amortization expense for the next five fiscal years is as follows:

Fiscal Year Ended December 31,	Estimated Amortization Expense ($ in thousands)
2021 (three months)	$	3
2022		12
2023		12
2024		12
2025		10
Total	$	49

Goodwill

The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The provisions of ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts, will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only one reporting unit, Identity Management which, at September 30, 2021, had a negative carrying amount of approximately $13,748,000. Based on the results of the Company's impairment testing, the Company determined that its goodwill was not impaired as of September 30, 2021 and December 31, 2020.

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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, 2022, had a negative carrying amount of approximately $18,961,000. Based on the results of the Company's impairment testing, the Company determined that its goodwill was not impaired as of March 31, 2022 and December 31, 2021 as the fair value of our Identity Management reporting unit exceeded that reporting unit’s carrying value. However, the Company has experienced decreases in its market capitalization and if our market capitalization continues to decrease, future impairment of goodwill may result.

Other Assets

In conjunction with the ~~2021~~ LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2021, 1,000,000 shares of Common Stock as consideration for entering into the LPC Purchase Agreement. Pursuant to this issuance, the Company recorded $70,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid -in capital in proportion to securities sold under ~~this~~the LPC Purchase Agreement. At ~~September~~March 3031, ~~2021~~2022, the Company had approximately $70,000 in deferred stock issuance costs included in the caption “Other assets” in its condensed consolidated balance sheets. During the three and nine months ended September 30, 2021, there were 0 shares and 1,000,000 shares of Common Stock sold by the Company under the 2021 LPC Purchase Agreement. The 2021 LPC Purchase Agreement supersedes and terminates the previous agreement between the Company and Lincoln Park entered into on June 11, 2020.

In conjunction with a securities purchase agreement entered into with 2020 LPC Purchase Agreement, the Company issued to Lincoln Park, in May 2020, 2,500,000 shares of Common Stock as consideration for entering into the 2020 LPC Purchase Agreement. Pursuant to this issuance, the Company recorded $400,000 as a deferred stock issuance cost. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under the 2020 LPC Purchase Agreement.

Due to the termination of the 2020 LPC Purchase Agreement, effectuated by the consummation of the 2021 LPC Purchase Agreement, the Company wrote-off and recorded operating expense of approximately $364,000 representing the unamortized capitalized deferred stock issuance costs remaining under the 2020 LPC Purchase Agreement during the nine months ended September 30, 2021.

NOTE 5. LEASES

The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 -– Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, initially recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5%, as the discount rates implicit in the Company’s leases cannot be readily determined. At ~~December~~March 31, ~~2020~~2022, such assets and liabilities aggregated approximately $1808,~~557,~~000 and $1,~~718~~181,000, respectively. At ~~September~~December 3031, 2021, such assets and liabilities aggregated approximately $1847,~~278,~~000 and $1,~~409~~298,000, respectively. The Company determined that it had no arrangements representing finance leases.

Our corporate headquarters is located in San Diego, California, where we now occupy approximately 500 square feet of office space at a cost of approximately $2,000 per month. We entered into this facility’s lease in February 2021, with the new lease commencing on March 1, 2021 on a month-to-month basis. ~~In addition to our corporate headquarters, we also occupied the following spaces at September 30, 2021:~~

●Prior 9to entering into our current lease agreement in January 2021 and moving our corporate headquarters to a new location,~~720~~ we occupied 8,511 square feet of office space in ~~Portland~~San Diego, ~~Oregon~~California, at a cost of approximately $2328,000 per month. ~~until~~In January 2021, we entered in a subleasing agreement for our previously occupied corporate headquarters located in San Diego, California. The term of the sublease commenced on April 1, 2021 and expires on April 30, 2025, coterminous with the expiration of the Company’s master lease. onSublease ~~February~~payments 28due to the Company approximate $26,000 ~~2023~~per month over the term of the sublease.

Prior to entering into our current lease agreement in January 2021 and moving our corporate headquarters to a new location, we occupied 8,511 square feet of office space in San Diego, at a cost of approximately $28,000 per month. In January 2021, we entered in a subleasing agreement for our previously occupied corporate headquarters located in San Diego, California. The term of the sublease commenced on April 1, 2021 and expires on April 30, 2025 coterminous with the expiration of the Company’s master lease. Sublease payments due the Company approximate $26,000 per month over the term of the sublease.

The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases.

For the three months ended March 31, 2022 and 2021, the Company recorded approximately $154,000 in lease expense using the straight- 16line method. Under the provisions of ASC 842, lease expense is comprised of the total lease payments under the lease plus any initial direct costs incurred less any lease incentives received by the lessor amortized ratably using the straight- line method over the lease term. The weighted-average remaining lease term of the Company’s operating leases as of March 31, 2022 is 1.33 years. Cash payments under operating leases are included in operating cash flows and aggregated approximately $162,000 and $166,000 for the three months ended March 31, 2022 and 2021, respectively.

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For the three months ended September 30, 2021 and 2020, the Company recorded approximately $162,000 and $169,000, respectively, in lease expense using the straight-line method. For the nine months ended September 30, 2021 and 2020, the Company recorded approximately $492,000 and $508,000 respectively, in lease expense using the straight-line method. Under the provisions of ASC 842, lease expense is comprised of the total lease payments under the lease plus any initial direct costs incurred less any lease incentives received by the lessor amortized ratably using the straight-line method over the lease term. The weighted-average remaining lease term of the Company’s operating leases as of September 30, 2021 is 1.7 years. Cash payments under operating leases aggregated approximately $165,000 and $504,000, respectively, for the three and nine months ended September 30, 2021 and $162,000 and $485,000, respectively, for the comparable periods in 2020, and are included in operating cash flows.

The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as its term is less than 12 months.

~~At September 30, 2021, future minimum undiscounted lease payments are as follows:~~ - 13-

($ in thousands)
2021 (three months)	$	161
2022		652
2023		424
2024		387
2025		132
Total		1,756
Present Value effect on future minimum undiscounted lease payments at September 30, 2021		(347	)
Lease liability at September 30, 2021		1,409
Less current portion		(494	)
Non-current lease liability at September 30, 2021	$	915

NOTE 6. MEZZANINE EQUITY

Series C Convertible Redeemable Preferred Stock

On September 18, 2018, the Company filed the Series C Certificate with the Secretary of State for the State of Delaware designating 1,000 shares of the Company’s preferred stock, par value $0.01 per shares, as Series C Preferred, each share with a stated value of $10,000 per share. The Company noted that the Series C Preferred instruments were hybrid instruments that contained several embedded features. The Company evaluated the identified embedded features of the Series C Preferred host instrument and determined that certain features met the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument. The Company has bifurcated from the Series C Preferred host instrument the conversion options, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $833,000 at issuance and were recorded by the Company as a discount to the Series C Preferred.

For the three and nine months ended September 30, 2020, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $170,000 and $517,000, respectively. Concurrently with the issuance of Series D Convertible Redeemable Preferred Stock (described below), all holders of Series C exchanged their shares for shares of Series D Preferred.

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At March 31, 2022, future minimum undiscounted lease payments are as follows:

($ in thousands)
2022 (nine months)	$	490
2023		424
2024		387
2025		132
Total		1,433
Present Value effect on future minimum undiscounted lease payments at March 31, 2022		(252	)
Lease liability at March 31, 2022		1,181
Less current portion		(495	)
Non-current lease liability at March 31, 2022	$	686

NOTE 6. MEZZANINE EQUITY

Series D Convertible Redeemable Preferred Stock

On November 12, 2020, the Company filed the Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock (the “Series D Certificate”) with the Secretary of State for the State of Delaware. Pursuant to the Series D Certificate, the Series D Preferred ranks senior to all Common Stock and all other present and future classes or series of capital stock, except for Series B Preferred (described below in Note 9), and upon liquidation will be entitled to receive the Liquidation Preference Amount (as defined in the Series D Certificate) plus any accrued and unpaid dividends, before the payment or distribution of the Company’s assets or the proceeds thereof is made to the holders of any junior securities. Additionally, dividends on shares of Series D Preferred will be paid prior to any junior securities, and are to be paid at the rate of 4% of the Stated Value (as defined in the Series D Certificate) per share per annum in the form of shares of Series D Preferred. Holders of Series D Preferred shall vote together with holders of Common Stock on an as-converted basis, and not as a separate class, except (i) the holders of Series D Preferred, voting as a separate class, shall be entitled to elect two directors, (ii) the holders of Series D Preferred have the right to vote as a separate class regarding the waiver of certain protective provisions set forth in the Series D Certificate, and (iii) as otherwise required by law.

The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into Common Stock at any time that is at least ninety days following the issuance date, at the conversion price calculated by dividing the Stated Value by the conversion price of $0.0583 per share of Common Stock, subject to adjustments as set forth in Section 5(e) of the Series D Certificate. The shares of Common Stock issuable upon conversion of the Series D Preferred shall be subject to the following registration rights: (i) one demand registration starting three months after the Closing,; (ii) two demand registrations starting one year after the Closing,; and (iii) unlimited piggy-back and Form S-3 registration rights with reasonable and customary terms.

If, on any date that is at least five (5) years following the Issuance Date (as defined in the Series D Certificate), (i) the Common Stock is registered pursuant to Section 12(b) or (g) under the Exchange Act; (ii) there are sufficient authorized but unissued shares of Common Stock (which have not otherwise been reserved or committed for issuance) to permit the issuance of all Common ~~Shares~~Stock issuable upon conversion of all outstanding shares of Series D Preferred; (iii) upon issuance, the Common ~~Shares~~Stock will be either (A) covered by an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), which is then available for the immediate resale of such Common ~~Shares~~Stock by the recipients thereof, and the Board reasonably believes that such effectiveness will continue uninterrupted for the foreseeable future, or (B) freely tradable without restriction pursuant to Rule l44 promulgated under the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by the counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected holders; and (iv) the VWAP of a share of Common Stock is greater than 300% of the Conversion Price (as defined in Section 5(d) below) then in effect for a period of at least twenty (20) Trading Days in any period of thirty (30) consecutive Trading Days, then the Company shall have the right, subject to the terms and conditions, to convert (a “Mandatory Conversion”) all, but not less than all, of the issued and outstanding shares of Series D Preferred into Common Stock.

On the fourth anniversary of the Issuance Date, or in the event of the consummation of a ~~Change~~change of ~~Control~~control, if any shares of Series D Preferred are outstanding, then each holder of Series D Preferred shall have the right (the “Holder Redemption Right”), at such holder’s option, to require the Company to redeem all or any portion of such holder’s shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal to all accrued but unpaid dividends, if any, (such price, the “Holder Redemption Price”), which Holder Redemption Price shall be paid in cash.

On November 12, 2020 (“Closing Date”), the Company consummated the Series D Financing, resulting in the sale of 11,560 shares of its Series D Preferred, resulting in gross proceeds to the Company of $11.56 million, less fees and expenses. The gross proceeds include approximately $2.2 million in principal amount due and payable under the terms of certain term loans issued by the Company on September 29, 2020 (“Bridge Note”), which Bridge Notes were converted into Series D Preferred at Closing (the “Conversion”). The issuance and sale of the Series D Preferred was made pursuant to that certain Securities Purchase Agreement, dated September 28, 2020 (the "Series D Purchase Agreement"), by and between the Company and the Investors, for the purchase price of $1,000 per share of Series D Preferred. The Conversion and Series D Financing was undertaken pursuant to Section 3(a)(9) and/or Rule 506 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). On December 23, 2020, the Company sold an additional 500 shares of Series D Preferred resulting in gross proceeds to the Company of $500,000 less fees and expenses. - 14-

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On November ~~the~~12, 2020 (“Closing Date”), the Company ~~exchanged~~consummated ~~approximately~~the ~~$661,000~~Series ofD ~~liabilities~~Financing, ofresulting in the ~~Company~~sale ~~for~~of ~~6613~~11,560 shares of its Series D Preferred, ~~and~~resulting ~~received~~in ~~notice~~gross ~~from~~proceeds to the ~~holders~~Company of a$11.56 ~~majority~~million, ofless ~~the~~fees ~~Series~~and Cexpenses. ~~Preferred~~The ~~(the~~gross ~~“Series~~proceeds Cinclude ~~Exchange~~approximately ~~Notice”)~~$2.2 ofmillion ~~their~~in ~~election~~principal toamount ~~convert~~due ~~all~~and ofpayable ~~their~~under ~~shares~~the terms of ~~Series~~certain Cterm ~~Preferred~~loans ~~into~~issued ~~Series~~by Dthe ~~Preferred,~~Company ~~and~~on September ~~further~~29, ~~exercising~~2020 ~~their~~(“Bridge ~~right~~Note”), towhich ~~require~~Bridge ~~all~~Notes ~~other~~were ~~holders~~converted ofinto Series CD Preferred toat ~~convert~~Closing ~~their~~(the ~~shares~~“Conversion”). ofThe ~~Series~~issuance Cand ~~Preferred~~sale ~~into~~of the Series D Preferred was made pursuant to that certain Securities Purchase Agreement, dated September 28, 2020 (the “~~Series~~Purchase ~~C Exchange~~Agreement”)., ~~Upon~~by and between the ~~consummation~~Company ofand the ~~Series~~investors, Cfor ~~Exchange~~the inpurchase ~~accordance~~price ~~with~~of ~~the~~$1,000 ~~terms~~per share of ~~the~~Series D Preferred. The Conversion and Series CD ~~Exchange~~Financing ~~Notice~~was undertaken pursuant to Section 3(a)(9) and/or Rule 506 promulgated under the Securities Act. On December 23, 2020, the Company ~~issued~~sold an additional ~~10,000~~500 shares of Series D Preferred resulting in ~~exchange~~gross ~~for~~proceeds ~~all~~to ~~1,000~~the ~~issued~~Company ~~and outstanding shares~~ of ~~the~~$500,000, ~~Company’s~~less ~~Series~~fees Cand ~~Preferred~~expenses.

~~On December 31, 2020, the Company issued 142 shares of Series D Preferred Stock as payment of dividends due to the Series D Preferred stockholders.~~ During the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2021, the Company issued ~~748~~an aggregate of 999 shares of Series D Preferred ~~Stock~~ as payment of dividends due to the Series D Preferred stockholders. During the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2021, certain holders of Series D Preferred converted 646 shares of Series D Preferred into 11,149,123 shares of Common Stock which includes 70,221 shares of ~~common~~Common ~~stock~~Stock issued for dividends up to the date of conversion.

~~Guidance~~During ~~for~~the ~~accounting~~three ~~for~~months ~~freestanding~~ended March ~~financial~~31, ~~instruments that contain characteristics of both liabilities and equity are contained in ASC 480~~2022, ~~Distinguishing~~the ~~Liabilities From Equity and Accounting Series Release 268 (“ASR 268”) Redeemable Preferred Stocks. The~~ Company ~~evaluated~~issued ~~the~~253 ~~provisions~~shares of ~~the~~ Series D Preferred ~~and~~Stock ~~determined~~as ~~that~~payment ~~the provisions~~ of ~~the~~dividends ~~Series~~due D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to ~~redeem in cash any or all of~~ the ~~holder’s outstanding~~ Series D Preferred ~~at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”)~~stockholders. ~~The~~There ~~Liquidation~~were ~~Preference~~no ~~Amount~~conversions ~~is defined as the greater~~ of ~~the stated value of the~~ Series D Preferred ~~plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted~~ into Common Stock. Induring the ~~event~~three ofmonths aended March ~~Change of Control~~31, ~~the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount~~2022. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.

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 Redeemable Preferred Stocks (“ASR 268”). The Company evaluated the provisions of the Series D Preferred and determined that the provisions of the Series D Preferred grant the holders of the Series D Preferred a redemption right whereby the holders of the Series D Preferred may, at any time after the fourth anniversary of the Series D Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series D Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control (as defined in the Series D Certificate), the holders of Series D Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series D Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.

The Company noted that the Series D Preferred instruments were hybrid instruments that contain several embedded features. In November 2014, the FASB issued ASU 2014-16 to amend ASC 815, “Derivatives and Hedging”, (“ASC 815”) and require the use of the whole instrument approach (described below) to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity.

The whole instrument approach requires an issuer or investor to consider the economic characteristics and risks of the entire hybrid instrument, including all of its stated and implied substantive terms and features. Under this approach, all stated and implied features, including the embedded feature being evaluated for bifurcation, must be considered. Each term and feature should be weighed based on the relevant facts and circumstances to determine the nature of the host contract. This approach results in a single, consistent determination of the nature of the host contract, which is then used to evaluate each embedded feature for bifurcation. That is, the host contract does not change as each feature is evaluated.

The revised guidance further clarifies that the existence or omission of any single feature, including an investor-held, fixed-price, noncontingent redemption option, does not determine the economic characteristics and risks of the host contract. Instead, an entity must base that determination on an evaluation of the entire hybrid instrument, including all substantive terms and features.

However, an individual term or feature may be weighed more heavily in the evaluation based on facts and circumstances. An evaluation of all relevant terms and features, including the circumstances surrounding the issuance or acquisition of the equity share, as well as the likelihood that an issuer or investor is expected to exercise any options within the host contract, to determine the nature of the host contract, requires judgement.

Using the whole instrument approach, the Company concluded that the host instrument of the Series D Preferred ~~was~~were more akin to debt than equity as the majority of identified features contain more characteristics of debt.

The Company evaluated the identified embedded features of the Series D Preferred host instrument and determined that certain features meet the definition of and contained the characteristics of derivative financial instruments requiring bifurcation at fair value from the host instrument. - 15-

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The Company ~~has~~evaluated ~~bifurcated~~the ~~from~~identified embedded features of the Series D Preferred host instrument ~~the conversion options, redemption option~~ and ~~participating~~determined ~~dividend~~that ~~feature~~certain ~~in accordance with the guidance in ASC 815. These bifurcated~~ features ~~aggregated~~meet ~~approximately $26,011,000 at issuance and have been recorded as a discount to~~ the ~~Series~~definition D.of ~~During the three~~ and ~~nine~~contained ~~months ended September 30, 2021,~~ the ~~Company~~characteristics ~~recorded the accretion~~ of ~~debt issuance costs and~~ derivative ~~liabilities~~financial ~~aggregating~~instruments ~~approximately~~requiring ~~$1,665,000~~bifurcation ~~and~~at ~~$5,214,000,~~fair ~~respectfully,~~value ~~using~~from the ~~effective~~host ~~interest rate method as a deemed dividend~~instrument.

The ~~following~~Company ~~table~~has ~~summarizes~~bifurcated from the ~~share~~Series ~~activity~~D ofPreferred host instrument the conversion option, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $26,011,000 at issuance and have been recorded as a discount to the Series D Preferred. ~~for~~During the three months ended March 31, 2022 and 2021, ~~three~~the ~~months~~Company ~~ended June~~recorded ~~30,~~the ~~2021~~accretion of debt issuance costs and ~~the~~derivative ~~three~~liabilities ~~months~~aggregating ~~ended September~~approximately 30$1,531,000 and ~~2021:~~$1,817,000, respectively, using the effective interest rate method as a deemed dividend.

	Series D Convertible Redeemable Preferred
Total shares of Series D Preferred Stock - December 31, 2020		22,863
Conversion of Series D Preferred into Common Stock		(354	)
Issuance of Series D Preferred as payment of dividends due		248
Total shares of Series D Preferred Stock - March 31, 2021		22,757
Conversion of Series D Preferred into Common Stock		(50	)
Issuance of Series D Preferred as payment of dividends due		251
Total shares of Series D Preferred Stock - June 30, 2021		22,958
Conversion of Series D Preferred into Common Stock		(242	)
Issuance of Series D Preferred as payment of dividends due		249
Total shares of Series D Preferred Stock - September 30, 2021		22,965

The following table summarizes the share activity of Series D Preferred for the three months ended March 31, 2022:

The carrying value of the Company’s Series D Preferred was approximately $6,973,000 and $1,572,000 net of discount of approximately $15,992,000 and $21,291,000 as of September 30, 2021 and December 31, 2020, respectively.

	Series D Convertible Redeemable Preferred

Total shares of Series D Preferred Stock - December 31, 2021		23,216
Conversion of Series D Preferred into Common Stock		—
Issuance of Series D Preferred as payment of dividends due		253
Total shares of Series D Preferred Stock - March 31, 2022		23,469

The carrying value of the Company’s Series D Preferred was approximately $10,478,000 and $8,759,000 net of discount of approximately $12,991,000 and $14,458,000 as of March 31, 2022 and December 31, 2021, respectively.

