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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

~~[X]~~☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2020~~2021

[☐ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from [____] to [____]

Commission file number 001-15757

IMAGEWARE SYSTEMS INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware		33-0224167
(State or other jurisdiction of incorporation or organization)		(I.R.S. 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		IWSY		OTCQB Marketplace

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ~~[ ]~~ ☐ No ~~[X]~~☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ~~[ ]~~ ☐ No ~~[X]~~☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ ~~[X]~~ No ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit such files). Yes ~~[X]~~ ☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer	☐	Accelerated filer	☐
Non–Accelerated filer	☒	Small 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ~~[ ]~~ ☐ No ~~[X]~~☒

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, ~~2020~~2021, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the OTCQB marketplace was $3312,~~822~~307,~~224~~779. This number excludes shares of common stock held by affiliates, executive officers and directors.

As of ~~March~~April 2612, ~~2021~~2022, there were ~~274~~347,~~919~~962,~~339~~742 shares of the registrant’s common stock outstanding.

Table of Contents

IMAGEWARE SYSTEMS, INC.

Form 10-K

For the Year Ended December 31, ~~2020~~2021

Table of Contents

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	96
Item 1B.	Unresolved Staff Comments	2118
Item 2.	Properties	2118
Item 3.	Legal Proceedings	2118
Item 4.	Mine Safety Disclosures	2118
PART II
Item 5.	Market for ~~Registrants~~Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2219
Item 6.	Selected Financial Data	2219
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2319
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4037
Item 8.	Financial Statements and Supplementary Data	4137
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	4137
Item 9A.	Controls and Procedures	4137
Item 9B.	Other Information	4137
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	4238
Item 11.	Executive Compensation	4642
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	5144
Item 13.	Certain Relationships and Related Transactions, and Director Independence	5648
Item 14.	Principal Accounting Fees and Services	5849
PART IV
Item 15.	Exhibits and Financial Statement Schedules	50
		56
EXHIBIT INDEX		50
EXHIBIT INDEX		56
SIGNATURES		54
SIGNATURES		63

-i-

Table of Contents

CAUTIONARY STATEMENT

This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” in Item 1A, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

-ii-

Table of Contents

PART I

ITEM 1.

BUSINESS

~~ImageWare~~Imageware Systems, Inc., a Delaware corporation, has its principal place of business at 11440 West Bernardo Court, Suite 300, San Diego, California 92127. We maintain a corporate website at www.~~iwsinc~~imageware.~~com~~io. Our common stock, par value $0.01 per share (“Common Stock”), is currently listed for quotation on the OTCQB marketplace under the symbol “IWSY”. As used in this Annual Report, “we”, “us”, “our”, “~~ImageWare~~Imageware”, “~~ImageWare~~ Imageware Systems” or the “Company” refers to ~~ImageWare~~ Imageware Systems, Inc. and all of its subsidiaries.

Overview

~~ImageWare~~Imageware Systems, Inc. (“~~ImageWare~~Imageware,” the “Company,” “we,” “our”) provides ~~defense-grade~~ biometric ~~identification and authentication~~ solutions to ~~safeguard your data~~identify, ~~products~~verify, ~~services~~and orauthenticate ~~facilities.~~people Webased ~~are experts~~on intheir ~~biometric~~true ~~authentication~~identity, ~~and~~rather ~~considered a preeminent~~than ~~patent~~on ~~holder~~what ofkeys ~~multimodal~~and ~~biometrics~~codes ~~IP,~~they ~~having many~~have. ofA ~~the~~pioneer ~~most-cited patents~~ in the ~~industry.~~field, ~~Our~~Imageware ~~patented~~was ~~IWS Biometric Engine® is one of~~ the ~~most~~first ~~accurate~~multimodal ~~and~~biometric ~~fastest~~solution ~~biometrics~~provider ~~matching~~in ~~engines~~history inand ~~the industry,~~holds ~~capable~~dozens of ~~our~~patents, ~~patented~~including ~~biometrics~~some ~~fusion.~~of ~~Part~~the ofmost ~~our heritage~~cited ispatents in ~~law~~the ~~enforcement,~~industry. ~~having~~Our ~~built~~Cloud-based ~~the~~and ~~first~~on-premises ~~statewide digital~~solutions ~~booking~~provide ~~platform~~faster, ~~for~~more ~~United~~accurate ~~States~~identification ~~local~~to ~~law~~better ~~enforcement~~secure ~~in the~~communities, ~~late~~data, ~~1990’s –~~ and ~~having~~assets. ~~more~~In ~~than~~fact, ~~three~~governments, ~~decades~~law ~~of experience~~enforcement inagencies, ~~the~~and ~~challenging~~public ~~government sector creating biometric smart cards~~ and ~~logical~~private ~~access~~enterprises ~~for~~worldwide ~~millions~~trust ofImageware ~~individuals.~~with ~~We are~~critical aidentity ~~“biometrics~~solutions ~~first”~~which ~~company,~~manage ~~leveraging~~millions ~~unique human~~of ~~characteristics~~identities toevery ~~provide unparalleled accuracy for identification while protecting your identity~~day.

~~The Company’s~~Recent products also provide law enforcement and public safety sector with integrated biographic, mugshot, SMT, and fingerprint capture for booking, in addition to investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities, computer networks or Internet sites. Biometric technology is now an integral part of all markets that the Company addresses, and every product leverages our patented IWS Biometric Engine®. Developments

~~The~~December ~~IWS~~2021 ~~Biometric~~Credit ~~Engine®~~Facility 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. It allows different types of biometrics to be operated at the same time on a seamlessly integrated platform. It is also offered as a Software Development Kit (“SDK”), enabling developers and system integrators to implement biometric solutions or integrate biometric capabilities, into existing applications.

~~Our secure~~On ~~credential~~December ~~solutions~~29, ~~empower~~2021 ~~customers~~(the to“Closing ~~design~~Date”), the Company entered into a Term Loan and ~~create smart~~Security ~~digital~~Agreement ~~identification~~(the ~~wristbands~~“Agreement”) with certain funds and ~~badges~~separate ~~for~~accounts ~~access control~~managed ~~systems.~~by WeNantahala ~~develop~~Capital Management, ~~sell~~LLC ~~and~~(collectively, ~~support~~“Nantahala”), ~~software~~as lenders, and ~~design systems~~other ~~that~~lenders ~~utilize~~set ~~digital~~forth ~~imaging~~on ~~and~~the ~~biometrics~~signature ~~for~~pages ~~photo identification~~thereto ~~cards~~(together with Nantahala, ~~credentials~~the ~~and~~“Lenders”), ~~identification~~pursuant ~~systems.~~to ~~Our products~~which the Lenders will provide to the Company a secured term loan credit facility in ~~this~~an ~~market~~aggregate ~~consist~~amount of ~~IWS~~up ~~EPI~~to ~~Suite~~$2,500,000 ~~and~~(the ~~IWS~~“Credit ~~EPI Builder~~Facility”). All ~~These~~loans ~~products~~(each ~~allow~~a ~~for~~“Loan", ~~production~~and collectively, the “Loans”) under the Credit Facility will bear interest at a rate of ~~digital identification~~12% ~~badges~~for ~~and~~the ~~related~~initial ~~databases~~six ~~and~~months ~~records~~after the Closing Date, and ~~can~~at ~~be used~~17% thereafter until the maturity date of 12 months from the Closing Date (the “Maturity Date”). All amounts borrowed by, ~~among~~the ~~others~~Company under the Credit Facility are secured by a first-priority lien on all the assets of the Company. On the Closing Date, ~~schools~~the Company received an initial draw-down on the Credit Facility of $600,000. As ~~airports~~of April 12, ~~hospitals~~2022, ~~corporations and~~the ~~governments.~~Company Wereceived ~~have~~two ~~added~~subsequent ~~the~~draw-downs ~~ability~~aggregating $1,050,000. The Company expects to ~~incorporate~~use ~~multiple biometrics~~the ~~into~~proceeds from the IDCredit ~~systems~~Facility ~~with~~for ~~the~~working ~~integration~~capital ofrequirements ~~IWS Biometric~~and ~~Engine®~~corporate purposes.