NOTE 7. DERIVATIVE LIABILITIES

The Company accounts for its derivative instruments under the provisions of ASC 815, “Derivatives and Hedging”. Under the provisions of ASC 815, the Company identified embedded features within the Series D Preferred host contracts that qualify as derivative instruments and require bifurcation.

The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series D Preferred host instrument required bifurcation. The Company valued ~~the~~these bifurcatable features at fair value. Such liabilities aggregated approximately $76,~~486~~024,000 and $245,~~128~~292,000 at ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, respectively, and are classified as current liabilities on the Company’s condensed consolidated balance sheets under the caption “Derivative liabilities”. The Company will revalue these features at each balance sheet date and record any change in fair value in the determination of period net income or loss.

The change in fair value of such amounts ~~are~~is recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of ~~income (loss)~~operations. For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022, the Company recorded aan ~~decrease~~increase to its derivative liabilities using fair value methodologies of approximately $1667,~~342,~~000 ~~and $16,558,000 related to Series D embedded derivatives~~. InFor ~~conjunction with~~ the ~~conversion of 242 shares of Series D Preferred during the~~ three months ended ~~September~~March 3031, 2021, the Company ~~recognized~~recorded a ~~gain~~decrease ofto ~~approximately~~its ~~$34,000.~~derivative Inliabilities ~~conjunction~~using ~~with~~fair ~~the~~value ~~conversion~~methodologies of ~~646 shares of Series D Preferred during the nine months ended September 30, 2021, the Company recognized a loss on the extinguishment of derivative liabilities of~~ approximately $~~311~~1,172,000.

~~The~~NOTE ~~Company determined that the conversion option, redemption option and participating dividend feature contained in the Series C Preferred host instrument required bifurcation~~8. ~~The~~LINE ~~Company~~OF valued these bifurcatable features at fair value and such liabilities aggregated approximately $0 at September 30, 2020. There is no Series C Preferred outstanding at September 30, 2021. The change in fair value of such amounts are recorded in the caption “Change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. During the three and nine months ended September 30, 2020, the Company recorded a decrease to these derivative liabilities using fair value methodologies of approximately $535,000 and $369,000, respectively.CREDIT

~~- 20~~ - December 2021 Credit Facility with Nantahala Capital Management

On December 29, 2021, the Company entered into a Term Loan and Security Agreement with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (together with Nantahala, the “Lenders”), pursuant to which the Lenders will provide to the Company a secured term loan credit facility in an aggregate amount of up to $2,500,000. Nantahala collectively owns, or otherwise controls, approximately 37.3% of our issued and outstanding voting securities.

On the Closing Date, the Company received in initial draw-down on the Credit Facility of $600,000. Subsequent to the initial draw-down and through May 20, 2022, the Company received additional draw-downs aggregating $1,450,000. The Company expects to use the proceeds from the Credit Facility for working capital requirements and corporate purposes. As of May 20, 2022, there is approximately $342,000 outstanding under the Credit Facility in such Lender’s discretion, and no assurances can be given that the Lenders will consent to the release of the additional $342,000 under the LOC. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.

For a more detailed description of this related party credit facility, see Note 12, Related Parties.

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NOTE 8. NOTES PAYABLE

On May 4, 2020, the Company entered into a loan agreement (the “PPP Loan”) with Comerica Bank (“Comerica”) under the Paycheck Protection Program (the “PPP”), which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under the PPP, the Company received proceeds of approximately $1,571,000. In accordance with the requirements of the PPP, the Company utilized the proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, matures on May 4, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. In July 2021, the Company filed an application with the SBA requesting loan forgiveness. In September 2021, the Company received notification that the PPP Loan was forgiven in its entirety. Accordingly, the Company recorded a gain on debt extinguishment for the amount of the PPP Loan of $1,571,000 plus approximately $10,000 in accrued unpaid interest. Such amounts are recorded under the caption “(Gain) on extinguishment of derivative liabilities and debt” in the Company’s Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2021.

At December 31, 2020, the Company has recorded the current portion of the PPP Loan of approximately $918,000 as a current liability under the caption “Notes payable, current portion” in its condensed consolidated December 31, 2020 balance sheet. The remaining portion of approximately $653,000 is recorded as a long-term liability under the caption “Note payable, net of current portion” in its condensed consolidated December 31, 2020 balance sheet.

NOTE 9. EQUITY

The Company’s Certificate of Incorporation, as amended, authorizes the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board ~~of Directors~~ may determine.

On June 9, 2020, the Company amended its Certificate of Incorporation to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of 179 million to 350 million, consisting of 345 million shares of Common Stock and 5 million shares of Preferred Stock. On September 28, 2020, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 345 million shares to 1.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective October 13, 2020. On February 16, 2021, the Company received executed written consents from the requisite holders of the Company's voting securities, voting on an as-converted basis, approving an increase in the authorized number of shares of Common Stock from 1.0 billion shares to 2.0 billion shares, with no change to the number of authorized shares of Preferred Stock, which action became effective April 21, 2021.

~~Series~~As Aof March ~~Convertible~~31, ~~Preferred~~2022, we had 347,281,946 and 347,275,242 shares of Common Stock issued and outstanding, respectively. As of December 31, 2021, we had 347,240,045 and 347,233,341 shares of Common Stock issued and outstanding, respectively. Our authorized but unissued shares of Common Stock are available for issuance without action by our shareholders. All shares of Common Stock now outstanding are fully paid and non-assessable.

~~On September~~Our ~~15,~~Board ~~2017,~~has ~~the~~designated ~~Company~~five ~~filed~~series ~~the Certificate~~ of ~~Designations~~Preferred ofStock; ~~the~~(i) Series A Preferred, ~~with~~(ii) ~~the~~Series ~~Delaware~~A-1 ~~Secretary~~Preferred, of(iii) ~~State~~Series B Preferred, (~~the~~iv) “Series AC ~~Certificate”~~Preferred and (v), ~~designating~~Series ~~38,000~~D ~~shares~~Preferred. As of March ~~the~~31, ~~Company’s~~2022, ~~preferred~~there ~~stock,~~were ~~par~~no ~~value~~shares ~~$0.01~~of ~~per~~Series ~~share~~A Preferred outstanding, asno shares of Series A-1 Preferred. ~~The~~outstanding, ~~Company~~239,400 ~~had~~shares 37of series B Preferred outstanding,~~467~~ no shares of Series AC Preferred outstanding, asand 23,469 shares of ~~December~~ ~~31,~~Series ~~2019~~D Preferred outstanding.

During July 2020, the Company entered into the Series A Exchange Agreement with the Series A Holders, pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred in consideration for their waiver of approximately $1,849,000 in dividends payable.

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On September 28, 2020, the Company received executed written consents from (i) the requisite holders of the Company’s voting securities, voting on an as-converted basis, and (ii) the requisite holders of Series A Preferred, voting as a separate class, approving the Amended Series A Certificate, which, among other things, provides for (a) the automatic conversion of all Series A Preferred into Common Stock at a rate of 10% per month following the Closing of the Series D Financing, with the conversion price for such conversion reduced from $1.15 per share of Common Stock, to $0.20 per share of Common Stock, and (b) a reduction of the dividend rate from 8% of the stated Series A Liquidation Preference Amount if paid in cash and 10% of the stated Series A Liquidation Preference Amount if paid in Common Stock, to 4% of the Series A Liquidation Preference Amount, with the dividends being paid only in shares of Common Stock.

The Company had 0 and 14,911 shares of Series A Preferred outstanding as of September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, the Company had cumulative undeclared dividends of $0. During the three months ended September 30, 2021, the Company issued the holders of Series A Preferred 109,836 shares of Common Stock as payment of dividends due. During the nine months ended September 30, 2021, the Company issued the holders of Series A Preferred 1,789,587 shares of Common Stock as payment of dividends due.

During the three months ended September 30, 2021, the Company issued 11,647,000 shares of Common Stock upon the conversion of 2,330 shares of Series A Preferred Stock. During the nine months ended September 30, 2021 the Company issued 74,562,000 shares of Common Stock upon the conversion of 14,911 shares of Series A Preferred Stock.

Series A-1 Convertible Preferred Stock

In July 2020, the Company filed the Series A-1 Certificate with the Secretary of State for the State of Delaware - Division of Corporations, designating 31,021 shares of the Company’s Preferred Stock as Series A-1 Preferred. Shares of Series A-1 Preferred accrue cumulative dividends and are payable quarterly beginning September 30, 2021 at a rate of 8% per annum if paid in cash, or 10% per annum if paid by the issuance of shares of the Company’s Common Stock.

Shares of Series A-1 Preferred rank senior to the Company’s Common Stock, pari-passu to the Company's Series A Preferred, and are subordinate and rank junior to Series B Preferred and Series D Preferred.

Each share of Series A-1 Preferred has a liquidation preference equal to the greater of (i) $1000 per share plus all accrued and unpaid dividends, or (ii) such amount per share as would have been payable had each such share been converted into Common Stock immediately prior to such liquidation, dissolution or winding up (the amount payable pursuant to the foregoing is referred to herein as the “Series A-1 Liquidation Preference Amount”) before any payment shall be made or any assets distributed to the holders of the Common Stock or any other classes and series of equity securities of the Company which by their terms rank junior to the Series A-1 Preferred.

Each share of Series A-1 Preferred was convertible into that number of shares of the Company’s Common Stock (“Series A-1 Conversion Shares”) equal to that number of shares of Series A-1 Preferred being converted multiplied by $1,000, divided by $0.65, or the conversion price as defined in the Series A-1 Certificate in effect as of the date the holder delivers to the Company their notice of election to convert. Holders of Series A-1 Preferred may elect to convert shares of Series A-1 Preferred into Common Stock at any time. In addition to the aforementioned holder conversion option, if the volume weighted average closing price ("VWAP") of the Company’s Common Stock is at least $1.00 per share for 20 consecutive trading days, then the Company has the right to convert one-half of the issued and outstanding shares of Series A-1 Preferred into Common Stock. In the event of a Change of Control, the Company will have the option to redeem all issued and outstanding shares of Series A-1 Preferred for 115% of the Liquidation Preference per share.

During July 2020, the Company entered into an Exchange Agreement, Consent and Waiver (“Exchange Agreement”) with certain holders of its Series A Preferred (the "Series A Holders"), pursuant to which such Series A Holders exchanged 18,828 shares of Series A Preferred for an equivalent number of Series A-1 Preferred.

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On September 28, 2020, the Company's holders of Common Stock and Preferred Stock voted to revise the Series A-1 Certificate by amending and restating the Series A-1 Certificate to, without limitation, provide for (i) the voluntary conversion of all outstanding shares of the Company's Series A-1 Preferred into shares of the Company’s Common Stock at a reduced conversion price of $0.20 per share of Common Stock, and (ii) the automatic conversion of all issued and outstanding shares of Series A Preferred and Series A-1 Preferred into shares of Common Stock at a rate of 10% per month, beginning on November 1, 2020, and ending on August 1, 2021, at the reduced conversion price of $0.20 per share of Common Stock.

The Company had 0 and 14,782 shares of Series A-1 Preferred outstanding as of September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021, the Company issued the holders of Series A-1 Preferred 105,343 shares of Common Stock as payment of dividends due. During the nine months ended September 30, 2021, the Company issued the holders of Series A-1 Preferred 1,789,587 shares of Common Stock as payment of dividends due.

During the three months ended September 30, 2021, the Company issued 11,194,000 shares of Common Stock upon the conversion of 2,239 shares of Series A-1 Preferred. During the nine months ended September 30, 2021, the Company issued 73,910,000 shares of Common Stock upon the conversion of 14,782 shares of Series A-1 Preferred.

Series B Convertible Redeemable Preferred Stock

The Company had 239,400 shares of Series B Convertible Preferred Stock (“Series B Preferred”) outstanding as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021. At ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, 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 ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021.

Common Stock

AsThe ~~of September~~following ~~30,~~table ~~2021,~~summarizes ~~we had 347,200,961 and 347,194,257 shares of Common Stock issued and~~ outstanding, ~~respectively. Our authorized but unissued shares of~~ Common Stock ~~are~~activity ~~available~~during ~~for~~the ~~issuance~~three ~~without~~months ~~action~~ended March by31, ~~our shareholders.~~2022:

The following table summarizes outstanding Common Stock activity during the nine months ended September 30, 2021:

	Common Stock
Shares outstanding at December 31, 2021		347,233,341
Shares issued pursuant to option exchange and RSU vesting		41,901
Shares outstanding at March 31, 2022		347,275,242

	Common Stock
Shares outstanding at December 31, 2020		180,089,613
Shares issued pursuant to payment of stock dividend on Series A Preferred		1,911,587
Shares issued pursuant to payment of stock dividend on Series A-1 Preferred		1,789,587
Shares issued pursuant to Series D conversion to Common Stock		11,149,123
Shares issued pursuant to Series A conversion to Common Stock		74,562,000
Shares issued pursuant to Series A-1 conversion to Common Stock		73,910,000
Shares issued pursuant to warrant exercises		400
Shares issued to secure financing facility		1,000,000
Shares issued for cash		1,000,000
Shares issued as compensation in lieu of cash		921,218
Shares issued pursuant to RSU vesting		860,729
Shares outstanding at September 30, 2021		347,194,257

During the nine months ended September 30, 2021, the Company sold 1,000,000 shares of its Common Stock to Lincoln Park pursuant to the 2021 LPC Purchase Agreement for $0.10 per share resulting in proceeds to the Company of $100,000. Also in May 2021, the Company issued to Lincoln Park 1,000,000 shares of its Common Stock as consideration for entering into the Purchase Agreement. The Company has recorded this issuance as a deferred stock issuance cost in the amount of $70,000. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under this Purchase Agreement.

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Warrants

As of ~~September~~March 3031, ~~2021~~2022, warrants to purchase 3,~~904~~150,~~470~~000 shares of Common Stock at prices ranging from $0.01048 to $0.80 were outstanding. ~~All warrants expiring on~~At ~~September~~March 1931, ~~2028~~2022, ~~were~~1,466,680 ~~cancelled~~warrants ~~with~~are ~~the~~exercisable. ~~final~~All ~~Series~~warrants Aexpire ~~conversions~~at tovarious ~~common~~dates onbetween August 15, ~~2021.~~2026 ~~There~~and August ~~are 600~~5,~~000~~ ~~warrants~~2028 ~~whose~~with ~~expiration~~the ~~date~~exception ~~is April~~of 15150, ~~2028 and150,~~000 warrants whose expiration date is 3 years from initial vesting, such vesting based on certain events. ~~There are also 400,000 warrants whose expiration date is July 11, 2028, 200,000 warrants whose expiration is August 3, 2028, and 1,800,000 warrants whose expiration is August 4, 2026.~~ The intrinsic value of warrants outstanding at ~~September~~March 3031, ~~2021~~2022 was $0.

~~The~~During ~~following~~the ~~table~~three ~~summarizes~~months ended March 31, 2022, there were no warrant ~~activity~~issuances, cancellations, expirations or exercises. The weighted-average exercise price of warrants outstanding was $0.10 per share. The Company recorded approximately $15,000 in share-based payment expense related to warrants for the ~~following~~three ~~periods:~~months ended March 31, 2022.

	Warrants			Weighted-Average Exercise Price
Balance at December 31, 2020		753,775		$	0.17
Granted		3,000,000		$	0.07
Expired / Canceled		(603,375	)	$	0.01
Exercised		(400	)	$	0.01
Balance at September 30, 2021		3,150,000		$	0.10

- 17-

~~In April~~ Table ~~2021, the Company created an advisory board to the Board~~ of Directors comprised of 3 individuals. As compensation for advisory board services, the Company granted each member warrants to purchase 200,000 shares of the Company’s Common Stock. Such warrants have an exercise price of $0.07 per share and will vest over a one-year period beginning on April 19, 2021. In July 2021, the Company issued 400,000 warrants to our Chief Financial Officer. Such warrants have an exercise price of $0.06 per share and fully vested over a two-month period. In August 2021, the Company issued 200,000 and 1,800,000 warrants to a new advisory board member. Such warrants have an exercise price of $0.048 per share and $0.07 per share, respectively, and will vest over a one-year period beginning on August 5, 2021. During the three and nine months ended September 30, 2021, the Company recorded approximately $15,636 and $25,636 in expense related to the vesting of these warrants.Contents

During the nine months ended September 30, 2021, 603,375 warrants were cancelled pursuant to the mandatory conversion of Series A Preferred Stock into Common Stock and 400 warrants were exercised at $0.01 per warrant.

NOTE 10. STOCK-BASED COMPENSATION

Stock Options

As of ~~September~~March 3031, ~~2021~~2022, the Company had one active stock-based compensation plan: the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”).

2020 Omnibus Stock Incentive Plan

On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 ~~Omnibus Stock Incentive~~ Plan ~~(the “2020 Plan”)~~. Such plan had been previously unanimously approved by the Company’s Board. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Internal Revenue Code.

~~- 24~~Pursuant - to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Stock Award Plan (the “1999 Plan”) and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan. The Company amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to 145.0 million shares. Such amendment became effective on April 21, 2021. As of March 31, 2022, there were 63,747,077 shares available for issuance under the 2020 Plan.

~~Table~~The Company estimates the fair value of ~~Contents~~ its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”). The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.

Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Plan and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan. The Company amended the 2020 Plan to increase the number of shares of Common Stock available for issuance to 145.0 million shares. Such amendment became effective on April 21, 2021. As of September 30, 2021, there were 66,363,578 shares available for issuance under the 2020 Plan.

The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC 718, “Compensation - Stock Compensation”. The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported in operating expense based upon the departments to which substantially all the associated employees report and credited to additional paid-in-capital.

ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14.

In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has adopted the provisions of ASU 2016-09 and will continue to use an estimated annualized forfeiture rate. The Company utilized estimated forfeiture rate of 25% for options granted during the three months ended ~~September~~March 3031, ~~2021~~2022. The Company is currently in the process of reviewing the expected forfeiture rate to determine if that percent is still reasonable based on recent historical experience.

A summary of the activity under the Company’s stock option plans is as follows:

	Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)
Balance at December 31, 2020		2,585,500		$	0.19		9.2
Balance at December 31, 2021		4,818,876		$	0.08		3.5
Granted		~~99,260,000~~—		$	~~0.06~~—
Expired/Cancelled		~~(18,700,625~~—	)	$	~~0.07~~—
Exercised		-—			-—
Balance at September 30, 2021		83,144,875		$	0.06		6.7
Balance at March 31, 2022		4,818,876		$	0.08		3.2

During the three months ended September 30, 2021, the Company granted an aggregate of 33,540,000 options to purchase shares of Common Stock including 17,000,000 to certain officers and employees and 0 to certain members of the Company’s Board of Directors. Such options have an exercise price ranging from $0.048 to $0.06 and vest at various times through August 1, 2024. - 18-

During the nine months ended September 30, 2021, an aggregate of 18,700,625 options expired unexercised.

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~~At September~~There ~~30, 2021, a total of 83,144,875 options~~ were ~~outstanding,~~no of which 15,424,688 were exercisable at a weighted average price of $0.06 per share with a remaining weighted average contractual term of 6.7 years. The Company expects that, in addition to the 15,424,688 options ~~that~~granted ~~were~~during exercisable as of September 30, 2021, another 67,720,187 will ultimately vest resulting in a combined total of 83,144,875. Those 67,720,187 shares have a weighted average exercise price of $0.06 and an aggregate intrinsic value of approximately $0 as of September 30, 2021. Stock-based compensation expense related to equity options was approximately $794,411 for the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022.

~~The~~During intrinsic value of options exercisable and outstanding at September 30, 2020 was $0. The aggregate intrinsic value for all options outstanding as of September 30, 2020 was $0. The weighted-average grant-date per share fair value of options granted during the ~~nine~~three months ended ~~September~~March 3031, ~~2020 was $0.09. At September 30~~2022, ~~2020,~~there ~~the~~were ~~total~~no ~~remaining~~options ~~unrecognized~~that ~~compensation~~expired ~~cost~~unexercised ~~related~~and tothere ~~unvested~~were ~~stock~~no options ~~amounted to approximately $2,784,000, which will be recognized over a weighted-average period of 1~~exercised.~~6 years.~~

At March 31, 2022, a total of 4,818,876 options were outstanding, of which 3,633,444 were exercisable at a weighted average price of $0.08 per share with a remaining weighted average contractual term of 3.2 years. The Company expects that, in addition to the 3,633,444 options that were exercisable as of March 31, 2022, another 1,185,432 will ultimately vest resulting in a combined total of 4,818,876. Those 4,818,876 shares have a weighted average exercise price of $0.08 and an aggregate intrinsic value of approximately $0 as of March 31, 2022. Stock-based compensation expense related to equity options was approximately $112,000 for the three months ended March 31, 2022.

The intrinsic value of options exercisable and outstanding at March 31, 2021 was $0. The aggregate intrinsic value for all options outstanding as of March 31, 2021 was $0. There were no issuances of options to purchase Common Stock during the three months ended March 31, 2021. Stock-based compensation expense related to equity options was approximately $32,000 for the three months ended March 31, 2021.

The Company periodically issues Restricted Stock Units (“RSUs”) to certain employees which vest over time. When vested, each RSU represents the right to that number of shares of Common Stock equal to the number of RSUs granted. The grant date fair value for RSU’s is based upon the market price of the Company's Common Stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term.

A summary of the activity related to RSUs is as follows:

	RSU’s			Weighted-Average Issuance Price
Balance at December 31, 2020		845,106		$	0.14
Balance at December 31, 2021		81,019,401		$	0.13
Granted		-—		$	-—
Expired/Cancelled		(~~540~~1,~~576~~025,000	)	$	0.1304
Vested		(~~220~~41,~~728~~901	)	$	0.0917
Balance at September 30, 2021		83,802		$	0.13
Balance at March 31, 2022		79,952,500		$	0.04

There were no RSUs granted ~~to employees~~ during the ~~nine~~three months ended ~~September~~March 3031, ~~2021. During the nine months ended September 30, 2021, 220,728 RSUs vested with the remainder of outstanding RSUs vesting at various times through February 8,~~ 2022.

During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022, the Company recorded compensation expense of approximately $30465,000 ~~and $99,000, respectively~~ related to RSUs. During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2020~~2021, the Company recorded compensation expense of approximately ~~and~~ $8215,000 ~~and $154,000, respectively~~ related to RSUs. During the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, the Company issued ~~860~~41,~~729~~901 and ~~546~~161,~~016~~168 shares of its Common Stock pursuant to the vesting of RSUs. ~~As part of the RSUs issued during the nine months ended September 30, 2021, were 555,000 shares of Common Stock pursuant to RSUs that vested in 2020 for which shares were not previously issued.~~

Stock-Based Compensation

Stock-based compensation related to equity options, RSUs and warrants has been classified as follows in the accompanying consolidated statements of income (loss) (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three months Ended March 31,
	2021		2020		2021		2020
	2022		2021
Cost of revenue	$	11	$	21	$	18	$	6
General and administrative		~~303~~335		8337		~~511~~		~~240~~
Sales and marketing		~~122~~127		1921		~~214~~		~~120~~
Research and development		~~121~~119		2319		~~199~~		83
Total	$	~~557~~592	$	~~127~~78	$	~~942~~	$	~~449~~

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NOTE 11. FAIR VALUE ACCOUNTING

The Company accounts for fair value measurements in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

	Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

	Level 2	Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

	Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Fair Value at September 30, 2021

Fair Value at March 31, 2022

($ in thousands)

Total

Level 1

Level 2

Level 3

Assets:

Pension assets

1,~~780~~643

Totals

1,~~780~~643

Liabilities:

Derivative liabilities

76,~~486~~024

Totals

76,~~486~~024

Fair Value at December 31, 2020

Fair Value at December 31, 2021

($ in thousands)

Total

Level 1

Level 2

Level 3

Assets:

Pension assets

1,~~881~~689

-—

1,~~881~~689

Totals

1,~~881~~689

-—

1,~~881~~689

Liabilities:

Derivative liabilities

245,~~128~~292

-—

245,~~128~~292

Totals

245,~~128~~292

-—

245,~~128~~292

The Company’s German pension plan is funded by insurance contract policies whereby the insurance company guarantees a fixed minimum return. The Company has determined that the pension assets are appropriately classified within Level 3 of the fair value hierarchy because they are valued using actuarial valuation methodologies which approximate cash surrender value that cannot be corroborated with observable market data. All plan assets are managed in a policyholder pool in Germany by outside investment managers. The investment manager is responsible for the investment strategy of the insurance premiums that the Company submits and does not hold individual assets per participating employer. The German Federal Financial Supervisory oversees and supervises the insurance contracts.

As of March 31, 2022 and December 31, 2021, the Company had embedded features contained in the Series D Preferred host instrument (issued in November 2020) that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $6,024,000 and $5,292,000 at March 31, 2022 and December 31, 2021, respectively, which are classified as a current liability in the consolidated balance sheet as of March 31, 2022 and December 31, 2021. The fair value of the Company’s derivative liabilities are classified within Level 3 of the fair value hierarchy because they are valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The Company uses Monte- 27Carlo simulations and other fair value methodologies in the determination of the fair value of derivative liabilities. Considering the various path dependencies for the Series D Preferred Stock, Monte- Carlo simulations were deemed the most appropriate methodology.

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AsSome of ~~September~~ ~~30, 2021,~~ the ~~Company~~aforementioned ~~had~~fair ~~embedded~~value ~~features~~methodologies ~~contained~~are inaffected by the ~~Series~~Company’s Dstock ~~Preferred~~price ~~host~~as ~~instrument~~well ~~that~~as ~~qualified~~assumptions ~~for~~regarding ~~derivative~~the ~~liability~~expected ~~treatment.~~stock ~~The~~price ~~recorded~~volatility ~~fair~~over ~~market~~the ~~value~~term of ~~these~~the ~~features~~derivative ~~was~~liabilities ~~approximately~~in ~~$7,486,000~~addition ~~and~~to ~~$24,128,000~~the ~~at September~~probability ~~30,~~of ~~2021~~future ~~and December~~events. ~~31,~~Significant ~~2020,~~assumptions ~~respectively,~~used ~~and~~in ~~are~~the ~~classified~~fair asvalue amethodologies ~~current~~during ~~liability~~the inthree ~~the~~months ~~condensed~~ended March ~~consolidated~~31, ~~balance~~2022 ~~sheets~~are asa risk-free rate of ~~September~~ 302.38%, ~~2021~~equity ~~and December~~volatility ~~31,~~of ~~2020~~127.8%, ~~The~~effective ~~fair~~life ~~value~~ of ~~the~~2.76 ~~Company’s~~years ~~derivative~~and ~~liabilities~~a isPreferred ~~classified~~Stock ~~within~~dividend ~~Level~~rate 3 of ~~the~~4.0%. ~~fair~~These ~~value~~assumptions ~~hierarchy~~incorporate ~~because~~management’s ~~they~~estimate ~~are~~of ~~valued~~the ~~using~~probability ~~pricing~~of ~~models~~future ~~that~~financings ~~incorporate~~(Series ~~management~~D ~~assumptions~~Financing) ~~that~~and ~~cannot~~the betiming ~~corroborated~~of ~~with~~potential ~~observable~~change ~~market~~of ~~data~~control events. The ~~Company~~primary ~~uses~~assumptions ~~Monte-Carlo~~impacted ~~simulations~~by inSeries ~~the~~D ~~determination~~Financing ofwere the ~~fair~~effective ~~value~~life of ~~derivative~~2.76 ~~liabilities~~years and equity volatility.

Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events. Significant assumptions used in the fair value methodologies during the nine months ended September 30, 2021 are a risk-free rate of 0.58%, equity volatility of 112.9%, effective life of 3.25 years and a preferred stock dividend rate of 4.0%. These assumptions incorporate management’s estimate of the probability of future financings (Series D Financing) and the timing of potential change of control events. The primary assumptions impacted by Series D Financing were the effective life of 3.25 years and equity volatility.

The Company monitors the activity within each level and any changes with the underlying valuation techniques or inputs utilized to recognize if any transfers between levels are necessary. That determination is made, in part, by working with outside valuation experts for Level 3 instruments and monitoring market related data and other valuation inputs for Level 1 and Level 2 instruments.

The reconciliations of Level 3 pension assets measured at fair value during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021 are presented below:

($ in thousands)	Three months ended ~~September~~March 3031, ~~2021~~2022			Three months ended ~~September~~March 3031, ~~2020~~2021			~~Nine months ended September 30, 2021~~			~~Nine months ended September 30, 2020~~
Pension assets:
Fair value at beginning of period	$	1,~~819~~689		$	1,~~711~~881		$	~~1,881~~		$	~~1,713~~
Return on plan assets		2116			1915			51			49
Company contributions and benefits paid, net		(1417	)		~~(28~~2	)		~~(31~~	)		~~(61~~	)
Effect of exchange rate changes		(4645	)		83(98	)		~~(121~~	)		84
Fair value at end of period	$	1,~~780~~643		$	1,~~785~~800		$	~~1,780~~		$	~~1,785~~

The reconciliations of Level 3 derivative liabilities measured at fair value for Series D Preferred Stock and for Series C Preferred Stock during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 is presented below:

($ in thousands)	Three months ended ~~September~~March 3031, ~~2021~~2022			Three months ended ~~September~~March 3031, ~~2020~~2021			~~Nine months ended September 30, 2021~~			~~Nine months ended September 30, 2020~~
Derivative liabilities:
Fair value at beginning of period	$	85,~~925~~292		$	~~535~~24,128		$	~~24,128~~		$	~~369~~
Derivative liability from issuance of Preferred Series C		-			-			-			-
Derivative liability from issuance of Preferred Series D		65			248
Decrease in derivative liability from conversions of Preferred Series C		-			-			-			-
Decrease in derivative liability from conversions of Preferred Series D		—			(354	)
Derivative liability from issuance of Preferred Series D		84			-			500			-
Change in fair value included in earnings		667			(1,172	)
Decrease in derivative liability from conversions of Preferred Series D		(181	)		-			(584	)		-
Fair value at end of period	$	6,024		$	22,850
Change in fair value included in earnings		(1,342	)		(535	)		(16,558	)		(369	)
Fair value at end of period	$	7,486		$	-		$	7,486		$	-

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NOTE 12. RELATED PARTY TRANSACTIONS

~~Professional~~ ~~Services~~December ~~Agreement~~2021 Credit Facility with Nantahala Capital Management

~~During the year ended~~On December 3129, ~~2020~~2021 (the “Closing Date”), the Company entered into ~~professional~~a ~~services~~Term ~~agreement~~Loan ~~with~~and aSecurity ~~firm~~Agreement ~~affiliated~~(the “Agreement”) with acertain ~~member~~funds ofand ~~the~~separate ~~Company’s~~accounts ~~Board~~managed ofby ~~Directors~~Nantahala atCapital ~~the~~Management, ~~time~~LLC ~~the~~(collectively, ~~parties~~“Nantahala”), ~~entered~~as ~~into~~lenders, ~~the~~and ~~agreement.~~other ~~The~~lenders ~~Company~~set ~~made~~forth noon ~~payments~~the ~~pursuant~~signature topages ~~this~~thereto ~~agreement~~(together ~~during~~with Nantahala, the ~~twelve~~“Lenders”), ~~months~~pursuant ~~ended December~~to ~~31,~~which ~~2020~~the ~~and~~Lenders ~~made~~will ~~payment~~provide ofto ~~approximately~~the ~~$34,000~~Company ~~during~~a ~~nine~~secured ~~months~~term ~~ended September~~loan ~~30,~~credit ~~2021.~~facility ~~The~~in ~~Company~~an ~~has~~aggregate ~~the~~amount ~~right~~of up to ~~terminate~~$2,500,000 (the ~~agreement~~“Credit onFacility”). Nantahala ~~thirty~~collectively ~~days~~owns, ~~written~~or ~~notice~~otherwise atcontrols, ~~any~~approximately ~~time~~37.5% of our issued and outstanding voting securities.

All loans (each a “Loan”, and collectively, the “Loans”) under the Credit Facility will bear interest at a rate of 12% for the initial six months after the Closing Date, and at 17% thereafter until the maturity date of 12 months from the Closing Date (the “Maturity Date”). All amounts borrowed by the Company under the Credit Facility are secured by a first-priority lien on all the assets of the Company. On the Closing Date, the Company received in initial draw-down on the Credit Facility of $600,000. As of May 4, 2022, the Company received additional proceeds from draw-downs on the Credit Facility aggregating $1,450,000. The Company expects to use the proceeds from the Credit Facility for working capital requirements and corporate purposes. As of May 20, 2022, there is approximately $342,000 outstanding under the Credit Facility in such Lender’s discretion, and no assurances can be given that the Lenders will consent to the release of the additional $342,000 under the Credit Facility. The Company is currently negotiating to obtain the remaining funds available under the Credit Facility, including obtaining a waiver of the minimum cash requirement covenant under the Credit Facility. In this regard, the Company is required to maintain a minimum amount of unrestricted cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although we believe we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to obtain a waiver of the minimum cash requirement, the Lenders fail to provide the remaining funds under the Credit Facility, and/or we fail to obtain alternative sources of capital, of which no assurances can be given, such inability may result in an event of default under the terms of the Credit Facility, thereby providing the Lenders with certain rights and remedies under the terms of the Credit Facility, including declaring all advances under the terms of the Credit Facility immediately due and payable.

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The Company may prepay amounts borrowed under the Credit Facility in whole or in part, at a price equal to 105% of the principal amount borrowed under the Credit Facility (including any interest capitalized thereon), subject to additional prepayment terms pursuant to the Agreement, a copy of which is filed as an Exhibit to the Company’s Current Report on Form 8-K, filed with the SEC on January 4, 2022. In addition, pursuant to the Agreement, at any time after the Closing Date, each Lender shall have the right, but not the obligation, on mutually agreed upon terms, to exchange each such Lender’s pro rata portion of shares of the Company’s Series D Convertible Preferred Stock, par value $0.01 (“Series D Preferred”) held by such Lender for a mutually agreed upon portion of any subsequent Delayed Draw Loan (as defined in the Agreement) (an “Exchange”). Upon the Company’s receipt by a Lender of a notice stating a Lender’s intent to participate in an Exchange, the Company is required to offer to all holders of Series D Preferred the opportunity, but not the obligation, to exchange each such holder’s pro rata portion of shares of the Company’s Series D Preferred held by such holder for participation in any subsequent Delayed Draw Loan, upon substantially similar terms as those provided in the applicable notice of Exchange by a Lender.

Consulting Agreement

On March 1, 2022, the Company entered into a consulting agreement with a member of the Company’s Board of Directors (the “Consulting Agreement”). The Consulting Agreement provides for the provision of certain strategic financing and corporate development activities . The term of the agreement is for a period of three months and expires June 1, 2022. The maximum consulting fee is $8,000 per month to be accrued throughout the term but with payment deferral until the closing of certain contractually defined milestones. The Company has not made any payments pursuant to the Consulting Agreement during the three months ended March 31, 2022.

NOTE 13. CONTINGENT LIABILITIES

Employment Agreements

The Company has an employment agreement with its Chief Executive Officer, which expires on March 2, 2024 (the “Employment Agreement”). The Company may terminate the ~~agreement~~Employment Agreement with or without cause. Subject to the conditions and other limitations set forth in the ~~employment~~Employment ~~agreement~~Agreement, the executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the ~~employment~~Employment ~~agreement~~Agreement) by the Company or by the executive:

Under the terms of the ~~agreement~~Employment Agreement, if employment is terminated by the Company without cause or there is a change of control, then the ~~Executive~~executive shall be entitled to severance payments equal to the ~~Executive~~executive’s annual salary and shall remain enrolled in the Company’s health, dental, and life insurance plans for the lesser of twelve (12) months or the remaining period prior to expiration of the Employment Period (as defined in the Employment Agreement) plus the ~~Executive~~executive shall be entitled to any bonus due as of the effective date of such termination.

Litigation

There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

NOTE 14. SUBSEQUENT EVENTS

During the period from ~~October~~April 1, ~~2021~~2022 through ~~November~~May 1023, ~~2021~~2022, the Company issued ~~an aggregate 41~~687,~~901~~500 shares of its Common Stock pursuant to ~~RSUs~~the vesting of RSUs.

~~Subsequent~~During tothe period from ~~September~~April 301, ~~2021~~2022 through May 23, 2022, the Company ~~offered~~borrowed an additional $400,000 from the Lenders under the Credit Facility. The Company is currently negotiating to ~~exchange~~obtain ~~with~~the ~~its~~remaining ~~employees,~~funds ~~contractors~~available under the Credit Facility, ~~and~~including ~~Board~~obtaining ~~members~~a ~~approximately~~waiver 80of ~~million~~the ~~options~~minimum ~~granted~~cash requirement covenant under the ~~2020~~Credit ~~Omnibus Stock~~Facility. In ~~Option~~this ~~Plan~~regard, ~~for~~the anCompany ~~equivalent~~is ~~number~~required to maintain a minimum amount of ~~RSUs effective~~unrestricted ~~10/1/2021~~cash and cash equivalents and may fall below the minimum cash requirement given its existing cash balances. Although ~~The~~we ~~RSUs are~~believe ~~scheduled~~we will obtain a waiver of the minimum cash requirement, in the event the Company is unable to ~~vest~~obtain ~~50%~~a ~~on April~~waiver 1of the minimum cash requirement, ~~2022~~the ~~with~~Lenders fail to provide the ~~remainder~~remaining ~~vesting~~funds ~~ratably~~under ~~over~~the anCredit ~~18-month~~Facility, ~~period~~and/or ~~ending~~we fail to obtain alternative sources of capital, of which no assurances can be given, such inability ~~October~~may 1result in an event of default under the terms of the Credit Facility, ~~2023.~~thereby ~~The~~providing ~~Company~~the ~~anticipates~~Lenders awith ~~large~~certain ~~majority~~rights and remedies under the terms of ~~these~~the ~~individuals~~Credit toFacility, ~~participate~~including indeclaring all advances under the ~~exchange~~terms of the Credit Facility immediately due and payable.

~~Effective October 1, 2021, three Board members were each granted 1,500,000 RSUs and these are scheduled to vest over the same period described above.~~ - 22-

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "“Quarterly Report"”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "“Securities Act"”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "“Exchange Act"”). All forward-looking statements included in this report are based on information available to us as of the date hereof and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known or unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those items discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021, and in Item 1A of Part II of this Quarterly Report.

The following discussion of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements included elsewhere within this Quarterly Report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for our products, such as the timing of new product introductions by us and by our competitors and our customers’ political and budgetary constraints. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. As used in this Quarterly Report, “we”, “us”, “our”, “~~ImageWare~~Imageware”, “~~ImageWare~~Imageware Systems”, "“IWS", or the “Company” refers to ~~ImageWare~~Imageware Systems, Inc., a Delaware corporation, and all of its subsidiaries.

Overview

~~The~~Imageware ~~Company~~Systems, isInc. a(“Imageware,” ~~pioneer~~the ~~and~~“Company,” ~~leader~~“we,” in“our”) provides biometric ~~identification~~solutions ~~and authentication software. Using human characteristics that are unique~~ to usidentify, ~~all~~verify, ~~the~~and ~~Company~~authenticate ~~creates~~people ~~software~~based ~~that~~on ~~provides~~their atrue ~~highly reliable indication of a person’s~~ identity., ~~The~~rather ~~Company’s~~than ~~products~~on ~~are~~what ~~used~~keys toand ~~manage~~codes ~~and~~they ~~issue~~have. ~~secure~~A ~~credentials,~~pioneer ~~including~~in ~~national~~the ~~IDs~~field, ~~passports,~~Imageware ~~driver~~was ~~licenses~~the ~~and~~first ~~access~~multimodal ~~control~~biometric ~~credentials.~~solution ~~The~~provider ~~Company’s~~in ~~products~~history ~~also~~and ~~provide~~holds ~~law~~dozens ~~enforcement~~of ~~with integrated mugshot~~patents, ~~fingerprint~~including ~~LiveScan~~some ~~and~~of ~~investigative~~the ~~capabilities.~~most ~~The~~cited ~~Company~~patents ~~also~~in ~~provides~~the ~~comprehensive~~industry. ~~authentication~~Our ~~security~~Cloud-based ~~software~~and ~~using~~on-premises ~~biometrics~~solutions toprovide ~~secure~~faster, ~~physical~~more ~~and~~accurate ~~logical~~identification ~~access~~ to ~~facilities~~better orsecure ~~computer~~communities, ~~networks~~data, orand ~~Internet sites~~assets. ~~Biometric~~In ~~technology~~fact, isgovernments, ~~now~~law anenforcement ~~integral~~agencies, ~~part~~and ofpublic ~~all~~and ~~markets~~private ~~the~~enterprises ~~Company~~worldwide ~~addresses,~~trust ~~and~~Imageware ~~all~~with ~~the~~critical ~~products~~identity ~~leveraged~~solutions bywhich ~~our~~manage ~~patented~~millions ~~IWS~~of ~~Biometric~~identities ~~Engine®~~every day.