The Company ismay ~~also~~prepay ~~a developer~~amounts ofborrowed aunder ~~biometric~~the ~~based~~Credit ~~multi-factor~~Facility ~~authentication (“MFA”) Cloud-based~~in ~~service.~~whole ~~ImageWare~~or ~~Authenticate~~in ~~(formerly~~part, ~~GoVerify ID®)~~at ~~brings~~a ~~together~~price ~~Cloud~~equal ~~and~~to ~~mobile~~105% ~~technologies~~of tothe ~~offer biometric~~principal ~~multi-factor~~amount ~~authentication~~borrowed ~~for~~under the ~~enterprise,~~Credit ~~and across~~Facility ~~industries.~~(including ~~ImageWare~~any ~~Authenticate~~interest ~~consists~~capitalized ofthereon), ~~mobile~~subject ~~and desktop~~to ~~clients,~~additional ~~and~~prepayment terms pursuant to the ~~backend~~Agreement, ~~system~~a copy of which is afiled ~~Cloud-based Software-~~as an Exhibit to the Company’s Current Report on Form 8-~~a-Service~~K, filed with the Securities and Exchange Commission (the “~~SaaS~~SEC”) ~~servicing~~ ~~Cloud-based~~on ~~biometric~~January ~~template~~4, ~~matching requests~~2022. ~~ImageWare~~ ~~Authenticate~~In ~~comes~~addition, inpursuant ~~two~~to ~~offerings~~the Agreement, ~~Workforce~~at ~~and Customer.~~any ~~ImageWare~~time ~~Authenticate~~after ~~Customer~~the isClosing ~~leveraged~~Date, byeach ~~product developers~~Lender shall have the right, but not the obligation, on mutually agreed upon terms, to ~~enable~~exchange ~~biometric~~each ~~authentication~~such ~~for~~Lender’s ~~their~~pro ~~consumers. For~~rata portion of shares of the ~~enterprise~~Company’s Series D Convertible Preferred Stock, ~~ImageWare~~par ~~Authenticate~~value ~~Workforce~~$0.01 ~~provides turnkey~~(“Series ~~integration~~D ~~with~~Preferred”) ~~Microsoft~~held ~~Windows,~~by ~~Microsoft~~such ~~Active Directory,~~Lender CAfor ~~SSO,~~a ~~IBM~~mutually ~~Security~~agreed ~~Access~~upon ~~Manager~~ portion of any subsequent Delayed Draw Loan (as defined in the Agreement) (an “~~ISAM~~Exchange”)~~, SAP~~. ~~Cloud~~Upon ~~Platform, Fujitsu~~the Company's ~~RunMyProcess~~receipt by a Lender of a notice stating a Lender's intent to participate in an Exchange, ~~Palo~~the ~~Alto Networks~~Company ~~VPN and~~is ~~HPE~~required to offer to all holders of Series D Preferred the opportunity, but not the obligation, to exchange each such holder’s ~~Aruba~~pro ~~ClearPass.~~rata ~~These integrations~~portion ~~provide~~of ~~multi-modal~~shares ~~biometric~~of ~~authentication~~the ~~to replace~~Company's orSeries ~~augment~~D ~~passwords~~Preferred held by such holder for ~~use~~participation ~~with~~in ~~enterprise~~any ~~and~~subsequent ~~consumer class~~Delayed ~~systems~~Draw Loan, upon substantially similar terms as those provided in the applicable notice of Exchange by a Lender.

Strategic Review and Going Concern

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. To date, the Company has not received any offers or other indications of interest on terms and conditions acceptable to the Board of Directors (“Board”), nor has the Board received any committed financing arrangements to support our projected cash shortfall to address our projected working capital requirements 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. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders and may result in the loss of your entire investment. In the event the Company is unable to consummate one or more transactions in the near term, the Company will not be able to continue as a going concern.

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Our law enforcement solutions enable 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 Web-based platform. We develop, sell and support a suite of modular software products used by law enforcement and public safety agencies to create and manage criminal history records and to investigate crime. Our IWS Law Enforcement solution consists of five software modules: Capture and Investigative modules, which provide a criminal booking system with related databases, as well as the ability to create and print mug photo/scars, marks, and tattoos (SMT), as well as image lineups and electronic mug-books; a Facial Recognition module, which uses biometric facial recognition to identify suspects; a Web module, which provides access to centrally stored records over the Internet in a connected or wireless fashion; and a LiveScan module, which incorporates LiveScan capabilities into IWS Law Enforcement platform providing integrated fingerprint and palm print biometric management for civil and law enforcement use. The IWS Biometric Engine® is also available to our law enforcement clients and allows them to capture and search using multiple biometrics.

Recent Developments

New Products

In ~~July 2020~~February 2021, we ~~introduced~~released ~~BioIntellic™,~~a ~~our~~new ~~standalone,~~and ~~highly~~improved ~~scalable anti-spoofing~~Imageware ~~detection~~Authenticate ~~feature~~ (~~embedded~~formerly, inGoVerifyID) ~~the~~solution, ~~IWS Biometric~~enabling ~~Engine®)~~users to ~~ensure~~ ~~secure~~leverage ~~onboarding.~~multimodal ~~BioIntellic™~~biometrics ~~bolsters~~on ~~our joint~~a ~~offering~~central ~~with~~server ~~our~~or ~~existing proofing partner~~ in the ~~African market,~~Cloud ~~Contactable,~~to ~~and~~log ~~also~~into ~~supports~~applications ~~our existing MTN business as well as drives new business in the African region~~ and ~~beyond~~ services.

In October 2021, we completed aImageware ~~new~~Capture, ~~QuickCapture~~the ~~Mobile~~first ~~software product~~module ~~that~~of ~~resides on~~ the ~~Laxton~~new ~~Chameleon~~Law 5Enforcement ~~and~~2.0 ~~8 devices~~solution. ~~QuickCapture~~ ~~Mobile~~Imageware ~~will~~Capture befacilitates anthe ~~inherent~~fastest ~~part~~capture of ~~our~~biographic ~~newest generation~~and ~~law~~biometric ~~enforcement~~detail ~~platform,~~such ~~called~~as LEface, ~~2.0.~~fingerprint, ~~This~~palm ~~powerful solution~~print, ~~allows officers~~iris, ~~public safety~~ and ~~military~~Scars, ~~personnel~~Marks ~~in the~~and ~~field~~Tattoos to(“SMTs”) ~~have dynamic data on a perpetrator~~ in the ~~palm of their hands~~industry.

In December ~~2020~~2021, we ~~reached~~completed ~~code completion of our GoVerifyID product, now renamed to~~ Imageware ~~Authenticate~~Investigate, ~~which~~the ~~introduced~~second ~~a new~~module ~~administration portal for easier management and usability~~ of the ~~product~~new ~~along~~Law ~~with~~Enforcement ~~compatibility~~2.0 ~~with~~solution. ~~many~~Imageware ~~other~~Investigate ~~3rd~~enables ~~party~~law ~~identity~~enforcement ~~and~~professionals ~~Cloud~~to ~~services, through~~rapidly ~~the~~create ~~inclusion~~digital ~~of identity protocols SAML and OIDC~~lineups.

Coronavirus (COVID-19) Pandemic

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. As of ~~March~~April ~~2021~~12, 2022, the global outbreak of COVID-19 continues to ~~rapidly~~ evolve, and the extent to which COVID-19 may impact our business and markets we serve will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the continued duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken both in the United States and other countries. We are continuing to vigilantly monitor the situation with our primary focus on health and safety of our employees and clients.

~~The~~Products ~~Series~~and ~~D Financing~~Solutions

~~On November~~Our ~~12,~~patented ~~2020~~Imageware ~~and~~Biometric ~~December~~Engine® ~~23,~~is ~~2020,~~one ~~the Company consummated private placements~~ of ~~12,060 shares of its Series D Convertible Preferred Stock, par value $0.01 per share (~~the ~~"Series~~most Daccurate ~~Preferred"), resulting in gross proceeds to the Company of $12.06 million, less fees~~ and ~~expenses~~ ~~(the~~fastest ~~“Series~~biometrics ~~D Financing”).~~matching ~~The~~engines ~~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~~industry, ~~2020 (“Bridge Notes”),~~capable ~~which~~of ~~Bridge~~our ~~Notes~~patented ~~were~~biometrics ~~converted into Series D Preferred at Closing (the “Conversion”)~~fusion. ~~The~~We ~~issuance~~are of the Series D Preferred was made pursuant to securities purchase agreements, dated September 28, 2020 (the "Purchase Agreement"), by and between the Company and certain accredited investors (the "Purchasers"), for the sale of the Series D Preferred at a ~~purchase~~“biometrics ~~price~~first” ~~of $1~~company,~~000~~ ~~per~~leveraging ~~share~~unique ~~of Series~~human Dcharacteristics Preferred. The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into shares of the Company’s 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~~provide asunparalleled ~~set forth~~accuracy infor ~~Section~~identification ~~5(e)~~while ofprotecting ~~the~~your ~~Certificate of Designations, Preferences, and Rights of Series D Convertible Preferred Stock (the "Series D Certificate")~~identity. 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.

OnOur ~~the fourth~~product ~~anniversary~~portfolio, ofcalled the ~~Issuance~~Imageware ~~Date~~Identity ~~(as defined in the Series D Certificate)~~Platform, oris inbuilt ~~the~~around ~~event~~three ofkey ~~the~~areas: ~~consummation~~Enroll of& aIdentify, ~~Change~~Badge ~~of Control~~& ~~(as defined in the Series D Certificate)~~Credential, ifand ~~any~~Authenticate. ~~shares~~All of ~~Series~~ Dthese ~~Preferred~~areas are ~~outstanding,~~built ~~then~~on ~~each~~top ~~holder~~ of ~~Series~~the ~~D Preferred~~Imageware ~~shall~~Biometric ~~have~~Engine. ~~the~~The ~~right~~Platform ~~(the~~is ~~“Holder~~a ~~Redemption Right”)~~fully-modular, at ~~such holder’s option~~customizable, ~~to require~~and ~~the~~pre-integrated ~~Company~~portfolio ~~to redeem all or any portion~~ of ~~such holder’s~~capabilities ~~shares of Series D Preferred at the Liquidation Preference Amount per share of Series D Preferred plus an amount equal~~ to ~~all~~support ~~accrued~~state ~~but~~and ~~unpaid~~local ~~dividends,~~law ~~if any~~enforcement, ~~(such~~Federal ~~price~~agencies, ~~the “Holder~~and ~~Redemption Price”), which~~enterprises ~~Holder Redemption Price shall be paid in cash~~alike.

Enroll & Identify

The Enroll & Identify area includes four key modules: Imageware Proof, Imageware Capture, Imageware Identify, and Imageware Investigate.

Imageware Proof 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.

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.

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InImageware ~~connection~~Biometric with the sale of the Series D Preferred, we granted certain registration rights to the Investors with respect to the Conversion Shares and Dividend Shares, pursuant to a Registration Rights Agreement by and among us and the Investors. The registration statement registering the Conversion Shares and Dividend Shares was declared effective by the United States Securities and Exchange Commission (the “SEC”) on February 12, 2021. Engine

~~Solutions~~The Imageware Biometric Engine® is a patented biometric identity and ~~Products~~ 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.

WeImageware ~~are a~~Law "biometrics first" security company who brings the highest level of security to systems, data and places, by identifying and authenticating people through biometrics. Our solutions are focused on biometrics and secure credentials providing complete, cross-functional interoperable systems and an open architecture.Enforcement

~~IWS~~Our ~~Biometric~~modules ~~Engine.~~are ~~This~~leveraged isacross ~~a biometric~~many ~~identity~~industries and ~~authentication~~use ~~database~~cases ~~for~~with ~~multi-biometric enrollment,~~minimal ~~management~~customization ~~and~~needed. ~~authentication,~~One ~~managing population databases~~ of ~~unlimited~~the ~~sizes~~key ~~without~~areas ~~regard~~includes toour ~~hardware~~Law ~~or algorithm~~Enforcement 2.0 ~~Searches~~solution ~~can~~which beenables ~~1:1 (verification)~~state, ~~1:N (identification),~~local and ~~N:N~~federal ~~(database~~agencies ~~integrity).~~to ~~IWS~~quickly ~~Biometric Engine~~capture, isarchive, ~~biometric~~search, ~~agnostic~~retrieve, ~~enabling~~and ~~the~~share ~~use~~digital ofimages, ~~biometric~~fingerprints ~~devices~~ and ~~algorithms~~other ~~from any vendor~~biometrics, ~~and~~as ~~with~~well ~~current~~as ~~support~~criminal ofhistory ~~the following~~records ~~biometric~~on ~~types:~~a ~~finger~~stand-alone, ~~face~~networked, ~~iris,~~wireless ~~palm,~~or ~~and~~browser-based ~~voice~~platform. ~~We leverage~~Our ~~the~~Imageware ~~IWS~~Law ~~Biometric~~Enforcement ~~Engine®~~2.0 tosolution ~~create~~includes ~~products~~Imageware ~~that provide government~~Capture, ~~law~~Imageware ~~enforcement~~Identify, ~~public~~Imageware ~~safety~~Investigate, ~~border management~~Imageware ~~and enterprise businesses~~Credential, ~~with~~and aImageware ~~wide~~Authenticate. ~~variety~~Other ~~of solutions~~modules ~~that~~can ~~address~~also ~~specific~~be ~~problems,~~easily ~~mandates~~leveraged ~~and~~as ~~technology standards~~needed.

ImageWare Authenticate. The Company introduced GoVerify ID®, now known as ImageWare Authenticate, a multi-factor biometric authentication, MFA product, for the enterprise markets on November 14, 2016. ImageWare Authenticate supports multimodal biometric Cloud-based matching and authentication including, but not limited to, face, voice, fingerprint, iris, palm, and more. All the biometrics can be combined with authentication and access control tools, including tokens, digital certificates, passwords, and PINS, to provide the ultimate level of assurance, accountability, and ease of use for corporate networks, web applications, mobile devices, and PC desktop environments. ImageWare Authenticate provides multimodal biometric identity authentication that can be used in place of passwords or as a strong second factor authentication method. ImageWare Authenticate is provided as a Cloud-based SaaS solution, thereby, eliminating complex IT deployment of biometric software and eliminating startup costs. ImageWare Authenticate works with existing mobile devices, eliminating the need for specialized biometric scanning devices typically used with most biometric solutions. We enhanced the product and completed this work on December 31, 2020. We relaunched ImageWare Authenticate on February 1, 2021.

IWS EPI Suite. This is an ID software solution for producing, issuing, and managing secure credentials and personal identification cards, also called biometric smart badges. It is used by many human resource departments, along with other corporate groups, to enroll employees and print physical badges which may be used later for physical access. Users can efficiently manage large amounts of data, images and card designs, as well as track and issue multiple cards per person, automatically populate multiple cards and eliminate redundant data entry. IWS EPI Suite was designed to integrate with our customers’ existing security and computing infrastructure. We believe that this compatibility may be an appealing feature to corporations, government agencies, transportation departments, schools, and other public institutions.

IWS EPI Builder. This is an SDK and a leading secure credential component of identity management and security solutions, providing all aspects of ID functionality from image and biometric capture to the enrollment, issuance and management of secure documents. It contains components which developers or systems integrators can use to support and produce secure credentials, including national IDs, passports, International Civil Aviation Office -compliant travel documents, smartcards and driver licenses. IWS EPI Builder enables organizations to develop custom identification solutions or incorporate sophisticated identification capabilities into existing applications including the ability to capture images, biometric and demographic data; enable biometric identification and verification (1:1 and 1:X); as well as support numerous biometric hardware and software vendors. It also enables users to add electronic identification functionality for other applications, including access control, tracking of time and attendance, point of sale transactions, human resource systems, school photography systems, asset management, inventory control, warehouse management, facilities management and card production systems. We intend to update the EPI Suite and Builder platforms in late 2021 and offer these products in the Cloud.