~~Critical~~Our ~~Accounting~~patented ~~Policies~~Imageware Biometric Engine® is one of the most accurate and ~~Estimates~~fastest biometrics matching engines in the industry, capable of our patented biometrics fusion. We are a “biometrics first” company, leveraging unique human characteristics to provide unparalleled accuracy for identification while protecting your identity.

~~The~~Our ~~discussion~~product ~~and~~portfolio, ~~analysis~~called ofthe ~~our~~Imageware ~~consolidated~~Identity ~~financial~~Platform, ~~condition~~is ~~and~~built ~~results~~around ofthree ~~operations~~key ~~are~~areas: ~~based~~Enroll on& ~~our~~Identify, ~~consolidated~~Badge ~~financial~~& ~~statements~~Credential, ~~which~~and ~~have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)~~Authenticate. ~~The~~All ~~preparation~~ of these ~~consolidated~~areas ~~financial~~are ~~statements~~built inon ~~accordance~~top ~~with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts~~ of ~~assets and liabilities,~~ the ~~disclosure~~Imageware ofBiometric ~~contingencies~~Engine. asThe ofPlatform ~~the~~is ~~date~~a offully-modular, ~~the~~customizable, ~~consolidated financial statements~~ and ~~the~~pre-integrated ~~reported~~portfolio ~~amounts~~ of ~~revenue~~capabilities ~~and expense during a fiscal period. The Securities and Exchange Commission (“SEC”) considers an accounting policy~~ to besupport ~~critical~~state ~~if it is important to a company’s financial condition~~ and ~~results~~local oflaw ~~operations~~enforcement, ~~and~~Federal ifagencies, ~~it requires significant judgment~~ and ~~estimates~~enterprises ~~on the part of management in its application~~alike.

~~The~~Enroll ~~preparation~~& of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Preferred Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations.Identify

~~Critical~~The ~~accounting~~Enroll ~~policies~~& ~~are~~Identify ~~those~~area ~~that,~~includes infour ~~management’s~~key ~~view,~~modules: ~~are~~Imageware ~~most~~Proof, ~~important~~Imageware inCapture, ~~the~~Imageware ~~portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended September 30~~Identify, ~~2021 to the critical accounting policies discussed in the Management’s Discussion~~ and ~~Analysis~~Imageware ~~of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2020~~Investigate.

-Imageware 30Proof - enables an entity to prove someone’s identity from their biometrics, government issued ID, and 3rd party databases (such as credit bureau data). Imageware Capture enables the fastest capture of biographic and biometric detail (such as face, fingerprint, palm print, iris, and SMT’s) in the industry. Imageware Identify enables a user to identify someone from their biometrics in seconds. Imageware Investigate enables an officer to create digital lineups very quickly.

Badge & Credential

The Badge & Credential area includes two key modules: Imageware Credential (formerly EPI Suite) and Imageware Digital ID. Imageware Credential enables a user to design, build, and print badges for access control systems. This includes tickets, smart badges, wristbands, Personal Identity Verification (“PIV”) cards, and more. Imageware Digital ID is a decentralized identity service that enables self-sovereign identity underpinned by blockchain technology tied to biometrics.

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Table of Contents

Authenticate

The Authenticate area includes Imageware Authenticate, which enables users to leverage multimodal biometrics hosted in a central server or cloud to log in to services and applications from any device. Imageware Authenticate is easily integrated into existing solutions leveraging OpenID Connect (“OIDC”), Security Assertion Mark-up Language (“SAML”), or OAuth2 protocols, and includes a software development kit (“SDK”) for partners and customers to easily embed into their existing applications.

Imageware Biometric Engine

The Imageware Biometric Engine® is a patented biometric identity and authentication database built for multi-biometric enrollment, management and authentication. It is hardware agnostic and can utilize different types of biometric algorithms from any vendor. It allows different types of biometrics to be operated at the same time on a seamlessly integrated platform. It is also offered as an SDK, enabling developers and system integrators to implement biometric solutions or integrate biometric capabilities, into existing applications.

Imageware Law Enforcement

Our modules are leveraged across many industries and use cases with minimal customization needed. One of the key areas includes our Law Enforcement 2.0 solution which enables state, local and Federal agencies to quickly capture, archive, search, retrieve, and share digital images, fingerprints and other biometrics, as well as criminal history records on a stand-alone, networked, wireless or browser-based platform. Our Imageware Law Enforcement 2.0 solution includes Imageware Capture, Imageware Identify, Imageware Investigate, Imageware Credential, and Imageware Authenticate. Other modules can also be easily leveraged as needed.

Critical Accounting Policies and Estimates

The discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the consolidated financial statements and the reported amounts of revenue and expense during a fiscal period. The Securities and Exchange Commission (“SEC”) considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of financial instruments issued with and affected by the Series D Financing, assumptions used in the application of revenue recognition policies, and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations.

Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended March 31, 2022 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2021.

Results of Operations

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes contained elsewhere in this Quarterly Report.

~~Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020~~ -24-

Net Product Revenue	Three Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Software and royalties	$	40		$	587		$	(547	)		(93	)%
Percentage of total net product revenue		28	%		32	%
Hardware and consumables	$	20		$	13		$	7			54	%
Percentage of total net product revenue		14	%		0	%
Services	$	85		$	1,258		$	(1,173	)		(93	)%
Percentage of total net product revenue		58	%		68	%
Total net product revenue	$	145		$	1,858		$	(1,713	)		(92	)%

Table of Contents

~~Software~~Comparison ~~and~~of ~~royalty revenue decreased approximately $547,000 during~~ the ~~three~~Three ~~months~~Months ~~ended~~Ended ~~September~~March 3031, 2021 ~~as compared~~ to the ~~corresponding~~Three ~~period~~Months inEnded ~~2020.~~March ~~This decrease is attributable to lower identification project related revenue of approximately $529~~31,~~000,~~ lower law enforcement software revenue of approximately $5,000, lower identification royalties of approximately $19,000, offset by higher sales of boxed identity management software sold through our distribution channel of approximately $6,0002020

Revenue from the sale of hardware and consumables increased approximately $7,000 during the three months ended September 30, 2021 as compared to the corresponding period in 2020 due to an increase in consumables procurement by our law enforcement customers.

	Three Months Ended March 31,
Net Product Revenue	2022			2021			$ Change		% Change
(dollars in thousands)

Software and royalties	$	141		$	39		$	102		262	%
Percentage of total net product revenue		67	%		70	%
Hardware and consumables	$	43		$	13		$	30		231	%
Percentage of total net product revenue		21	%		23	%
Services	$	26		$	4		$	22		550	%
Percentage of total net product revenue		12	%		7	%
Total net product revenue	$	210		$	56		$	154		275	%

~~Services~~Software ~~revenue is comprised primarily of software integration services, system installation services~~ and ~~customer~~royalty ~~training. Such~~ revenue ~~decreased~~increased approximately $1102,~~173,~~000 during the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to the corresponding period ofin ~~2020~~2021. ~~due~~This increase is attributable to ahigher ~~decrease~~identification inproject ~~the~~related ~~service~~revenue ~~element~~of approximately $87,000, higher law enforcement software revenue of ~~project~~approximately ~~related~~$30,000, ~~work~~higher ~~completed~~sales ~~during~~of ~~the~~boxed ~~three~~identity ~~months~~management ~~ended~~software ~~September~~sold 30through our distribution channel of approximately $3,000 ~~2021~~offset by lower identification royalties of approximately $18,000.

WeRevenue ~~believe~~from ~~that~~ the ~~period-to-period~~sale ~~fluctuations~~ of ~~identity~~hardware ~~management~~and ~~software~~consumables ~~revenue~~increased inapproximately ~~project-oriented~~$30,000 ~~solutions~~during ~~are largely due to~~ the ~~timing~~three ofmonths ~~government~~ended ~~procurement~~March ~~with respect to the various programs we are pursuing. Although no assurances can be given~~31, ~~based~~2022 onas ~~management’s~~compared ~~current~~to ~~visibility into~~ the ~~timing~~corresponding ofperiod ~~potential~~in ~~government~~2021 ~~procurements~~due ~~and~~to ~~potential partnerships and current pilot programs, we believe that we will see~~ an increase in ~~government~~both ~~procurement~~hardware and ~~implementations~~consumables ~~with respect to identity management initiatives; however, government~~ procurement ~~initiatives,~~by ~~implementations~~our ~~and~~law ~~pilots~~enforcement ~~are frequently delayed and extended and we cannot predict the timing of such initiatives~~customers.

Services revenue is comprised primarily of software integration services, system installation services and customer training. Such revenue increased approximately $22,000 during the three months ended March 31, 2022 as compared to the corresponding period of 2021 due to an increase in the service element of project related work completed during the three months ended March 31, 2022.

We believe that the period-to-period fluctuations of identity management software revenue in project-oriented solutions are largely due to the timing of government procurement with respect to the various programs we are pursuing. Although no assurances can be given, based on management’s current visibility into the timing of potential government procurements, potential partnerships and current pilot programs, we believe that we will see an increase in government procurement and implementations with respect to identity management initiatives; however, government procurement initiatives, implementations and pilots are frequently delayed and extended and we cannot predict the timing of such initiatives.

As discussed more fully elsewhere in this Quarterly Report, the full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.

During the three months ended ~~September~~March 3031, ~~2021~~2022, we have focused on strategically ~~updating~~modernizing our ~~products~~modules ~~with~~within the ~~latest~~Imageware ~~mobile~~Identity ~~and Cloud technology~~Platform, prioritized by market opportunities. We ~~The~~relaunched ~~first~~Imageware ~~major~~Authenticate ~~update~~(formerly isGoVerify ~~the~~ID®) ~~launch~~in ofFebruary ~~the~~2021. This relaunch includes a new container and microservices-based architecture along with refreshed mobile and desktop clients. We believe these updates will result in additional customers implementing our Imageware Authenticate solution. Additionally, we launched Imageware Capture, our first module of the Law Enforcement 2.0 ~~(LE~~solution ~~2.0)~~in ~~Platform,~~October 2021 and Imageware ~~Capture,~~Investigate in ~~September~~December 2021. WeThese ~~modernized~~are the UIfirst ~~for~~of ~~law~~many ~~enforcement~~modules ~~professionals,~~that ~~building~~we ~~the~~plan ~~solution~~to asbuild aand ~~web-based~~modernize ~~Software~~throughout as2022 aand ~~Service~~beyond. ~~(SaaS)~~Prior ~~product~~to ~~with~~releasing aImageware ~~reactive~~Investigate, ~~design~~we ~~that~~closed ~~can~~our belargest ~~accessed~~software-as-a-service ~~from~~(SaaS) ~~any~~deal ~~device~~in ~~anywhere.~~the InCompany’s ~~addition,~~history wewith ~~have~~Imageware ~~integrated~~Investigate. ~~Imageware~~Management ~~Authenticate~~believes ~~formerly~~that ~~GoVerify~~these ~~ID®~~initiatives ~~into~~will result in the LEexpansion ~~2.0~~of ~~platform.~~our ~~This~~solutions ~~update~~into isstate ~~already~~& ~~resulting~~local inlaw ~~additional~~enforcement, ~~customers~~federal ~~implementing~~government, ~~our~~and ~~Authenticate~~enterprises ~~solution~~alike.

We have focused on integrating the suite of products that comprise the Imageware Identity Platform – this includes simplifying our portfolio overview, positioning, and branding. In addition, we plan to continue enhancing our Identity Platform products through 2022. This effort includes modernizing our Credential product (formerly EPI) for biometric smart badges. Management believes that these initiatives will result in the expansion of our solutions into both state/local law enforcement and federal agencies in addition to non-governmental sectors, including banking/financial services, insurance, telecommunications, healthcare, hospitality, and others.

Maintenance Revenue	Three Months Ended March 31,
(dollars in thousands)	2022		2021		$ Change			% Change

Total maintenance revenue	$	635	$	677	$	(42	)		(6	)%

- 31 25-

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Maintenance Revenue	Three Months Ended September 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Total maintenance revenue	$	633	$	613	$	20		3	%

Maintenance revenue was approximately $635,000 for the three months ended March 31, 2022, as compared to approximately $677,000 for the corresponding period in 2021. Identity management maintenance revenue generated from identification software solutions was approximately $323,000 for the three months ended March 31, 2022 as compared to approximately $361,000 during the comparable period in 2021. Law enforcement maintenance revenue was approximately $312,000 and $316,000 for the three months ended March 31, 2022 and 2021, respectively. The decrease of $4,000 in law enforcement software maintenance revenue for the three months ended March 31, 2022 as compared to the corresponding period of 2021 is reflective of the expiration of certain maintenance contracts. The decrease of $38,000 in our Identity Management maintenance revenue for the three months ended March 31, 2022 as compared to the corresponding period of 2021 is also reflective of the expiration of certain maintenance contracts.

Maintenance revenue was approximately $633,000 for the three months ended September 30, 2021, as compared to approximately $613,000 for the corresponding period in 2020. Identity management maintenance revenue generated from identification software solutions was approximately $334,000 for the three months ended September 30, 2021 as compared to approximately $290,000 during the comparable period in 2020. Law enforcement maintenance revenue was approximately $299,000 and $323,000 for the three months ended September 30, 2021 and 2020, respectively. The decrease of $24,000 in law enforcement software maintenance revenue for the three months ended September 30, 2021 as compared to the corresponding period of 2020 is reflective of the expiration of certain maintenance contracts. The increase in our Identity Management maintenance revenue of approximately $44,000 reflects the expansion of our installed base.

We anticipate growth of our maintenance revenue through the retention of existing customers combined with the expansion of our installed base resulting from the completion of project-oriented work; however, we cannot predict the timing of this anticipated growth.

Cost of Product Revenue	Three Months Ended ~~September~~March 3031,
(dollars in thousands)	~~2021~~2022			~~2020~~2021			$ Change			% Change
Software and royalties	$	-5		$	13—		$	~~(13~~5	)		(100	)%
Percentage of software and royalty product revenue		04	%		20	%
Hardware and consumables	$	1127		$	9		$	218			22200	%
Percentage of hardware and consumables product revenue		5563	%		69	%
Services	$	58—		$	~~693~~—		$	~~(635~~—	)		~~(92~~—	)%
Percentage of services product revenue		680	%		550	%
Total product cost of revenue	$	6932		$	~~715~~9		$	~~(646~~23	)		~~(90~~256	)%
Percentage of total product revenue		4815	%		3816	%

The cost of software and royalty product revenue ~~decreased~~increased approximately $135,000 due primarily to ~~lower~~higher software and royalty revenue for the three months ended ~~September~~March 3031, ~~2021~~2022 of approximately $~~547~~102,000. The cost of software and royalty product revenue as a percentage of software and royalty revenue ~~decreased~~increased to 04% during the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to 20% for the corresponding ~~2020~~2021 period as the 2021 period contained revenue being comprised of solutions containing no third-party software costs or software customization. In addition to changes in costs of software and royalty product revenue caused by revenue level fluctuations, costs of products can vary as a percentage of product revenue from period to period depending upon level of software customization and third-party software license content included in product sales during a given period.

The cost of revenue for our hardware and consumables sales increased by approximately $218,000 for the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to the corresponding period in ~~2020~~2021 due to higher hardware and consumable revenue of $730,000.

The cost of services revenue decreased approximately $635,000 during the three months ended September 30, 2021 as compared to the corresponding period in 2020 due to lower services revenue of $1,173,000. In addition to changes in costs of services product revenue caused by revenue level fluctuations, costs of services can vary as a percentage of service revenue from period to period depending upon both the level and complexity of professional services resources utilized in the completion of the service element.

Maintenance Cost of Revenue	Three Months Ended March 31,
(dollars in thousands)	2022			2021			$ Change			% Change

Total maintenance cost of revenue	$	100		$	110		$	(10	)		(9	)%
		16	%		16	%

Maintenance Cost of Revenue	Three Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Total maintenance cost of revenue	$	87		$	123		$	(36	)		(29	)%
		14	%		20	%

-26-

Cost of maintenance revenue decreased approximately $36,000 during the three months ended September 30, 2021 as compared to the corresponding period in 2020 due to reductions in fixed maintenance costs through headcount reductions.

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Product Gross Profit	Three Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Software and royalties	$	40		$	574		$	(534	)		(93	)%
Percentage of software and royalty product revenue		100	%		98	%
Hardware and consumables	$	9		$	4		$	5			125	%
Percentage of hardware and consumables product revenue		45	%		31	%
Services	$	27		$	565		$	(538	)		(95	)%
Percentage of services product revenue		32	%		45	%
Total product gross profit	$	76		$	1,143		$	(1,067	)		(93	)%
Percentage of total product revenue		52	%		62	%

Cost of maintenance revenue decreased approximately $9,000 during the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to reductions in fixed maintenance costs through headcount reductions.

Software and royalty gross profit decreased approximately $534,000 for the three months ended September 30, 2021 from the corresponding period in 2020 due primarily to lower software and royalty revenue of approximately $547,000. In addition to changes in costs of software and royalty product revenue caused by revenue level fluctuations, costs of products can vary as a percentage of product revenue from period to period depending upon level of software customization and third-party software license content included in product sales during a given period.

Product Gross Profit	Three Months Ended March 31,
(dollars in thousands)	2022			2021			$ Change		% Change

Software and royalties	$	136		$	39		$	97		249	%
Percentage of software and royalty product revenue		96	%		100	%
Hardware and consumables	$	16		$	4		$	12		300	%
Percentage of hardware and consumables product revenue		21	%		31	%
Services	$	26		$	4		$	22		550	%
Percentage of services product revenue		100	%		100	%
Total product gross profit	$	178		$	47		$	131		279	%
Percentage of total product revenue		85	%		84	%

~~Services~~Software and royalty gross profit ~~decreased~~increased approximately $~~538~~97,000 for the three months ended ~~September~~March 3031, ~~2021~~2022 asfrom ~~compared to~~ the corresponding period in ~~2020~~2021 due toprimarily ~~lower service revenue of approximately $1,173,000 for the three months ended September 30, 2021 as compared~~ to ~~the~~higher ~~corresponding~~software ~~period~~and inroyalty ~~2020 combined with lower costs of service~~ revenue of approximately $~~635~~102,000 ~~for the three months ended September 30, 2021 as compared to the corresponding period in 2020~~. In addition to changes in costs of ~~services~~software and royalty product revenue caused by revenue level fluctuations, costs of ~~services~~products can vary as a percentage of ~~service~~product revenue from period to period depending upon ~~both~~level ~~the~~of ~~level~~software customization and ~~complexity~~third-party ofsoftware ~~professional~~license ~~service~~content ~~resources~~included ~~utilized~~ in ~~the~~product ~~completion~~sales ofduring ~~the~~a ~~service~~given ~~element~~period.

Maintenance Gross Profit	Three Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change		% Change
Total maintenance gross profit	$	546		$	490		$	56		11	%
Percentage of total maintenance revenue		86	%		80	%

Hardware and consumables gross profit increased approximately $12,000 for the three months ended March 31, 2022 from the corresponding period in 2021 due primarily to higher hardware and consumables revenue of approximately $30,000 offset by higher cost of hardware and consumables revenue of approximately $18,000.