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IWS Law Enforcement. IWS Law Enforcement is a digital booking, identification and investigative platform that enables users to digitally capture, store, search and retrieve images and demographic data, including mugshots and line ups, fingerprints and scars, marks and tattoos (SMT’s). Law enforcement may choose between submitting fingerprint data directly to the State Automated Fingerprint Identification System (“AFIS”), FBI criminal repository, or other agencies as required. Additional features and functionality include real-time access to images and data, creation of photo lineups or electric mug books, and production of identification cards and credentials. IWS Law Enforcement also uses off-the-shelf, biometric hardware and is designed to comply with open industry standards so that it can operate on an array of systems ranging from a stand-alone personal computer or handheld to larger, integrated systems. To avoid duplication of entries, the system can be integrated easily with several other information storage and retrieval systems, such as a records/jail management system (“RMS/JMS”) or an automated fingerprint identification system. We intend to update the Law Enforcement platform in first half of 2021 and offer the full suite in the Cloud as a SaaS offering.

The IWS Law Enforcement platform contains the following components:

Capture. This software module allows users to capture and store a variety of images (facial, SMT and others such as evidence photos) as well as biographical text information. Each record includes images and text information in an easy-to-view format made up of fields designed and defined by the individual agency. Current customers of this module range from agencies that capture a few thousand mug shots per year to those that capture hundreds of thousands of mug shots each year.

LiveScan. This software module is FBI certified and complies with the FBI Integrated Automated Fingerprint Identification System (“IAFIS”) Image Quality Specifications (“IQS”) while utilizing FBI certified LiveScan devices from most major vendors. LiveScan allows users to capture single to ten prints and palm data, providing an integrated biometric management solution for both civil and law enforcement use. By adding LiveScan capabilities, law enforcement organizations further enhance the investigative process by providing additional identifiers to identify suspects involved in a crime. In addition, officers no longer need to travel to multiple booking stations to capture fingerprints and mugshots. All booking information, including images, may be located at a central designation and from there routed to the State AFIS or FBI criminal history record repository.

Investigative. This software module allows users to search the database created with IWS Law Enforcement. Officers can conduct text searches in many fields, including file number, name, alias, distinctive features, and other information, such as gang membership and criminal history. The Investigative module creates a catalogue of possible matches, allowing officers or witnesses to save time by looking only at mug shots that closely resemble the description of the suspect. This module can also be used to create a line-up of similar facial images from which a witness may identify the suspect.

EPI Designer for Law Enforcement. The EPI Designer for LE software is a design solution created for the IWS Law Enforcement databases based on the IWS EPI Suite program. This program allows integration with various IWS databases for the production of unique booking/inmate reports, wristbands, photo ID cards, Wanted or BOLO fliers, etc., created from the information stored in booking records. Designs can be created in minutes and quickly added to the IWS Law Enforcement system, allowing all users with appropriate permissions immediate access to the newly added form.

Quick Capture. Quick Capture is a multiple biometric capture application that dynamically adapts to a client’s required use case, including different city, state, and federal charge codes. With it, you can collect a variety of biometrics (face, finger, palm, iris, voice, etc.) using a variety of biometric hardware in the order desired as well as any needed biographic information associated with the subjects.

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BioIntellic. BioIntellic is a facial matching and anti-spoofing product integrated into ImageWare Authenticate. It is designed to prevent presentation attacks, by ensuring the captured biometric image is that of a live individual, not a picture of 3D mask. BioIntellic is also available as a standalone product, enabling companies to quickly integrate facial matching and liveness detection into their offerings.

Maintenance and Customer Support

Maintenance and support enrollment entitles software license customers to technical support services, including telephone and email support, problem resolution services, and the right to receive unspecified product upgrades, maintenance releases and patches released during the term of the support period. Maintenance and support service fees are an important source of recurring revenue, and we invest continuing resources into providing maintenance and support services.

Customers

We have a wide variety of domestic and international customers. Most of our ~~IWS~~ Law Enforcement 2.0 customers are government agencies at the federal, state and local levels in the United States and Canada, but we also have clients outside of North America. For the year ended December 31, ~~2020~~2021, ~~two~~ three customers accounted for approximately 6151% or $21,~~921~~787,000 of total revenue and had trade receivables of approximately $~~250~~172,000 as of the end of the year. For the year ended December 31, ~~2019~~ 2020, two customers accounted for approximately 3761% or $12,~~301~~921,000 of total revenue and had trade receivables of approximately $~~161~~250,000 as of the end of the year.

Our Strategy

Our strategy is to be a “biometric first” cybersecurity company bringing the highest level of security to systems, data and places by identifying and authenticating people through biometrics. We sell to governments, law enforcement and public safety, as well as enterprises, through key partners and large systems integrators and with our own direct sales team.

With recent COVID-19 events, remote work and social distancing have quickly been brought to the forefront of society. And while the impact of these events will be seen in the coming years, many problems have been immediately realized by corporations and government agencies, who are diligently looking for solutions to operate in a new business environment.

Within a matter of weeks, corporations and government agencies have had to heavily rely upon remote access technologies to enable work continuity through the pandemic. This increase in employees remotely accessing sensitive corporate systems has increased the risk of both cybercrime and unintentional information leaks. This risk is also increased by the fact that many employees now use a mixture of personal and corporate owned devices on the job, a trend known as, Bring Your Own Device (“BYOD”).

~~Verification of an~~ -3- individual through biometrics is an effective way to authenticate users accessing sensitive information and systems. ImageWare Authenticate provides this functionality and is already integrated in many of the authentication systems leveraged by large companies and agencies to manage the identities of their employees and users. We will market and sell ImageWare Authenticate as a solution for protecting corporate data to the most relevant business verticals during this time of increased susceptibility to broad cyberattacks, such as malware, viruses, trojans, ransomware infections and phishing attacks.

Additionally, social distancing and the need to limit personal contact throughout everyday life is driving governments and corporations to deploy new ways to continue work and commerce while minimizing contact points between individuals. We believe this trend will increase the acceptance and use of biometrics as a means of contactless and touchless authentication for health, retail, finance/banking, government services, higher education and transportation.

Scaling out biometrics across these verticals is going to require new methods and solutions to support the increased number of users and transactions. With our decades of experience innovating and scaling government grade biometric solutions and our years executed strategy of creating multimodal, vendor agnostic solutions, ImageWare has had a rich portfolio of products and solutions to address these new challenges brought on by the pandemic. 

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~~Additionally,~~Verification ~~the law~~of ~~enforcement~~an ~~community~~individual ~~continues~~through tobiometrics beis an ~~important~~effective ~~market~~way ~~and customer~~to ~~base.~~authenticate ~~Over~~users ~~the~~accessing ~~past~~sensitive ~~few~~information ~~years,~~and ~~innovation~~systems. ~~within~~Imageware ~~our~~Authenticate ~~law enforcement~~provides ~~product~~this ~~line~~functionality ~~has~~and ~~been~~is ~~static,~~already ~~which~~integrated ~~has resulted~~ in ~~revenue~~ ~~being~~many ~~primarily~~of ~~driven~~the ~~from~~authentication ~~support~~systems ~~and~~leveraged ~~maintenance. Recently~~by ~~ImageWare~~large ~~released~~companies aand ~~new~~agencies ~~product offering~~ to manage the ~~law enforcement~~identities ~~sector~~of ~~called,~~their ~~QuickCapture~~employees ~~Mobile~~and users. ~~Quick~~We ~~Capture Mobile~~will ~~streamlines~~market ~~the~~and ~~process~~sell ofImageware ~~capturing~~Authenticate ~~biometrics~~as ~~from perpetrators~~a onsolution afor ~~mobile,~~protecting ~~PC-based~~corporate ~~device,~~data into the ~~field.~~most ~~The~~relevant ~~law enforcement~~business ~~market~~verticals ~~will~~during ~~immediately benefit from~~ this ~~product.~~time ~~We believe~~of weincreased ~~can~~susceptibility ~~develop the Quick Capture product~~ to ~~service~~broad ~~other verticals~~cyberattacks, such as; ~~corporate~~malware, ~~telecommunications~~viruses, ~~academia~~trojans, ~~hospitality~~ ransomware infections and ~~entertainment~~phishing attacks.