~~Gross~~Services gross profit ~~related to maintenance revenue~~ increased ~~11% or~~ approximately $5622,000 for the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to the corresponding period in ~~2020.~~2021 ~~This~~due ~~increase~~to ~~reflects~~ higher ~~maintenance~~service revenue of approximately $2022,000 ~~combined~~for ~~with~~the ~~lower~~three ~~cost~~months ofended ~~maintenance~~March ~~revenue of approximately $36~~31,~~000.~~ ~~Higher~~2022 ~~maintenance~~as ~~revenue~~compared ~~reflects~~to the ~~expansion~~corresponding ~~of our installed base and lower maintenance cost of revenue reflects reductions in fixed maintenance costs through headcount reductions. Maintenance gross profit can change from~~ period ~~to period depending upon both the level and complexity of engineering service resources utilized~~ in ~~the provision of maintenance services~~2021.

Operating Expense	Three Months Ended September 30,
Maintenance Gross Profit	Three Months Ended March 31,
(dollars in thousands)	~~2021~~2022			~~2020~~2021			$ Change			% Change
General and administrative	$	1,228		$	953		$	275			29	%
Total maintenance gross profit	$	535		$	567		$	(32	)		(6	)%
Percentage of total net revenue		158	%		39	%
Percentage of total maintenance revenue		84	%		84	%
Sales and marketing	$	747		$	615		$	132			21	%
Percentage of total net revenue		96	%		25	%
Research and development	$	1,073		$	1,117		$	(44	)		(4	)%
Percentage of total net revenue		138	%		45	%
Depreciation and amortization	$	11		$	18		$	(7	)		(39	)%
Percentage of total net revenue		1	%		1	%

-Gross 33profit - related to maintenance revenue decreased 6% or approximately $32,000 for the three months ended March 31, 2022 as compared to the corresponding period in 2021. This decrease reflects lower maintenance revenue of approximately $42,000 combined with lower cost of maintenance revenue of approximately $10,000. Lower maintenance revenue reflects the expiration of certain maintenance contracts and lower maintenance cost of revenue reflects reductions in fixed maintenance costs through headcount reductions. Maintenance gross profit can change from period to period depending upon both the level and complexity of engineering service resources utilized in the provision of maintenance services.

Operating Expense	Three Months Ended March 31,
(dollars in thousands)	2022			2021			$ Change			% Change

General and administrative	$	1,176		$	1,347		$	(171	)		(13	)%
Percentage of total net revenue		139	%		184	%
Sales and marketing	$	626		$	724		$	(98	)		(14	)%
Percentage of total net revenue		74	%		99	%
Research and development	$	868		$	1,168		$	(300	)		(26	)%
Percentage of total net revenue		103	%		159	%
Depreciation and amortization	$	6		$	18		$	(12	)		(67	)%
Percentage of total net revenue		1	%		2	%

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Table of Contents

General and Administrative Expense

General and administrative expense is comprised primarily of salaries and other employee-related costs for executive, financial, and other infrastructure personnel. General legal, accounting and consulting services, insurance, occupancy and communication costs are also included with general and administrative expense. The dollar ~~increase~~decrease of approximately $~~275~~171,000 during the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to the corresponding period in ~~2020~~2021 is comprised of the following major components:

● Decrease in personnel related expense of approximately $~~124~~86,000 due to headcount reductions;

● ~~Increase~~Decrease in professional services of approximately $~~119~~246,000 from ~~higher~~reductions ~~contract~~in contractor fees, professional services and Board of Director fees of approximately $29136,000, ~~higher~~lower ~~contractor~~general ~~fees~~corporate ~~and~~expense ~~professional services~~ of $7918,000, ~~and~~, ~~higher~~lower ~~general~~audit ~~corporate~~related ~~expense~~fees of approximately $4689,000, ~~higher~~lower ~~investor~~patent ~~relations~~related ~~fees~~expense of approximately $2864,000, ~~higher~~and ~~audit~~lower ~~related~~legal fees of approximately $149,000 offset by ~~lower~~higher ~~patent~~contract ~~related~~services ~~expense~~ of approximately $5265,000 and ~~lower~~higher ~~legal~~investor relations fees of approximately $255,000;.

● Increase in licenses, dues and other costs of approximately $537,000; ● Increase in stock-based compensation expense of approximately $299,000; ● Decrease in financing expense of approximately $32,000;

● Decrease in rent, ~~and~~ office related ~~expense~~expenses and other of approximately $71120,000 due primarily to the sublease of certain office facilities;

● Increase in ~~insurances~~insurance costs of approximately $543,000; and

● Increase in bad debt expense of approximately $254,000.

We continue to focus our efforts on achieving additional future operating efficiencies by reviewing and improving upon existing business processes and evaluating our cost structure. We believe these efforts will allow us to continue to gradually decrease our level of general and administrative expense expressed as a percentage of total revenue.

Sales and Marketing

Sales and marketing expense consists primarily of the salaries, commissions, other incentive compensation, employee benefits and travel expense of our sales, marketing, and business development functions. The dollar ~~increase~~decrease of approximately $~~132~~98,000 during the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to the corresponding period in ~~2020~~2021 is primarily comprised of the following major components:

● Decrease in personnel related expense of approximately $69135,000, driven primarily by the effect of headcount reductions;

● ~~Increase~~Decrease in ~~contractor~~contract services and ~~contract~~dues ~~services~~and subscriptions of approximately $8733,000 resulting from decreased utilization of certain sales ~~contractors~~contract services of approximately $1948,000 offset by ~~higher contract service expense including~~ dues and subscriptions of approximately $~~106~~15,000;

● Increase in travel, trade show expense ~~and~~of ~~office~~approximately ~~related~~$19,000 ~~expense~~due ~~including~~to ~~demo~~the ~~equipment~~resumption of ~~approximately~~sales ~~$86,000~~travel and trade show attendance;

● Increase in stock-based compensation expense of approximately $103,000; and

	●	Increase in stock-based compensation expense of approximately $106,000; and

	●	Decrease in advertising and demo equipment expense and other miscellaneous selling related expense of approximately $28,000; and

● Decrease in our Mexico sales office ~~expense~~ and other expense of approximately $7527,000 due to headcount reductions at this location.

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Research and Development

Research and development expense consists primarily of salaries, employee benefits and outside contractors for new product development, product enhancements, custom integration work and related facility costs. Such expense decreased approximately $44300,000 for the three months ended ~~September~~March 3031, ~~2021~~2022 as compared to the corresponding period in ~~2020~~2021 due primarily to the following major components:

● Decrease in personnel related expense of approximately $~~265~~394,000 driven primarily by the effect of headcount decreases;

● Increase in contractor fees and contract services of approximately $6798,000 resulting from the replacement of certain function with contract labor;

● Increase in stock based-compensation expense of approximately $98100,000; and

● ~~Increase~~Decrease in office related expense, engineering tools, supplies, communications (including internet) and travel of approximately $56104,000.

Depreciation and Amortization

During the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, depreciation and amortization expense was approximately $116,000 and $18,000, respectively. The relatively small amount of depreciation and amortization reflects the relatively small property and equipment carrying value.

Interest Expense (Income), Net

For the three months ended ~~September~~March 3031, 2022 and 2021, we recognized net interest expense of $53,000 and $0, respectively. ~~For~~Interest expense for the three months ended ~~September~~March 3031, ~~2020,~~2022 weis ~~recognized~~comprised ~~interest expense~~ of approximately $5624,000 ~~and~~in coupon interest ~~income~~related ofto ~~approximately~~borrowings ~~$0.~~under ~~Interest~~our ~~expense~~2021 ~~for~~Credit ~~the~~Facility ~~three~~and ~~months~~approximately ~~ended September 30~~$29,000 ~~2020~~from ~~reflects~~amortization ~~interest~~of ~~incurred~~debt ondiscount aassociated ~~related~~with ~~party~~the ~~factoring~~2021 ~~agreement~~Credit ~~and certain related party notes payable~~Facility.

Other (income) expense, net

During the three months ended ~~September~~March 3031, ~~2021~~2022, we recognized other income of approximately $5,000 from ~~the~~certain ~~write-off~~miscellaneous ~~of a deferred contract prepayment~~receipts. During the three months ended ~~September~~March 3031, ~~2020~~2021, we recognized other expense of approximately $382,000 from the ~~recognition~~write-off of acertain furniture and fixtures and recognized other income of approximately $57,000 from the settlement ~~fee~~of oncertain anliabilities ~~outstanding~~at ~~obligation~~less than their carrying amount.

Change in Fair Value of Derivative Liabilities

For the three months ended ~~September~~March 3031, ~~2021~~2022, we recognized ~~income~~expense of approximately $1667,~~342,~~000 from the decrease of derivative liabilities arising from the consummation of the Series D Financing in November 2020. Such ~~decrease~~increase was determined by management using fair value methodologies and is included as income under the caption “~~(Gain)~~Change ~~on change~~ in fair value of derivative liabilities” in our condensed consolidated statement of ~~income~~operations ~~(loss)~~ for three months ended ~~September~~March 3031, ~~2021~~2022.

For the three months ended ~~September~~March 3031, ~~2020~~2021, we recognized income of approximately $~~535~~1,172,000 from the decrease of derivative liabilities arising from the consummation of the Series CD Financing in ~~September~~November ~~2018~~2020. Such decrease was determined by management using fair value methodologies and is included as income under the caption “~~(Gain)~~Change ~~on change~~ in fair value of derivative liabilities” in our condensed consolidated statement of ~~income~~operations ~~(loss)~~ for three months ended ~~September~~March 3031, ~~2020~~2021.

-Loss 35on - Extinguishment of Derivative Liabilities and Debt

During the three months ended March 31, 2021, we recognized a loss on the extinguishment of derivative liabilities of approximately $335,000 pursuant to the conversion of 354 shares of Series D Preferred into Common Stock. Such loss is included in the caption “Loss on extinguishment of derivative liabilities and debt” in our condensed consolidated statement of operations for three months ended March 31, 2021.

There were no extinguishments of derivative liabilities during the three months ended March 31, 2022.

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Table of Contents

(Gain) on Extinguishment of Derivative Liabilities and Debt

During the three months ended September 30, 2021, we recognized a gain on the extinguishment of derivative liabilities of approximately $35,000 pursuant to the conversion of 242 shares of Series D Preferred into Common Stock. Such gain is included in the caption “(Gain) on extinguishment of derivative liabilities and debt” in our condensed consolidated statement of income (loss) for three months ended September 30, 2021. During the three months ended September 30, 2021, we recognized a gain on debt extinguishment from the forgiveness of our PPP Loan. In September 2021, we received notification from the SBA that our PPP Loan of $1,571,000 was forgiven in its entirety along with accrued unpaid interest of approximately $10,000. Such gain is included in the caption “(Gain) on extinguishment of derivative liabilities and debt” in our condensed consolidated statement of income (loss) for three months ended September 30, 2021.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Net Product Revenue	Nine Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Software and royalties	$	301		$	780		$	(479	)		(61	)%
Percentage of total net product revenue		63	%		36	%
Hardware and consumables	$	76		$	75		$	1			1	%
Percentage of total net product revenue		16	%		4	%
Services	$	98		$	1,274		$	(1,176	)		(92	)%
Percentage of total net product revenue		21	%		60	%
Total net product revenue	$	475		$	2,129		$	(1,654	)		(78	)%

Software and royalty revenue decreased approximately $479,000 during the nine months ended September 30, 2021 as compared to the corresponding period in 2020. This decrease is attributable to lower identification project related revenue of approximately $486,000, lower royalty revenue of approximately $54,000 and lower law enforcement software revenue of approximately $4,000 offset by higher sales of boxed identity management software sold through our distribution channel of approximately $65,000.The decrease in identification project related revenue is reflective of lower software licenses sold into identification projects during the nine months ended September 30, 2021 and the increase in boxed identity management software sold through our distribution channel reflects higher procurement from certain international customers. The decrease in royalty revenue results primarily from lower reported usage from certain customers.

Services revenue is comprised primarily of software integration services, system installation services and customer training. Such revenue decreased approximately $1,176,000 during the nine months ended September 30, 2021 as compared to the corresponding period of 2020 due to a decrease in the service element of project related work completed during the nine months ended September 30, 2021.

We believe that the period-to-period fluctuations of identity management software revenue in project-oriented solutions are largely due to the timing of government procurement with respect to the various programs we are pursuing. Although no assurances can be given, based on management’s current visibility into the timing of potential government procurements and potential partnerships and current pilot programs, we believe that we will see an increase in government procurement and implementations with respect to identity management initiatives during 2021; however, government procurement initiatives, implementations and pilots are frequently delayed and extended and we cannot predict the timing of such initiatives.

During the nine months ended September 30, 2021, we have focused on strategically updating our products with the latest mobile and Cloud technology, prioritized by market opportunities.

We launched Authenticate (formerly GoVerify ID ®) in February 2021. This relaunch included a new container and microservices-based architecture and refreshed mobile and desktop clients for seamless and quick integrations to applications and services. In addition, the first major update is the launch of the first module of the Law Enforcement 2.0 (LE 2.0) Platform, Imageware Capture, in September. We modernized the UI for law enforcement professionals, building the solution as a web-based Software as a Service (SaaS) product with a reactive design that can be accessed from any device anywhere. In addition, we have integrated Imageware Authenticate into the LE 2.0 platform. This update is already resulting in additional customers implementing our Authenticate solution.

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Maintenance Revenue	Nine Months Ended September 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Total maintenance revenue	$	1,977	$	1,870	$	107		6	%

Maintenance revenue was approximately $1,977,000 for the nine months ended September 30, 2021, as compared to approximately $1,870,000 for the corresponding period in 2020. Identity management maintenance revenue generated from identification software solutions was approximately $1,049,000 for the nine months ended September 30, 2021 as compared to approximately $898,000 during the comparable period in 2020. Law enforcement maintenance revenue was approximately $928,000 as compared to approximately $972,000 during the comparable period in 2020. The increase of $151,000 in identification software maintenance revenue for the nine months ended September 30, 2021 as compared to the corresponding period of 2020 is reflective of certain additional maintenance services provided by the Company during the nine months ended September 30, 2021. The decrease of approximately $44,000 in our law enforcement maintenance revenue reflects expiration of certain maintenance contracts.

Cost of Product Revenue	Nine Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Software and royalties	$	20		$	40		$	(20	)		(50	)%
Percentage of software and royalty product revenue		7	%		5	%
Hardware and consumables	$	52		$	46		$	6			13	%
Percentage of hardware and consumables product revenue		68	%		61	%
Services	$	62		$	695		$	(633	)		(91	)%
Percentage of services product revenue		63	%		55	%
Total product cost of revenue	$	134		$	781		$	(647	)		(83	)%
Percentage of total product revenue		28	%		37	%

The cost of software and royalty product revenue decreased approximately $20,000 due primarily to lower software and royalty revenue for the nine months ended September 30, 2021 as compared to the corresponding period in 2020 due to the 2021 period containing uncharacteristically low third-party software license costs and minimal levels of software customization.

The cost of revenue for our hardware and consumables sales increased by approximately $6,000 for the nine months ended September 30, 2021 as compared to the corresponding period in 2020 due to the 2021 period containing hardware and consumables with slightly higher costs of revenue than the corresponding period in 2020.

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The cost of services revenue decreased approximately $633,0000 during the nine months ended September 30, 2021 as compared to the corresponding period in 2020 due to lower services revenue of $1,176,000. In addition to changes in costs of services product revenue caused by revenue level fluctuations, costs of services can vary as a percentage of service revenue from period to period depending upon both the level and complexity of professional service resources utilized in the completion of the service element.

Maintenance Cost of Revenue	Nine Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Total maintenance cost of revenue	$	276		$	328		$	(52	)		(16	)%
Percentage of total maintenance revenue		14	%		18	%

Cost of maintenance revenue decreased approximately $52,000 during the nine months ended September 30, 2021 as compared to the corresponding period in 2020 despite higher maintenance revenue of $107,000. This decrease is reflective of lower maintenance labor costs incurred during the nine months ended September 30, 2021 as compared to the corresponding period in 2020 due primarily to the composition of engineering resources used in the provision of maintenance services and reductions in headcount in our customer support department.

Product Gross Profit	Nine Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
Software and royalties	$	281		$	740		$	(459	)		(62	)%
Percentage of software and royalty product revenue		93	%		95	%
Hardware and consumables	$	24		$	29		$	(5	)		(17	)%
Percentage of hardware and consumables product revenue		32	%		39	%
Services	$	36		$	579		$	(543	)		(94	)%
Percentage of services product revenue		37	%		45	%
Total product gross profit	$	341		$	1,348		$	(1,007	)		(75	)%
Percentage of total product revenue		72	%		63	%

Software and royalty gross profit decreased approximately $459,000 for the nine months ended September 30, 2021 from the corresponding period in 2020 due primarily to lower software and royalty revenue of approximately $479,000 combined with lower software and royalty cost of revenue of $20,000 for the same period. In addition to changes in costs of software and royalty product revenue caused by revenue level fluctuations, costs of products can vary as a percentage of product revenue from period to period depending upon level of software customization and third-party software license content included in product sales during a given period.

Hardware and consumable gross profit decreased approximately $5,000 for the nine months ended September 30, 2021 from the corresponding period in 2020 due primarily to lower hardware and consumable revenue of approximately $1,000 combined with higher cost of hardware and consumable revenue of approximately $6,000.

Services gross profit decreased approximately $543,000 for the nine months ended September 30, 2021 as compared to the corresponding period in 2020 due to lower service revenue of approximately $1,176,000 for the nine months ended September 30, 2021 as compared to the corresponding period in 2020 combined with lower costs of service revenue of approximately $633,000 for the nine months ended September 30, 2021 as compared to the corresponding period in 2020. In addition to changes in costs of services product revenue caused by revenue level fluctuations, costs of services can vary as a percentage of service revenue from period to period depending upon both the level and complexity of professional service resources utilized in the completion of the service element.

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Maintenance Gross Profit	Nine Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change		% Change
Total maintenance gross profit	$	1,701		$	1,542		$	159		10	%
Percentage of total maintenance revenue		86	%		83	%

Gross profit related to maintenance revenue increased approximately $159,000 for the nine months ended September 30, 2021 as compared to the corresponding period in 2020. This increase reflects higher maintenance revenue of approximately $107,000 combined with lower cost of maintenance revenue of approximately $52,000 due to headcount reductions in our customer service department combined with lower maintenance labor costs incurred during the same period due to the composition of engineering resources used in the provision of maintenance services.

Operating Expense	Nine Months Ended September 30,
(dollars in thousands)	2021			2020			$ Change			% Change
General and administrative	$	4,147		$	2,875		$	1,272			44	%
Percentage of total net revenue		169	%		72	%
Sales and marketing	$	2,217		$	2,239		$	(22	)		(1	)%
Percentage of total net revenue		90	%		56	%
Research and development	$	3,456		$	4,503		$	(1,047	)		(23	)%
Percentage of total net revenue		141	%		113	%
Depreciation and amortization	$	43		$	54		$	(11	)		(20	%
Percentage of total net revenue		2	%		1	%

General and Administrative Expense

General and administrative expense is comprised primarily of salaries and other employee-related costs for executive, financial, and other infrastructure personnel. General legal, accounting and consulting services, insurance, occupancy and communication costs are also included with general and administrative expense. The dollar increase of approximately $1,272,000 during the nine months ended September 30, 2021 as compared to the corresponding period in 2020 is comprised of the following major components:

● Decrease in personnel related expense of approximately $267,000;

● Increases in professional and contract services of approximately $609,000 which includes Board fees of approximately $7,000, higher auditing fees of approximately $28,000, higher contract service expense of approximately $222,000, higher contractor fees of approximately $269,000, higher general corporate expense of approximately $55,000, higher professional service fees of $41,000 and higher legal fees of approximately $62,000 offset by lower investor relations fees of approximately $11,000 and lower patent-related fees of approximately $64,000;

● Increase in travel, insurances, licenses, dues, rent, office related costs and other of approximately $304,000;

● Increase in financing expense of approximately $329,000 primarily due to the write-off of unamortized deferred stock issuance costs;

● Increase in stock-based compensation expense related to options and warrants of approximately $272,000; and

● Increase in bad debt expense of approximately $25,000.

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Sales and Marketing

Sales and marketing expense consists primarily of the salaries, commissions, other incentive compensation, employee benefits and travel expense of our sales, marketing, and business development functions. The dollar decrease of approximately $22,000 during the nine months ended September 30, 2021 as compared to the corresponding period in 2020 is primarily comprised of the following major components:

● Decrease in personnel related expense of approximately $213,000 driven primarily by the effect of headcount reductions;

● Increase in contractor and contract services of approximately $72,000 resulting from decreased utilization of certain sales consultants of approximately $145,000 offset by higher contract service expense of approximately $217,000;

● Increase in travel, trade show expense and office related expense of approximately $84,000;

● Increase in stock-based compensation expense of approximately $151,000; and

● Decrease in our Mexico sales office expense and other of approximately $116,000.

Research and Development

Research and development expense consists primarily of salaries, employee benefits and outside contractors for new product development, product enhancements, custom integration work and related facility costs. Such expense decreased approximately $1,047,000 for the nine months ended September 30, 2021 as compared to the corresponding period in 2020 due primarily to the following major components:

● Decrease in personnel related expense of approximately $1,137,000 due primarily to headcount reductions;

● Decrease in contractor fees and contract services of approximately $47,000;

● Increase in stock based-compensation expense of approximately $138,000; and

● Decrease in rent, office related expense and engineering tools and supplies of approximately $1,000.

Our level of expenditures in research and development reflects our belief that to maintain our competitive position in markets characterized by rapid rates of technological advancement, we must continue to invest significant resources in new systems and software development as well as continue to enhance existing products.

Depreciation and Amortization

During the nine months ended September 30, 2021 and 2020, depreciation and amortization expense was approximately $43,000 and $54,000, respectively. The relatively small amount of depreciation and amortization reflects the relatively small property and equipment carrying value.

Interest Expense, Net

For the nine months ended September 30, 2021, we recognized interest expense of approximately $0 and interest income of approximately $0. For the nine months ended September 30, 2020, we recognized interest expense of approximately $131,000 and interest income of approximately $0. Interest expense of approximately $131,000 for the nine months ended September 30, 2020 reflects interest incurred on a related party factoring agreement and related party notes payable.

Other (income) expense, net

During the nine months ended September 30, 2021, we recognized other income of approximately $5,000 from the write-off of a deferred contract prepayment. During the nine months ended September 30, 2020, we recognized other expense of approximately $3,000 from the recognition of a settlement fee on an outstanding obligation and $1,000 of miscellaneous expense.

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Change in Fair Value of Derivative Liabilities

For the nine months ended September 30, 2021, we recognized income of approximately $16,558,000 from the decrease of derivative liabilities arising from the consummation of the Series D Financing in November 2020. Such decrease was determined by management using fair value methodologies and is included as income under the caption “(Gain) on change in fair value of derivative liabilities” in our condensed consolidated statement of income (loss) for nine months ended September 30, 2021.

For the nine months ended September 30, 2020, we recognized approximately $369,000 from the decrease of derivative liabilities arising from the consummation of the Series C Financing in September 2018. Such decrease was determined by management using fair value methodologies and is included as income under the caption “(Gain) on change in fair value of derivative liabilities” in our condensed consolidated statement of operations for nine months ended September 30, 2020. This decrease in derivative liabilities results primarily from the fair value methodologies including the high likelihood of the consummation of the Series D financing and conversion of the Series C host instrument containing the embedded derivatives.

(Gain) on Extinguishment of Derivative Liabilities and Debt

During the nine months ended September 30, 2021, we recognized a net loss on the extinguishment of derivative liabilities of approximately $311,000 pursuant to the conversion of 646 shares of Series D Preferred into Common Stock. Such loss is included in the caption “(Gain) on extinguishment of derivative liabilities and debt” in our condensed consolidated statement of income (loss) for nine months ended September 30, 2021. During the nine months ended September 30, 2021, we recognized a gain on debt extinguishment from the forgiveness of our PPP Loan. In September 2021, we received notification from the SBA that our PPP Loan of $1,571,000 was forgiven in its entirety along with accrued unpaid interest of approximately $10,000. Such gain is included in the caption “(Gain) on extinguishment of derivative liabilities and debt” in our condensed consolidated statement of income (loss) for nine months ended September 30, 2021.

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

Going Concern and Management’s Plans

Historically, our principal sources of cash have included proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, and, to a lesser extent, customer payments from the sale of our products. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain positive cash flows from operations. Historically, the Company has not been able to generate sufficient net revenue to achieve and sustain positive cash flows from operations, and this condition is currently expected to continue for the foreseeable future. As a result, the Company has been dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern. Due to the Company’s deteriorating liquidity, management has determined that there is substantial doubt about the Company’s ability to continue as a going concern.

At ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, we had negative working capital of $810,~~280~~289,000 and $198,~~349~~046,000, respectively. Included in our negative working capital as of ~~September~~March 3031, 2022 and December 31, 2021 are $76,~~486~~024,000 and $5,292,000, respectively, of derivative liabilities which are not required to be settled in cash except in the event of the consummation of a change of control or at any time after the fourth anniversary of the Series D Preferred issuance, at which time the holders of the Series D Preferred may require the Company to redeem in cash any or all of the holder’s outstanding Series D Preferred at an amount equal to the Series D Liquidation Preference Amount. At ~~September~~March 3031, ~~2021~~2022 the Liquidation Preference Amount totaled $2223,~~965~~469,000. Considering the financings consummated in ~~2020 and~~ 2021, as well as our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash will be insufficient to satisfy our cash requirements ~~for~~in the near term and the next twelve months from the date of this filing. At ~~November~~May 1020, ~~2021~~2022, cash on hand approximated $1215,~~154,~~000. Based on the Company’s rate of cash consumption induring the ~~first~~year ~~three~~ended ~~quarters~~December of31, 2021, the first quarter ended March 31, 2022 and the ~~last~~second quarter ofended ~~2020~~June 30, 2022, the Company estimates it will need additional capital in the ~~first~~second quarter of 2022 and its prospects for obtaining that capital are uncertain. As a result of the Company’s historical losses, ~~and~~ financial condition, and challenges raising additional capital given the volatile capital markets, there is substantial doubt about the Company’s ability to continue as a going concern.

-To 41address our working capital requirements, management is actively seeking additional financing, of which no assurances can be given that we will be successful. In addition, the Company has instituted several cost cutting measures and has utilized cash proceeds available under the Credit Facility with the Lenders (See Note 1), and under the purchase agreement with Lincoln Park to satisfy its working capital requirements (“LPC Purchase Agreement”) (See Note 1). In addition, as reported in the Company’s Quarterly Report on Form 10- Q filed with the SEC on August 23, 2021, on August 12, 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. Other than the LPC Purchase Agreement with Lincoln Park and our Credit Facility with Nantahala, which are currently restricted in our ability to access additional capital, there are currently no financing arrangements to support our projected cash shortfall. We currently have no other commitments to purchase additional debt and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional debt and/or equity securities, or entering into any other transaction that addresses our ability to continue as a going concern. The consummation of a transaction will involve substantial dilution to the Company’s stockholders.

~~Table~~In view of ~~Contents~~ the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital, generate positive cash flows from operations, or otherwise consummate a transaction that addresses the Company’s working capital requirements. There is no assurance that the Company will be able to obtain additional capital, consummate a transaction that addresses its liquidity concerns, or operate at a profit or generate positive cash flows in the future. Therefore, management’s plans do not alleviate the substantial doubt of the Company’s ability to continue as a going concern.

To address our working capital requirements, management has instituted several cost cutting measures and has utilized cash proceeds available under the purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to satisfy its working capital requirements (“LPC Purchase Agreement”). In addition, as reported in the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the "SEC") on August 23, 2021, on August 12, 2021, the Company retained an investment bank to initiate a review of available alternatives to maximize shareholder value, which may include, among other alternatives, (i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) the private placement of securities to meet its working capital requirements or otherwise as necessary in connection with the consummation of any of the above transactions. Other than the LPC Purchase Agreement with Lincoln Park, there are currently no financing arrangements to support our projected cash shortfall, and available capital under the LPC Purchase Agreement will be insufficient to address our working capital needs. We currently have no other commitments to purchase additional debt and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional debt and/or equity securities, or entering into any other transaction that addresses our ability to continue as a going concern. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

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Operating Activities

We used net cash of $61,~~764~~441,000 in operating activities for the three months ended ~~September~~March 3031, ~~2021 as compared to net cash used of $4~~2022,~~979,000~~ ~~during~~which ~~the comparable period in 2020. During the nine months ended September 30, 2021, net cash used in operating activities~~ consisted of net ~~income~~loss of $92,~~871~~698,000 and ana ~~increase~~decrease in working capital and other assets and liabilities of $~~284~~37,000. Those amounts are inoffset ~~addition~~by to approximately $161,~~351~~294,000 of non-cash ~~income,~~expenses ~~including~~comprised of $16667,~~558,~~000 ~~in income~~ from the change in fair value of derivative liabilities ~~and $1~~,~~270,000~~ ~~in income from the extinguishment of debt and derivative liabilities offset by~~ $~~942~~592,000 in stock-based compensation, $436,000 in depreciation and amortization, ~~$82,000~~and ~~in non-cash expense from the disposal of fixed assets,~~ $~~364~~29,000 in ~~non-cash~~amortization expense ~~from the write-off~~ of ~~deferred~~debt ~~stock~~discount ~~issuance~~on ~~costs,~~our ~~and~~line ~~$46,000 from the issuance~~ of ~~common stock as compensation in lieu of cash~~credit. During the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022, we ~~used~~generated cash of $~~176~~174,000 from ~~increases~~decreases in current assets combined with $3178,000 from decreases in our operating leases right-of-use assets and used cash of $77133,000 through decreases in current liabilities and deferred revenue.

We used net cash of $43,~~979~~290,000 in operating activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2020 as compared to net cash used of $8~~2021,~~007,000~~ ~~during~~which ~~the comparable period in 2019. During the nine months ended September 30, 2020, net cash used in operating activities~~ consisted of net loss of $61,~~652~~885,000 and aan ~~decrease~~increase in working capital and other assets and liabilities of $1767,~~450,~~000. Those amounts are in addition to approximately $~~223~~638,000 of non-cash ~~costs~~income, including $~~449~~1,172,000 in income from the change in fair value of derivative liabilities offset by $78,000 in stock-based compensation, $5418,000 in depreciation and amortization ~~and~~ $8982,000 in non-cash expense from the ~~application~~disposal of ~~rent~~fixed ~~deposits~~assets, ~~offset by~~ $~~369~~21,000 infrom the ~~change~~issuance of Common Stock as compensation in ~~fair~~lieu ~~value~~of cash and $335,000 from loss on extinguishment of derivative liabilities. During the ~~nine~~three months ended ~~September~~March 3031, ~~2020~~2021, we ~~generated~~used cash of $~~813~~459,000 from ~~decreases~~increases in current assets ~~offset~~combined bywith $1310,000 from ~~increases~~decreases in our operating leases right-of-use assets and ~~generated~~used cash of $~~650~~298,000 through ~~increases~~decreases in current liabilities and deferred revenue.

Investing Activities

~~Net~~There ~~cash used in investing activities during the nine months ended September 30, 2021~~ was ~~$48,000~~no asnet ~~compared~~cash toused ~~$19,000~~or ~~for~~provided ~~the~~by ~~corresponding~~investing ~~period~~activities induring ~~2020. For~~ the ~~nine~~three months ended ~~September~~March 3031, ~~2021, we used cash of $48,000 to fund capital expenditures of computer hardware~~2022.

-During 42the - three months ended March 31, 2021, we used cash of $53,000 to fund capital expenditures of computer hardware.

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Financing Activities

~~During~~Cash ~~the nine months ended September 30, 2021, we~~ generated ~~cash of approximately $100,000~~ from ~~the~~financing ~~sale~~activities ~~of 1,000,000 shares of Common Stock~~ for ~~$0.10 per share and used cash of approximately $25,000 for~~ the ~~payment~~three ~~of dividends on our Series B Preferred Stock. During the nine~~ months ended ~~September~~March 3031, ~~2020,~~2022 weconsisted ~~generated cash~~ of approximately $21,~~360~~050,000 ~~from~~received by the ~~sale~~Company ~~of 15,700,000 shares of Common Stock before recognition of approximately $64,000~~ in ~~direct stock issuance costs. We generated cash of $900,000 from~~ the ~~issuance~~form of ~~related~~drawdowns ~~party notes payable and generated cash of $1,571,000~~ from ~~the~~its ~~issuance~~Credit ~~of notes payable under the Paycheck Protection Program~~Facility. We also generated cash of $2,187,000 from the issuance of notes payable pursuant to the Bridge Loan Financing portion of the Series D Financing. During the nine months ended September 30, 2020, we used cash of approximately $25,000 for the payment of dividends on our Series B Preferred Stock.

There was no net cash used or provided by financing activities during the three months ended March 31, 2021.

Inflation

We do not believe that inflation has had a material impact on our historical operations or profitability.

Off-Balance Sheet Arrangements

At ~~September~~March 3031, ~~2021~~2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed elsewhere in this Quarterly Report.

Recently Issued Accounting Standards

Please refer to the section “Recently Issued Accounting Standards” in Note 2 of our Notes to the unaudited Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business extends to countries outside the United States, and we intend to continue to expand our foreign operations. As a result, our revenue and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure Controls and Procedures

Our management, Chief Executive Officer and Principal Financial and Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~September~~March 3031, ~~2021~~2022. The term "“disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of ~~September~~March 3031, ~~2021~~2022. This conclusion was based on the material weaknesses in our internal control over financial reporting as further described below.

Material Weaknesses

Remediation Efforts to Address Material Weaknesses

To remediate the material weaknesses described above, management is adding controls to further enhance and revise the design of the existing controls including:

●

Establishing policies and procedures to ensure timely review, by qualified personnel, of inputs and assumptions used in measuring fair value of certain financial instruments as well as the journal entries to record the change in fair value.

●

Reassessing the design and operation of internal controls over financial reporting and review procedures over the preparation of our financial statements.

●

Maintaining adequate internal qualified personnel to properly supervise and review the information provided by the outside consulting technical experts to ensure certain significant complex transactions and technical matters were properly accounted for.

This material weakness did not result in any restatements of our audited and unaudited consolidated financial statements or disclosures for any prior period previously reported by us.

Changes in Internal Controls Over Financial Reporting

During the three months ended ~~September~~March 3031, ~~2021~~2022, the Company implemented additional review procedures to address the material weakness identified and discussed above. Other than the institution of additional review procedures, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report ~~on Form 10-Q~~ that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

~~Investing~~Our inbusiness ~~our~~is ~~common~~subject ~~stock~~to ~~involves~~significant ~~a high degree of risk~~risks. You should carefully consider the risks indescribed ~~our~~below ~~Annual~~and ~~Report~~the onother ~~Form~~information ~~10-K~~in ~~for~~this ~~our~~Quarterly ~~fiscal~~Report, ~~year~~including ~~ended~~our ~~December~~financial ~~31,~~statements ~~2020,~~and ~~filed~~related ~~on April 5~~notes, ~~2021,~~before inyou ~~addition~~decide to ~~the~~invest ~~other~~in ~~information~~our ~~contained~~Common inStock. ~~this~~If ~~Quarterly~~any ~~Report,~~of ~~before~~the ~~making~~following anrisks ~~investment~~or ~~decision.~~uncertainties ~~Our~~actually ~~business~~occur, ~~financial~~our ~~condition~~business, or results of operations or financial condition could be materially harmed, bythe ~~any~~trading price of ~~these~~our ~~risks.~~Common AsStock acould ~~result~~decline, and you could lose ~~some~~all or ~~all~~part of your investment ~~in our Common Stock~~. ~~These~~The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks ~~not~~and ~~currently~~uncertainties ~~known~~of towhich uswe are unaware or ~~other~~currently ~~factors~~deem ~~not~~immaterial ~~perceived~~may byalso usbecome toimportant ~~present~~factors ~~significant~~that ~~risks~~may toharm our business. atExcept ~~this~~as ~~time~~required ~~also~~by ~~may~~law, ~~impair~~we ~~our~~undertake ~~business~~no ~~operations~~obligations to update any risk factors.

RISKS RELATED TO OUR LIQUIDITY, BUSINESS AND INDUSTRY

Available cash resources ~~will~~are becurrently insufficient to provide for our working capital needs ~~for the next twelve months~~. As a result, we ~~will~~ need to raise additional capital in the near term to continue as a going concern.

At ~~September~~March 3031, ~~2021,~~2022 and December 31, ~~2020 and 2019~~2021, we had negative working capital of $810,~~280~~289,000, ~~$19,349,000~~ and $18,~~653~~046,000, respectively. Our principal source of liquidity at ~~September~~March 3031, ~~2021,~~2022 and December 31, ~~2020~~2021 ~~and 2019~~ consisted of cash and cash equivalents of $832,000 and $1,~~672~~202,000, $8respectively. At May 20,~~345~~ 2022,~~000~~ ~~and~~cash on hand approximated $1215,~~030~~000, with an additional $342,000 available under the existing Credit Facility at the Lender’s discretion. No assurances can be given that the Lenders will advance the additional $342,000 ~~respectively~~under the Credit Facility. Considering the financings consummated in ~~2020~~2021 and ~~2021~~2022, as well as our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash ~~will~~is 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 ~~intends~~is toactively ~~seek~~seeking additional equity and/or debt financing through the issuance of additional debt and/or equity securities and ~~may~~is ~~seek~~contemporaneously seeking strategic or other transactions intended to increase shareholder value. There are currently no formal committed financing arrangements to support our projected cash shortfall during the next twelve months, 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 capital through the issuance of debt and/or equity securities, or entering into any other transaction that addresses our ability to continue as a going concern.

ToThe ~~continue~~Company’s ascash aand ~~going~~cash ~~concern,~~equivalents ~~the~~may ~~Company~~fall isbelow ~~exploring~~the ~~strategic~~minimum ~~options~~threshold ~~and~~required isunder ~~reviewing~~the ~~its~~Credit ~~assets~~Facility, ~~the outcome of~~ which ~~is uncertain and~~ may ~~involve~~result ~~substantial~~in ~~dilution~~an toevent ~~shareholders~~of ~~and/or~~default aunder ~~loss~~the terms of ~~your~~the ~~entire~~Credit ~~investment~~Agreement.

AsThe ~~reported in the~~ Company’s ~~Quarterly~~is ~~Report~~currently onnegotiating ~~Form~~to ~~10-Q~~obtain ~~filed with~~ the ~~Securities~~remaining ~~and~~funds ~~Exchange~~available ~~Commission~~under (the ~~"SEC")~~Credit ~~on August 23~~Facility, ~~2021,~~including onobtaining ~~August~~a ~~12,~~waiver ~~2021,~~of the ~~Company~~minimum ~~retained~~cash anrequirement ~~investment~~covenant ~~bank~~under tothe ~~initiate~~Credit aFacility. Although ~~review~~we ofbelieve ~~available~~we ~~alternatives~~will toobtain ~~maximize~~a ~~shareholder~~waiver ~~value,~~of ~~which~~the ~~may~~minimum ~~include,~~cash ~~among other alternatives~~requirement, ~~(i)~~in athe ~~merger,~~event ~~consolidation,~~the orCompany ~~other~~is ~~business~~unable ~~combination~~to orobtain a ~~purchase~~waiver ~~involving all or a substantial amount~~ of the ~~business,~~minimum ~~securities~~cash orrequirement ~~assets~~in ofconnection ~~the~~with ~~Company, and/or (ii)~~ the ~~private~~request ~~placement~~to ofobtain ~~securities~~the toremaining ~~meet~~funds ~~its~~under ~~working~~the ~~capital~~Credit ~~requirements~~Facility, or otherwise asin ~~necessary~~the inevent ~~connection~~we ~~with~~fail ~~the~~to ~~consummation~~obtain ofalternative ~~any~~sources of ~~the~~capital, ~~above~~of ~~transactions. No~~which no assurances can be given, ~~that~~such ~~the~~inability ~~Company~~may ~~will~~constitute bean ~~successful~~event ~~in consummating any or a combination~~ of ~~such~~default ~~alternatives.~~under ~~The~~the ~~consummation~~terms of athe ~~transaction~~Credit ~~will~~Facility, ~~likely~~thereby ~~involve~~providing ~~substantial~~the ~~dilution~~Lenders towith ~~the~~certain ~~Company’s~~rights ~~stockholders,~~ and ~~may~~remedies ~~involve~~under the ~~loss~~terms of ~~your entire investment. In~~ the ~~event~~Credit ~~the~~Facility, ~~Company~~including isdeclaring ~~unable~~all toadvances ~~consummate~~under ~~one~~the orterms ~~more~~of ~~transactions,~~ the ~~Company~~Credit ~~may~~Facility ~~not~~immediately bedue ~~able~~and ~~to continue as a going concern~~payable.