~~We believe~~Additionally, ~~the~~social ~~increasing~~distancing ~~demand~~and ~~for biometric technology will drive demand for our solutions. In~~ the ~~coming~~need ~~year, we will work~~ to ~~develop~~ anlimit ~~Identity~~personal ~~Platform,~~contact ~~which~~throughout ~~combines~~everyday ~~all~~life ofis ~~our~~driving ~~products onto~~governments ~~one~~and ~~end-~~corporations to~~-end,~~ ~~Cloud-based~~deploy ~~platform,~~new ~~allowing~~ways ~~large clients~~ to docontinue ~~enrollments~~work ~~(Enroll, Verify, Credential~~ and ~~Authenticate). The~~commerce ~~building~~while ~~blocks~~minimizing ofcontact ~~the~~points ~~Identity~~between ~~Platform~~individuals. ~~consist~~We ofbelieve ~~upgrades~~this ~~to our~~trend ~~current~~will ~~standalone~~increase ~~products~~the ~~(IWS~~acceptance ~~LE, EPI Builder,~~ and ~~ImageWare Authenticate)~~use asof ~~well~~biometrics as a ~~new~~means ~~identity proofing product, to be developed to verify the authenticity~~ of ~~government~~contactless ~~issued~~and ~~IDs.~~touchless ~~The Enroll,~~authentication ~~Verify,~~for ~~Credential and Authenticate workflow~~health, ~~is foundational to the majority of governments and corporate opportunities we compete for~~retail, ~~and therefore~~finance/banking, ~~a key to the Identity Platform. This single platform which allows a customer to create a digital identity fully vetted against a~~ government ~~issued ID~~services, ~~use it~~higher ~~thereafter~~education ~~for a reliable biometric authentication~~ and ~~manage that identity through its life cycle is compelling~~transportation. ~~We are scheduling the Identity Platform to be completed in late 2021.~~

Scaling out biometrics across these verticals is going to require new methods and solutions to support the increased number of users and transactions. With our decades of experience innovating and scaling government grade biometric solutions and our years executed strategy of creating multimodal, vendor agnostic solutions, Imageware has had a rich portfolio of products and solutions to address these new challenges brought on by the pandemic. 

Additionally, the law enforcement community continues to be an important market and customer base. Over the past few years, innovation within our law enforcement product line has been static, which has resulted in revenue being primarily driven from support and maintenance. Recently, Imageware released the Law Enforcement 2.0 solution, with the first two modules, Imageware Capture and Imageware Investigate, launched in October 2021 and December 2021, respectively. The law enforcement market will immediately benefit from this solution. Beyond the law enforcement vertical, the modules in the Law Enforcement 2.0 solution can be leveraged to service other verticals such as financial services, telecommunications, education,, hospitality and entertainment.

We believe the increasing demand for biometric technology will drive demand for our solutions. In the coming year, we will work to develop additional modules within the Imageware Identity Platform. This platform combines all of our products into a modular, end-to-end, Cloud-based platform. Our platform allows a customer to create and manage a verified digital identity, issue both physical and digital credentials, and leverage biometrics for both identification and authentication. We have built out a multi-year strategic roadmap for additional modules to include into the Imageware Identity Platform and open additional use cases, industries, and high value sales for the Company.

Sales and Marketing

We market and sell our products in most major world markets directly through our ~~salesforce~~sales force and indirectly through channel partners, including resellers, distributors and systems integrators. Our sales force includes both field, and inside sales, which provides us a lower-cost channel for additional sales into existing customers and for expanding our customer base.

International Operations

We are a global company. We are headquartered in San Diego, California with a remote office in Ottawa, Canada. Our main business operations are based in San Diego, California. We regularly seek out opportunities to efficiently expand our operations in international locations that offer highly talented resources as a way to maximize our global competitiveness.

Software Licenses

The bulk of our revenue presently is generated from new subscription and historical maintenance payments for our software solutions for Law Enforcement, Badging, Identity Management, and Multi-~~factor Access,~~Factor Authentication (“MFA”).  We currently have four primary revenue sources:

- Annual Maintenance of our Law Enforcement Solution;

- Perpetual license revenue of our Badging Solution;

- Term Subscriptions of our ~~ImageWare~~Imageware Authenticate solution; and    

- Professional Services fees associated with implementation and training for our customers.

We are actively engaged in simplifying our revenue sources, migrating our existing customers’ ~~Annual~~annual ~~Maintenance~~maintenance, and perpetual license agreements to more consistent and sustainable subscription models.

-4- ~~Software as a Service Business Model~~

We also provide an on-demand SaaS offering for ImageWare Authenticate. SaaS offerings will be offered on a subscription term-limited basis. We are exploring offering additional products as SaaS offerings on a subscription term-limited basis.

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Software as a Service Business Model

We also provide an on-demand SaaS offering for Imageware Authenticate and all solutions in the Law Enforcement 2.0 solution. SaaS offerings will be offered on a subscription term-limited basis. We are exploring offering additional products as SaaS offerings on a subscription term-limited basis.

Competition

Biometric Market

The market to provide biometric systems to the identity management market is evolving and we face competition from a number of sources. We believe that the strength of our competitive position is based on:

● Our ability to provide a system which enables the enrollment, management and authentication of multiple biometrics managing population databases of unlimited sizes;

~~Our~~● ~~ability~~Searches ~~to provide~~can abe ~~system~~1:1 ~~which~~(verification), ~~enables~~1:N ~~the enrollment~~(identification), ~~management~~ and ~~authentication~~ ofN:N ~~multiple~~(database ~~biometrics managing population databases of unlimited sizes~~integrity); and

● The system is technology and biometric agnostic, enabling the use of biometric devices and algorithms from any vendor, and the support of the following biometric types: finger, face, iris, palm and voice.

~~Searches~~Our ~~can~~multifactor-biometric beproduct ~~1:1 (verification)~~faces competition from Duo, ~~1:N~~HYPR, ~~(identification)~~Daon and Aware Inc., none of which have offerings with the scope and ~~N:N~~flexibility ~~(database~~of ~~integrity);~~ our Biometric Engine and its companion suite of products or relevant patent protection.

●

The system is technology and biometric agnostic, enabling the use of biometric devices and algorithms from any vendor, and the support of the following biometric types: finger, face, iris, palm and voice

Our multifactor-biometric product faces competition from Duo, HYPR, Daon and Aware Inc., none of which have offerings with the scope and flexibility of our IWS Biometric Engine and its companion suite of products or relevant patent protection.

Credential Market

Due to the breadth of our software offering in the secure credential market space, we face differing degrees of competition in certain market segments. The strength of our competitive position is based upon:

● Our strong brand reputation with a customer base, which includes small and medium-sized businesses, Fortune 1000 corporations and large government agencies;

~~our~~● ~~strong~~The ~~brand reputation~~ease ~~with~~of aintegrating ~~customer~~our ~~base,~~technology ~~which~~into ~~includes~~other ~~small~~complex ~~and medium-sized businesses, Fortune 1000 corporations and large government agencies~~applications;

● The leveraged strength that comes from offering customers software tools, packaged solutions and web-based service applications that support a wide range of hardware peripherals; and

~~the~~● The ease of ~~integrating~~ ~~our~~hacking ~~technology~~traditional ~~into~~NFC ~~other~~access ~~complex applications;~~control systems.

●

the leveraged strength that comes from offering customers software tools, packaged solutions and web-based service applications that support a wide range of hardware peripherals; and

●

traditional NFC access control systems are easily hacked

Our software faces competition from a number of companies, like HID Global, ASSA ABLOY, Gemalto, as well as small, regionally based companies.

The Law Enforcement and Public Safety Markets

Due to the fragmented nature of the law enforcement and public safety market and the modular nature of our product suite, we face different degrees of competition with respect to each ~~IWS~~ Law Enforcement module. We believe the principal bases on which we compete with respect to all of our products are:

● The unique ability to integrate our modular products into a complete biometric, LiveScan, imaging and investigative system;

~~the~~● ~~unique~~Our ~~ability to~~reputation ~~integrate~~as ~~our modular products into~~ a ~~complete~~reliable ~~biometric, LiveScan,~~systems ~~imaging and investigative system~~supplier;

● The usability and functionality of our products;

~~our~~● ~~reputation~~The asresponsiveness, ~~a reliable~~availability ~~systems~~and ~~supplier~~reliability of our customer support; and

● Hardware agnostic across many biometric vendors.

~~the usability and~~ ~~functionality of our products;~~ -5-

●

the responsiveness, availability and reliability of our customer support; and

●

hardware agnostic across many biometric vendors.

Our law enforcement product line faces competition from other companies such as DataWorks Plus, Idemia, Gemalto and NEC. Internationally, there are often a number of local companies offering solutions in most countries.

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Intellectual Property

We rely on trademark, patent, trade secret and copyright laws and confidentiality and license agreements to protect our intellectual property. We have several federally registered trademarks, including the trademark ~~ImageWare~~Imageware and ~~IWS~~ Biometric Engine, as well as trademarks for which there are pending trademark registrations with the United States, Canadian and other International Patent & Trademark Offices.

We hold several issued patents and have several other patent applications pending for elements of our products. We believe we have the foundational patents regarding the use of multiple biometrics and continue to be an IP leader in the biometric arena. It is our belief that this intellectual property leadership will create a sustainable competitive advantage.

We are an early pioneer of patents related to multi-modal biometrics and currently are a worldwide leader in multi-modal biometric patents, with 27 issued patents worldwide and 14 pending or allowed patent applications worldwide as well. The Company’s patents are as follows:

US Issued Patents -– 17

US Allowed Patents -– 1

US Patent Applications -– 3

International Issued Patents -– 10

International Patent Applications -– 10

Total Worldwide Issued Patents -– 27

Total Worldwide Allowed Patents -– 1

Total Worldwide Patent Applications -– 14

Employees

We had a total of 4426 full-time employees as of December 31, ~~2020. In 2020~~2021, weof ~~had~~which 4022 employees are based in the United States, ~~three employees based in Canada~~ and ~~one~~four ~~employee~~employees are based in ~~Mexico~~Canada. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Environmental Regulation

Our business does not require us to comply with any particular environmental regulations.

Additional Available Information

We make available, free of charge, at our corporate website www.~~iwsinc~~imageware.~~com~~io copies of our annual reports filed with the SEC on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request. Additionally, all reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov.

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ITEM 1A.

RISK FACTORS

Our business is subject to significant risks. You should carefully consider the risks described below and the other information in this Annual Report, including our financial statements and related notes, before you decide to invest in our Common Stock. If any of the following risks or uncertainties actually occur, our business, results of operations or financial condition could be materially harmed, the trading price of our Common Stock could decline, and you could lose all or part of your investment. 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 and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.

-6- ~~RISKS RELATED TO OUR BUSINESS AND INDUSTRY~~

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

At December 31, 2020 and 2019, we had negative working capital of $19,349,000 and $1,653,000, respectively. Our principal source of liquidity at December 31, 2020 and 2019 consisted of cash and cash equivalents of $8,345,000 and $1,030,000, respectively. Considering the financings consummated in 2020, as well as our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash will be insufficient to satisfy our cash requirements for the next twelve months from the date of this filing. These factors raise substantial doubt about our ability to continue as a going concern. To address our working capital requirements, management intends to seek additional equity and/or debt financing through the issuance of additional debt and/or equity securities and may seek strategic or other transactions intended to increase shareholder value. There are currently no formal committed financing arrangements to support our projected cash shortfall, including commitments to purchase additional debt and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional 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.

We have a history of significant recurring losses totaling approximately $213.2 million at December 31, 2020 and $203.2 million and December 31, 2019, and these losses may continue in the future.

As of December 31, 2020 and 2019, we had an accumulated deficit of approximately $213.2 million and $203.2 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.

Our loan under the Paycheck Protection Program may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan.

We have received loan proceeds in the amount of approximately $1.57 million under the Payroll Protection Program (“PPP Loan”), which was established under the CARES Act and is administered by the SBA (“PPP”). Under the terms of the CARES Act, PPP Loan recipients can apply for loan forgiveness. The potential loan forgiveness for all or a portion of PPP Loan is determined, subject to limitations, based on the use of loan proceeds over the 24 weeks after the loan proceeds are disbursed for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The amount of loan forgiveness will be reduced if PPP Loan recipients terminate employees or reduce salaries during the covered period. The unforgiven portion of our PPP Loan, if any, is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. We have utilized all the proceeds from the PPP Loan for purposes consistent with the PPP. While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of the PPP Loan, the Series D Financing may affect the Company's ability to have the PPP Loan forgiven under the PPP and there can be no assurance that forgiveness for any portion of the PPP Loan will be obtained.

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~~Additionally, the~~RISKS ~~Company~~RELATED isTO ~~evaluating~~OUR whether the Series D Financing will prevent the Company from qualifying for loan forgiveness. In the event the SBA determines that the Series D Financing disqualifies the Company for loan forgiveness under the PPPLIQUIDITY, ~~the~~BUSINESS ~~Company~~AND ~~will be required to repay all $1.57 million of the PPP Loan by May 4, 2022, with interest accruing at 1%.~~INDUSTRY

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

At December 31, 2021 and 2020, we had negative working capital of $8,046,000 and $19,349,000, respectively. Our principal source of liquidity at December 31, 2021 and 2020 consisted of cash and cash equivalents of $1,202,000 and $8,345,000, respectively. 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 is insufficient to satisfy our cash requirements. These factors raise substantial doubt about our ability to continue as a going concern. To address our working capital requirements, management is actively seeking additional equity and/or debt financing through the issuance of additional debt and/or equity securities and is 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.

To continue as a going concern, the Company is currently exploring strategic options and is reviewing its assets, the outcome of which is uncertain and may involve substantial dilution to shareholders and/or a loss of your entire investment.

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. To date, the Company has not received any offers or other indications of interest acceptable to the Company’s Board, and no assurances can be given that the Company will be successful in consummating any or a combination of such alternatives. The consummation of a transaction will likely involve substantial dilution to the Company’s stockholders and may involve the loss of your entire investment. In the event the Company is unable to consummate one or more transactions, the Company may not be able to continue as a going concern.

We have a history of significant recurring losses totaling approximately $204.3 million at December 31, 2021 and $213.2 million and December 31, 2020, and these losses may continue in the future.

As of December 31, 2021 and 2020, we had an accumulated deficit of approximately $204.3 million and $213.2 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 demand for and market acceptance of our technology and products;

~~varying~~● ~~demand~~Changes ~~for~~in ~~and~~our ~~market~~product ~~acceptance~~or ofcustomer ~~our technology and products~~mix;

● 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;

~~changes~~● inOur ~~our~~ability ~~product~~to orintroduce, ~~customer~~certify ~~mix~~and deliver new products and technologies on a timely basis;

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

~~the~~● ~~gain~~Competitive orpressures ~~loss~~on ofselling ~~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~~prices;

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

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

● Our accounting and legal expense; and

~~the~~● ~~announcement~~General oreconomic ~~introduction of products and technologies by our competitors;~~conditions.

●

competitive pressures on selling prices;

●

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

●

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

●

our accounting and legal expense; and

●

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.

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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.

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~~Three customers accounted for approximately 6151% of our total revenue during the year ended December 31, ~~2020~~2021, and two customers accounted for approximately 3761% of our total revenue during the year ended December 31, ~~2019~~2020. 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 year ended December 31, ~~2020~~ 2021, three ~~two~~ customers accounted for approximately 6151% or $21,~~921~~787,000 of ~~our~~ total revenue. During the year ended December 31, ~~2019~~2020, two customers accounted for approximately 37 61% or $12,~~301~~921,000 of ~~our~~ total revenue and had trade receivables of approximately $250,000 as of the end of the year. 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.

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 the cost of our products;

~~increase~~● ~~the~~Be ~~cost~~expensive ofand ~~our~~time ~~products~~consuming to defend;

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

be● ~~expensive~~Force ~~and~~us ~~time~~to ~~consuming~~cease tomaking ~~defend~~or selling products that incorporate the challenged intellectual property;

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

~~result~~● inRequire us ~~being~~to ~~required~~enter into royalty or licensing agreements in order to ~~pay~~obtain ~~significant~~the ~~damages~~right to use a third ~~parties~~ party’s intellectual property, the terms of which may not be acceptable to us;

● 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;

~~force~~● usDivert tothe ~~cease~~attention ~~making~~of orour ~~selling products that incorporate the challenged intellectual property~~management; and

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

require us to redesign, reengineer or rebrand our products;

●

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 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 the attention of our management; and

●

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~~ ~~significant~~operate 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.

~~-15-~~We have 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.