WeTo ~~have~~continue as a ~~history~~going ofconcern, ~~significant~~the ~~recurring~~Company ~~losses~~is ~~totaling~~currently ~~approximately~~exploring ~~$203.6~~strategic ~~million~~options atand ~~September~~is ~~30,~~reviewing ~~2021~~its assets, ~~$213.2~~the ~~million~~outcome atof ~~December~~which ~~31,~~is ~~2020~~uncertain and ~~$203.2~~may ~~million~~involve ~~and~~substantial ~~December~~dilution ~~31,~~to ~~2019,~~shareholders and/or ~~these~~a ~~losses~~loss ~~may~~of ~~continue~~your inentire ~~the future~~investment.

As ofreported ~~September~~in 31the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 23, 2021, ~~December~~on 31August 12, ~~2020 and 2019~~2021, wethe ~~had~~Company retained an ~~accumulated~~investment ~~deficit~~bank to initiate a review of ~~approximately~~available ~~$203.6~~alternatives ~~million~~to maximize shareholder value, ~~$213.2~~which ~~million~~may ~~and~~include, ~~$203.2~~among ~~million~~other alternatives, ~~respectively~~(i) a merger, consolidation, or other business combination or a purchase involving all or a substantial amount of the business, securities or assets of the Company, and/or (ii) ~~these~~the ~~losses~~private ~~may~~placement ~~continue~~of securities to meet its working capital requirements or otherwise as necessary in connection with the ~~future~~consummation of any of the above transactions. To Wedate, ~~expect~~the toCompany ~~continue~~has tonot ~~incur~~received ~~significant~~any ~~sales~~offers ~~and~~or ~~marketing,~~other ~~research~~indications ~~and~~of ~~development~~interest acceptable to the Company’s Board, and ~~general~~no ~~and~~assurances ~~administrative~~can ~~expense.~~be Asgiven that the Company will be successful in consummating any or a ~~result,~~combination weof such alternatives. The consummation of a transaction will ~~need~~likely involve substantial dilution to ~~generate~~the ~~significant~~Company’s ~~revenue~~stockholders and may involve the loss of your entire investment. In the event the Company is unable to ~~achieve~~consummate ~~profitability~~one or more transactions, ~~and~~the weCompany may ~~never~~not ~~achieve~~be ~~profitability~~able to continue as a going concern.

-We 45have - a history of significant recurring losses totaling approximately $207.0 million at March 31, 2022 and $204.3 million at December 31, 2021, and these losses may continue in the future.

As of March 31, 2022 and December 31, 2021, we had an accumulated deficit of approximately $207.0 million and $204.3 million, respectively, and these losses may continue in the future. We expect to continue to incur significant sales and marketing, research and development, and general and administrative expense. As a result, we will need to generate significant revenue to achieve profitability, and we may never achieve profitability.

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Our operating results have fluctuated in the past and are likely to fluctuate in the future.

Our operating results have fluctuated in the past. These fluctuations in operating results are the consequence of the following, amongst other things:

● ~~varying~~Varying demand for and market acceptance of our technology and products;

● ~~changes~~Changes in our product or customer mix;

● ~~the~~The gain or loss of one or more key customers or their key customers, or significant changes in the financial condition of one or more of our key customers or their key customers;

● ~~our~~Our ability to introduce, certify and deliver new products and technologies on a timely basis;

● ~~the~~The announcement or introduction of products and technologies by our competitors;

● ~~competitive~~Competitive pressures on selling prices;

● ~~costs~~Costs associated with acquisitions and the integration of acquired companies, products and technologies;

● ~~our~~Our ability to successfully integrate acquired companies, products and technologies;

● ~~our~~Our accounting and legal expense; and

● ~~general~~General economic conditions.

These factors, some of which are not within our control, will likely continue in the future. To respond to these and other factors, we may need to make business decisions that could result in failure to meet financial expectations. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. Most of our expense, such as employee compensation and inventory, is relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our revenue for a particular period was below our expectations, we may not be able to proportionately reduce our operating expense for that period. Any revenue shortfall would have a disproportionately negative effect on our operating results for the period.

We depend upon a small number of large system sales ranging from $100,000 to in excess of several million dollars and we may fail to achieve one or more large system sales in the future.

Historically, we have derived a substantial portion of our revenue from a small number of sales of large, relatively expensive systems, typically ranging in price from $100,000 to $2,000,000. If we fail to receive orders for these large systems in a given sales cycle on a consistent basis, our business could be significantly harmed. Further, our quarterly results are difficult to predict because we cannot predict in which quarter, if any, large system sales will occur in a given year. As a result, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance. In some future quarters, our operating results may be below the expectations of securities analysts and investors, in which case the market price of our Common Stock may decrease significantly.

Our lengthy sales cycle may cause us to expend significant resources for one year or more in anticipation of a sale to certain customers, yet we still may fail to complete the sale.

When considering the purchase of a large identity management product, potential customers may take as long as eighteen months to evaluate different solutions and obtain approval for the purchase. Under these circumstances, if we fail to complete a sale, we will have expended significant resources and received no revenue in return. Generally, customers consider a wide range of issues before committing to purchase our products, including product benefits, ability to operate with their current systems, product reliability and their own budgetary constraints. While potential customers are evaluating our products, we may incur substantial selling costs and expend significant management resources in an effort to accomplish potential sales that may never occur. In times of economic recession, our potential customers may be unwilling or unable to commit resources to the purchase of new and costly systems.

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A number of our customers and potential customers are local, state, and federal government agencies that are subject to unique political and budgetary constraints and have special contracting requirements, which may affect our ability to obtain new and retain current government customers.

A significant number of our customers are government agencies. These agencies often do not set their own budgets and therefore have little control over the amount of money they can spend from quarter-to-quarter or year-to-year. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. Due to political and budgetary processes and other scheduling delays that may frequently occur relating to the contract or bidding process, some government agency orders may be canceled or substantially delayed, and the receipt of revenue or payments from these agencies may be substantially delayed. In addition, future sales to government agencies will depend on our ability to meet government contracting requirements, certain of which may be onerous or impossible to meet, resulting in our inability to obtain a particular contract. Common requirements in government contracts include bonding requirements, provisions permitting the purchasing agency to modify or terminate at will the contract without penalty, and provisions permitting the agency to perform investigations or audits of our business practices, any of which may limit our ability to enter into new contracts or maintain our current contracts.

Two customers accounted for approximately 4437% of our total revenue during the ~~nine~~three months ended ~~September~~March ~~21, 2021, two customers accounted for approximately 61% of our total revenue during the year ended December~~ 31, ~~2020~~2022, and ~~two~~three customers accounted for approximately 3751% of our total revenue during the year ended December 31, ~~2019~~2021. In the event of any material decrease in revenue from these customers, or if we are unable to replace the revenue through the sale of our products to additional customers, our financial condition and results from operations could be materially and adversely affected.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022, two customers accounted for approximately 4437% or $1314,~~078,~~000 of ~~our~~ total revenue. During the year ended December 31, ~~2020~~2021, ~~two customers accounted for approximately 61% or $2,921,000~~ ofthree ~~our total revenue. During the year ended December 31, 2019, two~~ customers accounted for approximately 3751% or $1,~~301~~787,000 of ~~our~~ total revenue. If these customers were to significantly reduce their relationship with the Company, or in the event that we are unable to replace the revenue through the sale of our products to additional customers, our financial condition and results from operations could be negatively impacted, and such impact would be material.

We face competition from companies with greater financial, technical, sales, marketing and other resources, and, if we are unable to compete effectively with these competitors, our market share may decline, and our business could be harmed.

We face competition from other established companies. A number of our competitors have longer operating histories, larger customer bases, significantly greater financial, technological, sales, marketing and other resources than we do. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or client requirements, more quickly develop new products or devote greater resources to the promotion and sale of their products and services than we can. Likewise, their greater capabilities in these areas may enable them to better withstand periodic downturns in the identity management solutions industry and compete more effectively on the basis of price and production. In addition, new companies may enter the markets in which we compete, further increasing competition in the identity management solutions industry.

We believe that our ability to compete successfully depends on a number of factors, including the type and quality of our products and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully against current or future competitors, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products, any of which would adversely impact our results of operations and financial condition.

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RISKS RELATED TO OUR TECHNOLOGY

We occasionally rely on systems integrators to manage our large projects, and if these companies do not perform adequately, we may lose business.

We occasionally act as a subcontractor to systems integrators who manage large projects that incorporate our systems. We cannot control these companies, and they may decide not to promote our products or may price their services in such a way as to make it unprofitable for us to continue our relationship with them. Further, they may fail to perform under agreements with their customers, in which case we might lose sales to these customers. If we lose our relationships with these companies, our business, financial condition and results of operations may suffer.

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Some third parties integrate our software into their platforms or solutions. Any delay in the integration of our software or the launch of third-party products may materially affect our results from operations and financial condition.

We sell some of our software through larger product partners and/or resellers that will either resell our product alongside theirs, ~~OEM~~Original Equipment Manufacture a white label version of our products, or sell our products fully integrated into their offerings. In these cases, we are dependent upon the successful rollout of our products by our distribution partners. Any delays negatively affect our results from operations and financial condition.

If our security measures or those of our third-party data center hosting facilities, Cloud computing platform providers, or third-party service partners, are breached, and unauthorized access is obtained to a customer’s data, our data or our IT systems, or authorized access is blocked or disabled, our services may be perceived as not being secure, customers may curtail or stop using our services, and we may incur significant legal and financial exposure and liabilities.

Our services involve the storage and transmission of our customers’ and our customers’ customers’ proprietary and other sensitive data, including financial information and other personally identifiable information. While we have security measures in place, they may be breached as a result of efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states. Our security measures could also be compromised by employee error or malfeasance, which could result in someone obtaining unauthorized access to, or denying authorized access to our ITInformation Technology systems, our customers’ data or our data, including our intellectual property and other confidential business information. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords or other information to gain access to our customers’ data, our data or our IT systems.

We take extraordinary measures to ensure identity authentication of users who access critical IT infrastructure, including but not limited to, two-factor, multi-factor and biometric identity verification. This substantially reduces the threat of unauthorized access by bad actors using compromised user credentials.

Because the techniques used to breach, obtain unauthorized access to, or sabotage IT systems change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate or implement adequate measures to prevent against such techniques.

Our services operate in conjunction with and are dependent on products and components across a broad ecosystem and, if there are security vulnerabilities in one of these components, a security breach could occur. In addition, our internal IT systems continue to evolve, and we are often early adapters of new technologies and new ways of sharing data and communicating internally and with partners and customers, which increases the complexity of our IT systems. These risks are mitigated by our ability to maintain and improve business and data governance policies and processes and internal security controls, including our ability to escalate and respond to known and potential risks.

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In addition, our customers may authorize third-party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our servers. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our services.

A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data. A security breach could also result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability. Finally, the detection, prevention and remediation of known or potential security vulnerabilities, including those arising from third-party hardware or software may result in additional direct and indirect costs, for example additional infrastructure capacity to mitigate any system degradation that could result from remediation efforts.

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RISKS RELATED TO INTELLECTUAL PROPERTY

If the patents we own or license, or our other intellectual property rights, do not adequately protect our products and technologies, we may lose market share to our competitors and our business, financial condition and results of operations would be adversely affected.

Our success depends significantly on our ability to protect our rights to the technologies used in our products. We rely on patent protection, trade secrets, as well as a combination of copyright and trademark laws and nondisclosure, confidentiality and other contractual arrangements to protect our technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. In addition, we cannot be assured that any of our current and future pending patent applications will result in the issuance of a patent to us. The U.S. Patent and Trademark Office (“PTO”) may deny or require significant narrowing of claims in our pending patent applications, and patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or may not be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. These proceedings could result in adverse decisions as to the claims included in our patents.

Our issued and licensed patents and those that may be issued or licensed in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Additionally, upon expiration of our issued or licensed patents, we may lose some of our rights to exclude others from making, using, selling or importing products using the technology based on the expired patents. We also must rely on contractual rights with the third parties that license technology to us to protect our rights in the technology licensed to us. Although we have taken steps to protect our intellectual property and technology, there is no assurance that competitors will not be able to design around our patents. We also rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology. We seek to protect our know-how and other unpatented proprietary technology with confidentiality agreements and intellectual property assignment agreements with our employees. However, such agreements may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop similar or identical designs or other proprietary information. In addition, we rely on the use of registered and common law trademarks with respect to the brand names of some of our products. Our common law trademarks provide less protection than our registered trademarks. Loss of rights in our trademarks could adversely affect our business, financial condition and results of operations.

Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If we fail to apply for intellectual property protection or if we cannot adequately protect our intellectual property rights in these foreign countries, our competitors may be able to compete more effectively against us, which could adversely affect our competitive position, as well as our business, financial condition and results of operations.

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If third parties claim that we infringe their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling certain products.

Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. We face the risk of claims that we have infringed on third parties’ intellectual property rights. Searching for existing intellectual property rights may not reveal important intellectual property and our competitors may also have filed for patent protection, which is not yet a matter of public knowledge, or claimed trademark rights that have not been revealed through our availability searches. Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful. Any claims of patent or other intellectual property infringement, even those without merit, could:

● ~~increase~~Increase the cost of our products;

● beBe expensive and time consuming to defend;

● ~~result~~Result in us being required to pay significant damages to third parties;

● ~~force~~Force us to cease making or selling products that incorporate the challenged intellectual property;

● ~~require~~Require us to redesign, reengineer or rebrand our products;

● ~~require~~Require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property, the terms of which may not be acceptable to us;

● ~~require~~Require us to indemnify third parties pursuant to contracts in which we have agreed to provide indemnification to such parties for intellectual property infringement claims;

● ~~divert~~Divert the attention of our management; and

● ~~result~~Result in our customers or potential customers deferring or limiting their purchase or use of the affected products until the litigation is resolved.

In addition, new patents obtained by our competitors could threaten a product’s continued life in the market even after it has already been introduced.

REGULATORY AND LEGAL RISK FACTORS

Failure to comply with federal, state and international laws and regulations and our contractual obligations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.

We collect and maintain significant amounts of personal data and other data relating to our customers and employees. A variety of federal, state and international laws and regulations, and certain industry standards, govern or apply to our collection, use, retention, sharing and security of consumer data. We are subject to certain laws, regulations, contractual obligations and industry standards (including, for example, the Payment Card Industry Data Security Standard, or PCI-DSS) relating to privacy, data protection, information security and consumer protection, which are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not comply or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our privacy policies or with any federal, state or international laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal or contractual obligations relating to privacy, data protection, information security or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease or modify our use of certain data sets. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers or an inability to process credit card payments and may result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

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Foreign laws and regulations relating to privacy, data protection, information security and consumer protection often are more restrictive than those in the United States. The European Union (“EU”), for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection and consumer protection than the United States. In May 2018 the European Union's new regulation governing data practices and privacy called the General Data Protection Regulation, or GDPR, became effective and substantially replaced the data protection laws of the individual European Union member states. The law requires companies to meet more stringent requirements regarding the handling of personal data of individuals in the EU than were required under predecessor EU requirements. In the United Kingdom, a Data Protection Bill that substantially implements the GDPR also became law in May 2018. The law also increases the penalties for non-compliance, which may result in monetary penalties of up to €20.0 million or 4% of a company's worldwide turnover, whichever is higher. The GDPR and other similar regulations require companies to give specific types of notice and in some cases seek consent from consumers and other data subjects before collecting or using their data for certain purposes, including some marketing activities. Outside of the European Union, many countries have laws, regulations, or other requirements relating to privacy, data protection, information security, and consumer protection, and new countries are adopting such legislation or other obligations with increasing frequency. Many of these laws may require consent from consumers for the use of data for various purposes, including marketing, which may reduce our ability to market our products. There is no harmonized approach to these laws and regulations globally. Consequently, we increase our risk of non-compliance with applicable foreign data protection laws by operating internationally. We may need to change and limit the way we use personal information in operating our business and may have difficulty maintaining a single operating model that is compliant. In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, information security and consumer protection. For example, California recently adopted the California Consumer Privacy Act of 2018 (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for businesses. The CCPA includes a statutory damages framework and private rights of action against businesses that fail to comply with certain CCPA terms or implement reasonable security procedures and practices to prevent data breaches. The CCPA went into effect in January 2020. The effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. As a general matter, compliance with laws, regulations, and any applicable rules or guidance from self-regulatory organizations relating to privacy, data protection, information security and consumer protection, may result in substantial costs and may necessitate changes to our business practices, which may compromise our growth strategy, adversely affect our ability to acquire customers, and otherwise adversely affect our business, financial condition and operating results.

We may have additional tax assessments.

We are subject to income taxes in the United States. Significant judgments are required in determining our provisions for income taxes. In the course of preparing our tax provisions and returns, we must make calculations where the ultimate tax determination may be uncertain. Our tax returns are subject to examination by the Internal Revenue Service (“IRS”) and state tax authorities. There can be no assurance as to the outcome of these examinations. If the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.

We operate in foreign countries and are exposed to risks associated with foreign political, economic and legal environments and with foreign currency exchange rates.

We ~~have~~operate ~~significant~~in foreign ~~operations~~countries. As a result, we are exposed to risks, including among others, risks associated with foreign political, economic and legal environments and with foreign currency exchange rates. Our results may be adversely affected by, among other things, changes in government policies with respect to laws and regulations, anti-inflation measures, currency conversions, collection of receivables abroad and rates and methods of taxation.

-We 51have - identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.

During the second quarter of our fiscal year 2021, we identified material weaknesses in our internal control over financial reporting related to our financial statement close process and policies. We did not have adequate review policies and procedures in place to ensure the timely, effective review of the measurement of the fair value of certain derivative liabilities. Additionally, during the fourth quarter of fiscal year 2021, we identified an additional material weakness in our internal control over financial reporting. We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures relating to segregation of duties and controls over the preparation and review of journal entries, account reconciliations and consolidation. These material weaknesses did not result in a misstatement to the financial statements. However, if we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, these material weaknesses could result in a misstatement of our account balances or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected.

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GOVERNANCE RISKS AND RISKS RELATED TO OUR SECURITIES

Our Common Stock is subject to “penny stock” rules.

Our Common Stock is currently defined as a “penny stock” under Rule 3a51-1 promulgated under the Exchange Act which are subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose additional sales practice requirements on broker-dealers that sell penny stocks to persons other than established customers and institutional accredited investors. Among other things, for transactions covered by these rules, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, these rules may affect the ability of broker-dealers to sell our Common Stock and affect the ability of holders to sell their shares of our Common Stock in the secondary market. To the extent our Common Stock is subject to the penny stock regulations, the market liquidity for our shares will be adversely affected.

Our stock price has been volatile, and your investment in our Common Stock could suffer a decline in value.

There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our Common Stock. You may not be able to resell your shares at or above the price you pay for those shares due to fluctuations in the market price of our Common Stock caused by changes in our operating performance or prospects and other factors.

Some specific factors that may have a significant effect on our Common Stock market price include:

● ~~actual~~Actual or anticipated fluctuations in our operating results or future prospects;

● ~~our~~Our announcements or our competitors’ announcements of new products;

● ~~the~~The public’s reaction to our press releases, our other public announcements and our filings with the SEC;

● ~~strategic~~Strategic actions by us or our competitors, such as acquisitions or restructurings;

● ~~new~~New laws or regulations or new interpretations of existing laws or regulations applicable to our business;

● ~~changes~~Changes in accounting standards, policies, guidance, interpretations or principles;

● ~~changes~~Changes in our growth rates or our competitors’ growth rates;

● ~~developments~~Developments regarding our patents or proprietary rights or those of our competitors;

● ~~our~~Our inability to raise additional capital as needed;

● ~~substantial~~Substantial sales of Common Stock underlying warrants and preferred stock;

● ~~concern~~Concern as to the efficacy of our products;

● ~~changes~~Changes in financial markets or general economic conditions;

● ~~sales~~Sales of Common Stock by us or members of our management team; and

● ~~changes~~Changes in stock market analyst recommendations or earnings estimates regarding our Common Stock, other comparable companies or our industry generally.