~~Table~~During the second quarter of ~~Contents~~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.

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.

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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 or anticipated fluctuations in our operating results or future prospects;

~~actual or~~● ~~anticipated~~Our ~~fluctuations~~announcements inor our ~~operating~~competitors’ ~~results~~announcements orof ~~future prospects~~new products;

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

~~our announcements~~● Strategic actions by us or our competitors’, ~~announcements~~such ofas ~~new products~~acquisitions or restructurings;

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

~~the public’s~~● ~~reaction~~Changes toin ~~our~~accounting ~~press~~standards, ~~releases~~policies, ~~our~~guidance, ~~other~~interpretations ~~public announcements~~or ~~and our filings with the SEC~~principles;

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

~~strategic actions~~● byDevelopments usregarding or our ~~competitors,~~patents ~~such~~or asproprietary ~~acquisitions~~rights or ~~restructurings~~ those of our competitors;

~~-16-~~● Our inability to raise additional capital as needed;

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

● Concern as to the efficacy of our products;

~~new laws~~● orChanges ~~regulations~~in orfinancial ~~new~~markets ~~interpretations of existing laws~~ or ~~regulations~~ ~~applicable~~general toeconomic ~~our business~~conditions;

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

~~changes~~ ● Changes in ~~accounting~~stock ~~standards,~~market ~~policies,~~analyst ~~guidance~~recommendations or earnings estimates regarding our Common Stock, ~~interpretations~~other comparable companies or ~~principles;~~ our industry generally.

●

changes in our growth rates or our competitors’ growth rates;

●

developments regarding our patents or proprietary rights or those of our competitors;

●

our inability to raise additional capital as needed;

●

substantial sales of Common Stock underlying warrants and preferred stock;

●

concern as to the efficacy of our products;

●

changes in financial markets or general economic conditions;

●

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

●

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

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.

-14- 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 March 26, 2021, we had four series of Preferred Stock outstanding, the Series A Preferred, Series A-1 Preferred, Series B Preferred, and Series D Preferred.

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The ~~provisions~~holders of our ~~Series A~~ Preferred ~~prohibit the~~Stock ~~payment~~(as ofdefined ~~dividends~~below) onhave ~~our~~certain ~~Common~~rights ~~Stock~~and ~~unless~~privileges ~~the~~that ~~dividends on our preferred shares~~ are ~~first~~senior ~~paid.~~to ~~In addition, upon a liquidation, dissolution or sale of~~ our ~~business, the holders of our Series A 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 December 31, 2020~~ and ~~2019,~~we ~~there~~may ~~were 14,911~~issue ~~and~~additional ~~37,467~~ shares of ~~our Series A~~ Preferred ~~outstanding,~~Stock ~~respectively.~~without Asstockholder ofapproval ~~December~~that ~~31, 2020~~could ~~and~~have ~~2019,~~a wematerial ~~had~~adverse ~~no cumulative~~effect ~~undeclared~~on ~~dividends~~the onmarket ~~our~~value ~~Series~~of Athe ~~Preferred~~Common Stock.

~~The~~Our ~~provisions~~Board of ~~our~~Directors ~~Series~~has ~~A-1~~the ~~Preferred prohibit~~authority ~~the~~to ~~payment~~issue a total of ~~dividends~~up onto ~~our~~5.0 ~~Common~~million shares of preferred stock, par value $0.01 per share (“Preferred Stock”) ~~unless~~and to fix the ~~dividends~~ onrights, ~~our~~preferences, ~~preferred~~privileges, ~~shares~~and ~~are~~restrictions, ~~first~~including ~~paid.~~voting Inrights, ~~addition~~of the Preferred Stock, ~~upon a~~which ~~liquidation~~typically are senior to the rights of the Common Stock, ~~dissolution~~without any further vote or ~~sale~~action by the holders of our ~~business,~~Common Stock. The rights of the holders of our ~~Series~~Common ~~A-1~~Stock ~~Preferred~~ will be ~~entitled~~subject to ~~receive~~, inand ~~preference to~~may ~~any~~be ~~distribution~~adversely toaffected by, the rights of the holders of ~~Common~~the Preferred Stock, ~~initial distributions~~that have been issued or might be issued in the future. Preferred Stock also could have the effect of ~~$1,000~~making ~~per~~it ~~share~~more difficult for a third party to acquire a majority of our outstanding voting stock. This could delay, ~~plus~~defer, ~~all~~or ~~accrued~~prevent ~~but~~a ~~unpaid dividends~~change in control. AsFurthermore, holders of ~~December~~our 31Preferred Stock may have other rights, ~~2020~~including ~~and~~economic ~~2019~~rights, ~~there~~senior ~~were 14~~to the Common Stock. As a result,~~782~~ their existence and 0issuance ~~shares~~could have a material adverse effect on the market value of ~~our~~the ~~Series~~Common ~~A-1~~ Stock. We have in the past issued and may from time to time in the future issue, Preferred ~~outstanding~~Stock for financing or other purposes with rights, ~~respectively~~preferences, or privileges senior to the Common Stock. As of December 31, ~~2020~~2021, we had notwo ~~cumulative~~series ~~undeclared dividends~~of onPreferred ~~our~~Stock outstanding, the Series ~~A-1~~ B Preferred, and 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 December 31, ~~2020~~2021 and ~~2019~~ December 31, 2020, there were 239,400 shares of Series B Preferred outstanding. As of December 31, ~~2020 and 2019~~2021, we had cumulative undeclared dividends on our Series B Preferred of approximately $8,000.

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 December 31, ~~2020~~2021 and ~~2019~~December 31, 2020, there were 23,862.4 and 22,863.28 ~~and 0~~ shares of Series D Preferred outstanding, respectively. As of December 31, ~~2020~~2021, we had no cumulative undeclared dividends on our Series D Preferred.

The conversion of our Series ~~A Preferred Stock, Series A-1 Preferred Stock, 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 ~~A Preferred Stock, Series A-1 Preferred Stock, Stock 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 December 31, ~~2020~~2021, ~~we had outstanding: (i) 14~~239,~~911~~400 shares of Series AB Preferred Stock, which are convertible into 7447,~~555,000~~001 shares of Common Stock; ~~(ii)~~and 1423,~~782~~216.4 shares of Series ~~A-1~~D Preferred Stock, which are convertible into 73398,~~910~~222,~~000~~ 985 shares of Common Stock;, ~~(iii)~~were ~~239,400~~outstanding. ~~shares~~In ofaddition ~~Series~~to Bour outstanding shares of Preferred Stock, ~~which~~as ~~are~~of ~~convertible~~December ~~into~~31, 462021,~~029~~ ~~shares~~there ofwere ~~Common~~outstanding ~~Stock; and~~warrants ~~(iv)~~to 22purchase 3,~~863.28~~150,000 shares of ~~Series~~our DCommon ~~Preferred~~ Stock, ~~which~~outstanding ~~are convertible~~stock ~~into~~options ~~392~~to purchase 4,~~166~~848,~~023~~876 shares of our Common Stock. Inand ~~addition to our~~ outstanding ~~shares~~Restricted ~~of Preferred~~ Stock, asUnits ofthat ~~December~~upon ~~31,~~vesting ~~2020, there~~will ~~were~~result ~~outstanding~~in ~~warrants~~the toissuance ~~purchase~~of ~~753~~81,~~775~~019,401 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, 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.

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.

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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 37.3% of the Company’s outstanding voting securities as of March 2625, ~~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 Amended~~The ~~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 derivative action or proceeding brought on behalf of the Company;

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

● 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 ofagainst ~~breach~~the ofCompany aor ~~fiduciary duty owed by~~ any director or officer or other employee of the Company togoverned ~~the~~by ~~Company or~~ the ~~Company’s~~internal ~~stockholders;~~affairs doctrine.

●

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 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.

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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~~ asor ~~the~~harm ~~recent~~to ~~global~~our ~~outbreak~~reputation ~~of the COVID-19 coronavirus~~or competitive position.