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Our future sales of our Common Stock could adversely affect its price and our future capital-raising activities could involve the issuance of equity securities, which would dilute shareholders’ investments and could result in a decline in the trading price of our Common Stock.

We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for additional capital at that time. Sales of substantial amounts of our Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our Common Stock and our ability to raise capital. We may issue additional Common Stock in future financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of Common Stock. The market price for our Common Stock could decrease as the market takes into account the dilutive effect of any of these issuances. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to the market price of our Common Stock. A negative reaction by investors and securities analysts to any discounted sale of our equity securities could result in a decline in the trading price of our Common Stock.

The holders of our Preferred Stock (as defined below) have certain rights and privileges that are senior to our Common Stock, and we may issue additional shares of Preferred Stock without stockholder approval that could have a material adverse effect on the market value of the Common Stock.

Our Board of Directors has the authority to issue a total of up to 5.0 million shares of preferred stock, par value $0.01 per share (“Preferred Stock”) and to fix the rights, preferences, privileges, and restrictions, including voting rights, of the Preferred Stock, which typically are senior to the rights of the Common Stock, without any further vote or action by the holders of our Common Stock. The rights of the holders of our Common Stock will be subject to, and may be adversely affected by, the rights of the holders of the Preferred Stock that have been issued or might be issued in the future. Preferred Stock also could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. This could delay, defer, or prevent a change in control. Furthermore, holders of our Preferred Stock may have other rights, including economic rights, senior to the Common Stock. As a result, their existence and issuance could have a material adverse effect on the market value of the Common Stock. We have in the past issued and may from time to time in the future issue, Preferred Stock for financing or other purposes with rights, preferences, or privileges senior to the Common Stock. As of ~~September~~March 3031, ~~2021~~2022, we had two series of Preferred Stock outstanding, the Series B Preferred, and the Series D Preferred.

The provisions of our Series B Preferred prohibit the payment of dividends on our Common Stock unless the dividends on our preferred shares are first paid. In addition, upon a liquidation, dissolution or sale of our business, the holders of our Series B Preferred will be entitled to receive, in preference to any distribution to the holders of Common Stock, initial distributions of $2.50 per share, plus all accrued but unpaid dividends. As of ~~September~~March 3031, ~~2021,~~2022 and December 31, ~~2020 and 2019~~2021, there were 239,400 shares of Series B Preferred outstanding. As of ~~September~~March 3031, 2022 and December 31, 2021, we had cumulative undeclared dividends on our Series B Preferred of approximately $21,000 and $8,000, respectively.

The provisions of our Series D Preferred prohibit the payment of dividends on our Common Stock unless the dividends on our preferred shares are first paid. In addition, upon a liquidation, dissolution or sale of our business, the holders of our Series D Preferred will be entitled to receive, in preference to any distribution to the holders of Common Stock, initial distributions of $1,000 per share, plus all accrued but unpaid dividends. As of ~~September~~March 3031, ~~2021,~~2022 and December 31, ~~2020 and 2019~~2021, there were 2223,~~965~~469.4, 22and 23,~~863~~216.284 ~~and 0~~ shares of Series D Preferred outstanding, respectively. As of ~~September~~March 3031, 2022 and December 31, 2021, we had no cumulative undeclared dividends on our Series D Preferred.

-The 53conversion - of our Series B Preferred Stock and Series D Preferred Stock and the exercise of currently outstanding warrants, stock options and vesting of Restricted Stock Units could result in significant dilution to the holders of our common stock.

The holders of our Series B Preferred Stock and Series D Preferred Stock may elect to convert their shares of Preferred Stock into shares of Common Stock. As of March 31, 2022, 239,400 shares of Series B Preferred Stock, which are convertible into 46,980 shares of Common Stock; and 23,469.4 shares of Series D Preferred Stock, which are convertible into 402,562,607 shares of Common Stock, were outstanding. In addition to our outstanding shares of Preferred Stock, as of March 31, 2022, there were outstanding warrants to purchase 3,150,000 shares of our Common Stock, outstanding stock options to purchase 4,818,876 shares of our Common Stock and outstanding Restricted Stock Units that upon vesting will result in the issuance of 81,019,401 shares of our Common Stock.

The conversion of our Series B Preferred Stock and Series D Preferred Stock, as well as the exercise of our outstanding warrants, outstanding stock options and the vesting of our Restricted Stock Units could result in significant dilution to existing common shareholders, adversely affect the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity securities.

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The conversion of our Series B Preferred Stock and Series D Preferred Stock and the exercise of currently outstanding warrants could result in significant dilution to the holders of our common stock.

The holders of our Series B Preferred Stock and Series D Preferred Stock may elect to convert their shares of Preferred Stock into shares of Common Stock. As of September 30, 2021, 239,400 shares of Series B Preferred Stock, which are convertible into 47,001 shares of Common Stock; and 22,965.4 shares of Series D Preferred Stock, which are convertible into 393,917,667 shares of Common Stock. In addition to our outstanding shares of Preferred Stock, as of September 30, 2021, there were outstanding warrants to purchase 3,150,000 shares of our Common Stock.

The conversion of our Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series D Preferred Stock, as well as the exercise of our outstanding warrants could result in significant dilution to existing common shareholders, adversely affect the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity securities.

Upon the occurrence of certain events, we may be required to redeem all or a portion of our Preferred Stock.

Holders of certain of our Preferred Stock may require us to redeem all or any portion of such Holder’s shares Preferred Stock within specific date from issuance or in the event of the consummation of a Change of Control (as such term is defined in the Certificate of Designations, Preferences and Rights of each class of Preferred Stock). We cannot assure you that we will maintain sufficient cash reserves or that our business will generate cash flow from operations at levels sufficient to permit us to redeem our shares of Preferred Stock if and when required to do so. In the event we have insufficient cash available or do not have access to additional third-party financings on commercially reasonable terms or at all to complete such redemption, our business, results of operations, and financial condition may be materially adversely affected.

Certain large shareholders may have certain personal interests that may affect the Company.

As a result of the securities issued to Nantahala Capital Management, LLC ~~(“Nantahala Capital Management”)~~, and the related entities controlled by Nantahala Capital Management, (i) Blackwell Partners LLC - Series A, (ii) Nantahala Capital Partners Limited Partnership, (iii) Nantahala Capital Partners II Limited Partnership, (iv) Nantahala Capital Partners SI, LP, (v) NCP QR Limited Partnership, and (vi) Silver Creek CS SAV, L.L.C. (collectively, "“Nantahala"”), Nantahala beneficially owns, in the aggregate, approximately 37.5% of the Company’s outstanding voting securities as of ~~October~~May 1520, ~~2021~~2022. As a result, Nantahala has the potential ability to exert influence over the outcome of issues requiring approval by the Company’s shareholders. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other shareholders or preventing transactions in which shareholders might otherwise recover a premium for their shares over current market prices.

Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control of the Company.

Provisions in our ~~certificate~~Amended and Restated Certificate of ~~incorporation~~Incorporation (the “Amended Charter”) and bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our certificate of incorporation authorizes Preferred Stock, which carries special rights, including voting and dividend rights. With these rights, holders of Preferred Stock could make it more difficult for a third party to acquire us.

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Our Amended Charter designates courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and the federal district courts for the United States of America for claims brought under the Securities Act of 1933, as amended, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

~~Our~~The Amended ~~and Restated Certificate of Incorporation (the “Amended~~ Charter”) ~~require~~requires that, to the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware), will, to the fullest extent permitted by law, be the sole and exclusive forum for each of the following:

● ~~any~~Any derivative action or proceeding brought on behalf of the Company;

● ~~any~~Any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Company to the Company or the Company’s stockholders;

● ~~any~~Any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the Delaware General Corporation Law or the Company’s Amended Charter, or the Amended and Restated Bylaws; or

● ~~any~~Any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine.

Furthermore, the Amended Charter sets forth that the federal district courts of the United States of America are the exclusive forum for the resolution of any causes of action arising under the Securities Act of 1933, as amended (the “Securities Act”).

Because the applicability of the exclusive forum provision is limited to the extent permitted by law, we believe that the exclusive forum provision would not apply to suits brought to enforce any duty or liability created by the Securities Exchange Act of 1934, as amended (“Exchange Act”), or any other claim for which the federal courts have exclusive jurisdiction. We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law and federal law under the Securities Act in the types of lawsuits to which they apply, the provisions may have the effect of discouraging lawsuits against our directors and officers.

We do not expect to pay cash dividends on our Common Stock for the foreseeable future.

We have never paid cash dividends on our Common Stock and do not anticipate that any cash dividends will be paid on the Common Stock for the foreseeable future. The payment of any cash dividend by us will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, capital, regulatory requirements and financial condition. Furthermore, the terms of our Series ~~A Preferred, Series A-1 Preferred, Series~~ B Preferred, ~~Series C Preferred~~ and Series D Preferred directly limit our ability to pay cash dividends on our Common Stock.

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GENERAL RISK FACTORS

~~Our~~Cyberattacks ~~business~~and issecurity ~~subject~~vulnerabilities could lead to ~~risks~~reduced ~~arising~~revenue, ~~from~~increased ~~epidemic~~costs, ~~diseases~~liability claims, ~~such~~or asharm ~~the~~to ~~recent~~our ~~global~~reputation ~~outbreak~~or ofcompetitive ~~the COVID-19 coronavirus~~position.

~~The~~Threats ~~recent~~to ~~outbreak~~IT security can take a variety of ~~the~~forms. ~~novel~~Individual ~~coronavirus~~and groups of hackers and sophisticated organizations, ~~COVID~~ including state-~~19,~~sponsored ~~which~~organizations ~~has~~or ~~been~~nation-states, ~~declared~~continuously byundertake ~~the~~attacks ~~World~~that ~~Health~~pose ~~Organization~~threats to beour customers and our IT. These actors may use a ~~pandemic,~~wide ~~has~~variety ~~spread~~of ~~across~~methods, ~~the~~which ~~globe~~may include developing and isdeploying ~~impacting~~malicious ~~worldwide~~software ~~economic~~or ~~activity.~~exploiting Avulnerabilities ~~pandemic~~in hardware, ~~including COVID-19~~ software, or other ~~public~~infrastructure ~~health~~in ~~epidemics,~~order ~~pose~~to ~~the~~attack ~~risk~~our ~~that~~products weand services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, ~~contractors~~users, ~~suppliers~~partners, ~~and~~or ~~other~~customers ~~partners~~to ~~may~~disclose bepasswords ~~prevented~~or ~~from~~other ~~conducting~~sensitive ~~business~~information ~~activities~~or ~~for~~take another ~~indefinite~~actions ~~period~~to ofgain ~~time,~~access ~~including~~to ~~shutdowns~~our ~~that~~data ~~may~~or beour ~~requested~~users’ or ~~mandated~~customers’ bydata, ~~governmental~~or ~~authorities.~~acting ~~While~~in ita iscoordinated ~~not~~manner ~~possible~~to atlaunch ~~this~~coordinated ~~time~~attacks. toNation ~~estimate~~state ~~the~~and ~~impact~~state ~~that COVID-19 could~~sponsored ~~have~~actors oncan ~~our~~deploy ~~business,~~significant ~~the COVID-19 pandemic~~resources to plan and ~~mitigation~~carry ~~measures~~out ~~have~~exploits. ~~had~~Inadequate ~~and~~account security practices may ~~continue~~also toresult ~~have~~in anunauthorized ~~adverse~~access ~~impact~~to onconfidential ~~global~~data. ~~economic~~Employees ~~conditions~~or ~~which~~third ~~could~~parties ~~have~~may anintentionally ~~adverse~~compromise ~~effect~~our onor our ~~business~~users’ ~~and~~security ~~financial~~or ~~condition,~~systems ~~including~~or ~~impairing~~reveal ~~our~~confidential ~~ability~~information. Malicious actors may employ the IT supply chain to ~~raise~~introduce ~~capital~~malware ~~when~~through ~~needed~~software updates or compromised supplier accounts or hardware.

~~COVID-19~~Cyberthreats ~~has~~are ~~prevented~~constantly ~~employees~~evolving ~~from~~and ~~returning~~becoming toincreasingly ~~physical~~sophisticated ~~offices.~~and ~~In many cases~~complex, ~~our~~increasing ~~potential customers in~~ the ~~government~~difficulty orof ~~commercial~~detecting ~~enterprise-side~~and ~~like~~successfully todefending ~~test~~against ~~our~~them. ~~software~~We inmay ~~their~~have ~~labs~~no ~~with~~current ~~their~~capability ~~systems~~to ~~and~~detect ~~hardware.~~certain ~~Potential~~vulnerabilities, ~~customers~~which ~~have~~may ~~been~~allow ~~unable~~them to dopersist ~~this~~in ~~and~~the ~~that~~environment ~~has~~over ~~caused~~long ~~purchase~~periods ~~decisions~~of totime. beCyberthreats ~~delayed~~can ashave ~~these~~cascading ~~employees~~impacts ~~who~~that ~~would~~unfold bewith ~~testing~~increasing ~~are~~speed ~~now~~across ~~working~~our ~~from~~internal ~~their~~networks ~~homes~~ and ~~can’t~~systems ~~simulate~~and ~~test~~those ~~environments. COVID-19~~of ~~has~~our ~~further~~partners ~~led~~and ~~to a distributed work environment~~customers. ~~Decision~~Breaches ~~makers~~of ~~are~~our ~~now~~network ~~working~~or ~~from~~data ~~their~~security ~~homes,~~could ~~from~~disrupt ~~all~~the ~~different~~security ~~parts~~ of aour ~~state~~systems orand ~~country.~~business ~~Some have weak or no Internet connections~~applications, ~~making~~impair itour ~~harder~~ability to ~~review~~provide ~~paperwork~~services to ~~decide~~our oncustomers aand ~~large~~result ~~financial~~in ~~purchase.~~product ~~Some~~development ~~decision~~delays, ~~makers~~compromise ~~want~~confidential toor ~~have~~technical ~~more~~business ~~conversations~~information ~~with~~harming ~~more~~our ~~people,~~reputation ~~and~~or ~~mull~~competitive ~~over decisions longer~~position, ~~versus~~result in ~~the~~theft ~~past,~~or ~~when~~misuse anof ~~individual~~our ~~could~~intellectual ~~walk~~property ~~into~~or aother ~~decision~~assets, ~~makers~~require ~~office~~us ~~and~~to ~~garner~~allocate more ~~rapid~~resources ~~approval. Some countries have limits on how many people are permitted~~ to ~~gather~~improve intechnologies ~~one meeting~~ or ~~have~~remediate ~~been hit particularly hard with many residents suffering and dying from~~ the ~~COVID-19~~impacts ~~virus.~~of ~~There~~attacks, isor aotherwise ~~new~~adversely ~~paradigm~~affect ~~emerging~~our ~~in making critical decisions from a video conference calls versus in person~~business.

AnWhile ~~economic~~we ~~recession~~expect ~~had set in from~~ the ~~pandemic~~impacts inof ~~2020. Some companies are not receiving payments and in turn are not making payments to us, causing impairments in our ability to pay others.~~ COVID-19 ~~has led~~ to some of our customers and potential customers being stricken with the virus causing them to not be able to work for many weeks and therefore causing delays for us in our projects or decisions. Technology partners have ~~slowed~~an ~~down~~adverse ~~and/or~~effect ~~laid off employees, impacting us downstream because decisions makers have been furloughed or the work has been passed to new employees who need to come up to speed~~ on ~~a particular project. The closing/downsizing of~~ our ~~offices~~business, ~~due~~financial tocondition ~~COVID-19 has further caused employees to work from home on unsecured personal Wifi networks,~~ and asresults ~~such,~~of ~~working from home may cause security breaches such as malware~~operations, ~~ransomware,~~we ~~and~~are ~~Phishing~~unable ~~attempts. These attempts in some cases have knocked out their ability~~ to ~~have~~predict athe ~~connection~~extent ~~and~~or benature ~~able~~of tothese ~~work~~impacts ~~until~~at ~~their~~this ~~IT department resolves their issues~~time.

~~This~~Due ~~outbreak~~to ~~could~~the ~~decrease~~COVID-19 ~~spending,~~pandemic ~~adversely~~we ~~affect~~have ~~demand~~been ~~for~~limited ~~the~~in ~~Company’s~~our ~~products,~~ability ~~and~~to: ~~harm~~(i) ~~the~~conduct ~~Company’s~~face-to-face ~~business~~meetings with customers and ~~results~~prospective customers, (ii) present in-person demonstrations of ~~operations. It~~our issoftware ~~not~~solutions, ~~possible~~(iii) ~~for~~attend ~~the~~trade ~~Company~~shows toand ~~predict~~conferences ~~the~~which ~~duration~~typically orgenerate ~~magnitude~~future ofsales ~~the~~opportunities, ~~adverse~~or ~~results~~(iv) ofmeet ~~the~~with ~~outbreak~~prospective ~~and~~strategic ~~its~~partners. These effects oncaused by the ~~Company’s~~COVID-19 ~~business~~pandemic will orlikely ~~results~~have ofan ~~operations,~~adverse ~~financial~~impact ~~condition,~~on orour ~~liquidity,~~operating and financial results over at ~~this~~least ~~time~~the next several quarters.

~~Certain~~The ~~key~~extent ~~personnel~~to ~~have~~which ~~terminated~~our ~~their~~operating ~~employment~~and ~~with~~financial ~~the~~results ~~Company.~~will ~~Given~~continue ~~that~~to webe ~~are~~affected ~~dependent~~by the COVID-19 pandemic will depend on ~~key~~various ~~personnel~~factors and consequences beyond our control, such as the ~~loss~~duration and scope of ~~any~~the pandemic; the impact of the emergence of new variants of the virus that causes COVID-19; additional ~~personnel~~actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus, including ~~our~~vaccine ~~Chief~~development ~~Executive~~and ~~Officer~~distribution. COVID-19, ~~could~~and ~~materially~~the volatile regional and ~~adversely~~global ~~affect~~economic conditions stemming from the pandemic, could also aggravate our ~~plan~~other ofrisk ~~operations~~factors ~~and~~described ~~ability~~in tothis ~~obtain~~Form ~~financing~~10-K.

We are dependent to a significant extent upon the efforts and abilities of our executive officers and other key personnel. During the current fiscal year, we have lost certain key personnel due to the absence of meaningful equity incentives, among other causes. The loss of the services of any additional key employees, including our Chief Executive Officer, and any negative market or industry perception arising from the loss of such services, could have a material adverse effect on us, our plan of operations and ability to obtain financing. Our business will also be dependent upon our ability to attract and retain qualified personnel. Acquiring and keeping these personnel has proven difficult as the market value of our Common Stock has declined, and could cost substantially more than estimated. We cannot be certain that we will be able to retain such personnel or attract a high caliber of personnel in the future. -43-

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Certain key personnel have terminated their employment with the Company. Given that we are dependent on key personnel, the loss of any additional personnel, including our Chief Executive Officer, could materially and adversely affect our plan of operations and ability to obtain financing.

We are dependent to a significant extent upon the efforts and abilities of our executive officers and other key personnel. During the current fiscal year, we have lost certain key personnel due to the absence of meaningful equity incentives, among other causes. The loss of the services of any additional key employees, including our Chief Executive Officer, and any negative market or industry perception arising from the loss of such services, could have a material adverse effect on us, our plan of operations and ability to obtain financing. Our business will also be dependent upon our ability to attract and retain qualified personnel. Acquiring and keeping these personnel has proven difficult as the market value of our Common Stock has declined and could cost substantially more than estimated. We cannot be certain that we will be able to retain such personnel or attract a high caliber of personnel in the future.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022 that were not previously reported.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6 . EXHIBITS

(a)		EXHIBITS

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
31.2		Certification by the Acting Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a)
32.1		Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase
104		Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	IMAGEWARE SYTEMS, INC
Date: November 15, 2021	By:	/s/ Kristin Taylor
Date: May 23, 2022	By:	/s/ Kristin Taylor
		Kristin Taylor Chief Executive Officer (Principal Executive Officer) and President
Date: November 15, 2021	By:	/s/ Jeffrey Hotze
Date: May 23, 2022	By:	/s/ Jeffrey Hotze
		Acting Principal Financial and Accounting Officer
		Corporate Controller (Principal Financial and Accounting Officer)

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Filing Compare · IMAGEWARE SYSTEMS INC