~~The recent~~Threats ~~outbreak~~to 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 been~~or ~~declared~~nation-states, bycontinuously ~~the~~undertake ~~World~~attacks ~~Health~~that ~~Organization~~pose threats to beour customers and our IT. These actors may use a ~~pandemic~~wide variety of methods, ~~has~~ ~~spread~~which ~~across~~may ~~the~~include ~~globe~~developing and isdeploying ~~impacting~~malicious ~~worldwide~~software ~~economic activity.~~or Aexploiting ~~pandemic~~vulnerabilities in hardware, ~~including COVID-19~~ software, or other ~~public health~~infrastructure ~~epidemics,~~in ~~pose~~order ~~the~~to ~~risk~~attack ~~that~~our weproducts and services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, ~~contractors~~ users, ~~suppliers~~partners, ~~and~~or customers to disclose passwords or other ~~partners~~sensitive ~~may~~information beor ~~prevented~~take ~~from conducting~~other ~~business~~actions ~~activities~~to ~~for~~gain anaccess ~~indefinite~~to ~~period~~our ofdata ~~time, including~~or ~~shutdowns~~our ~~that~~users’ ~~may~~or becustomers’ ~~requested~~data, or ~~mandated~~acting ~~by governmental~~in ~~authorities.~~a ~~While~~coordinated itmanner isto ~~not~~launch ~~possible~~coordinated atattacks. ~~this~~Nation ~~time~~state ~~to estimate~~and ~~the~~state ~~impact~~sponsored ~~that COVID-19 could~~actors ~~have~~can ondeploy ~~our business,~~significant ~~the COVID-19 pandemic~~resources to plan and ~~mitigation~~carry ~~measures have~~out ~~had~~exploits. ~~and~~Inadequate account security practices may ~~continue~~also toresult ~~have~~in anunauthorized ~~adverse~~access ~~impact~~to onconfidential ~~global economic~~data. ~~conditions~~Employees ~~which~~or ~~could~~third ~~have~~parties anmay ~~adverse~~intentionally ~~effect~~compromise onour or our ~~business~~ ~~and~~users’ ~~financial~~security ~~condition,~~or ~~including~~systems ~~impairing~~or ~~our~~reveal ~~ability~~ confidential 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 has~~Cyberthreats ~~prevented~~are ~~employees~~constantly ~~from~~evolving ~~returning~~and tobecoming ~~physical~~increasingly ~~offices.~~sophisticated Inand ~~many cases~~complex, ~~our~~increasing ~~potential customers in~~ the ~~government~~difficulty orof ~~commercial enterprise-side~~detecting ~~like~~and tosuccessfully ~~test~~defending ~~our~~against ~~software in their labs with their systems and hardware~~them. ~~Potential~~We ~~customers~~may have ~~been~~no ~~unable~~current capability to ~~do this~~detect ~~and~~certain ~~that~~vulnerabilities, ~~has~~which ~~caused~~may ~~purchase~~allow ~~decisions~~them to bepersist ~~delayed~~in asthe ~~these employees~~environment ~~who~~over ~~would~~long beperiods ~~testing~~of ~~are~~time. ~~now~~Cyberthreats ~~working from their homes and~~ can’t ~~simulate~~have ~~test~~cascading ~~environments. COVID-19~~impacts ~~has~~that ~~further led~~unfold towith aincreasing ~~distributed~~speed ~~work~~across ~~environment.~~our ~~Decision~~internal ~~makers~~networks ~~are~~and ~~now working~~systems ~~from~~and ~~their~~those ~~homes,~~of ~~from~~our ~~all~~partners ~~different~~and ~~parts~~customers. Breaches of aour ~~state~~network or ~~country.~~ ~~Some~~data ~~have~~security ~~weak~~could ordisrupt nothe ~~Internet~~security ~~connections,~~of ~~making~~our ~~it harder~~systems toand ~~review~~business ~~paperwork~~applications, toimpair ~~decide~~our onability ato ~~large~~provide ~~financial~~services ~~purchase. Some decision makers want~~ to ~~have~~our ~~more~~customers ~~conversations with more people,~~ and ~~mull~~result ~~over decisions longer, versus~~ in ~~the~~product ~~past~~development delays, ~~when~~compromise ~~an individual~~confidential ~~could~~or ~~walk~~technical ~~into~~business ainformation ~~decision~~harming ~~makers~~our ~~office~~reputation ~~and~~or ~~garner~~competitive ~~more rapid~~position, ~~approval.~~result ~~Some countries have limits on how many people are permitted to gather~~ in ~~one~~theft ~~meeting~~ or ~~have~~misuse ~~been~~of ~~hit~~our ~~particularly hard~~intellectual ~~with~~property ~~many~~or ~~residents~~other ~~suffering~~assets, ~~and~~require ~~dying~~us ~~from~~to ~~the~~allocate ~~COVID-19 virus.~~more ~~There~~resources isto aimprove ~~new~~technologies ~~paradigm~~or ~~emerging~~remediate inthe ~~making~~impacts ~~critical decisions~~of ~~from~~attacks, aor ~~video~~otherwise ~~conference~~adversely ~~calls~~affect ~~versus~~our ~~in person~~business.

~~An economic~~While ~~recession~~we ~~had~~expect ~~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~~ ~~down~~an ~~and/or~~adverse ~~laid~~effect ~~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 to~~financial ~~COVID-19~~condition ~~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 Phishing~~are ~~attempts.~~unable ~~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 IT~~this ~~department resolves their issues~~time.

~~This outbreak~~Due ~~could~~to ~~decrease~~the ~~spending,~~COVID-19 ~~adversely~~pandemic ~~affect~~we ~~demand~~have ~~for~~been ~~the Company’s~~limited ~~products,~~in ~~and~~our ~~harm~~ability ~~the~~to: ~~Company’s~~(i) ~~business~~conduct face-to-face 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 ~~to predict~~and ~~the~~conferences ~~duration~~which typically generate future sales opportunities, or ~~magnitude~~(iv) ofmeet ~~the~~with ~~adverse~~prospective ~~results~~strategic ofpartners. These effects caused by the ~~outbreak~~ ~~and~~COVID-19 ~~its~~pandemic will ~~effects~~likely have an adverse impact on ~~the~~our ~~Company’s~~operating ~~business~~and orfinancial results of ~~operations,~~over ~~financial~~at ~~condition,~~least orthe ~~liquidity,~~next atseveral ~~this time~~quarters.

WeThe extent to which our operating and financial results will continue to be affected 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 ~~whom~~the emergence of new variants of the virus that causes COVID-19; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus, including vaccine development and distribution. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, could ~~materially~~ ~~adversely~~also ~~affect~~aggravate ~~future~~our ~~operations~~other risk factors described in this Form 10-K.

~~Our success~~Certain ~~will~~key ~~depend~~personnel tohave aterminated ~~significant~~their ~~extent~~employment ~~upon~~with the ~~efforts~~Company. ~~and abilities~~Given ofthat ~~our~~we ~~executive~~are ~~officers~~dependent ~~and~~on ~~other~~ key personnel., ~~The loss of~~ the ~~services~~loss of ~~one or more of these key employees and~~ any ~~negative~~ ~~market~~additional orpersonnel, ~~industry~~including ~~perception~~our ~~arising~~Chief ~~from~~Executive ~~the~~Officer, ~~loss of such services~~ could ~~have~~materially ~~a material adverse effect on us~~ and ~~the trading~~adversely ~~price~~affect of our ~~Common~~plan ~~Stock. Our~~of ~~business~~operations ~~will~~and ~~also be dependent upon our~~ ability to ~~attract~~obtain ~~and retain qualified personnel~~financing. Acquiring and keeping these personnel could prove more difficult or cost substantially more than estimated and we cannot be certain that we will be able to retain such personnel or attract a high caliber of personnel in the future.

~~-20-~~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.

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ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our corporate headquarters is located in San Diego, California and is currently leased on a month-to-month basis. We sublet our former headquarters effective March 1, 2021. As of December 31, ~~2020~~2021, in addition to our corporate headquarters, we lease properties in the following locations: Ottawa, Province of Ontario, Canada; Portland, Oregon; Mexico City, México. Management believes that leaving the former headquarters and subleasing the space saves the company money. The new corporate headquarters space is small and adequate for our needs today. When the company reaches cash flow positive, we will be looking for a new space that takes into account the distributed workforce. We downsized our Portland, Oregon engineering office in 2020 and are actively advertising the space to be subleased. The San Diego headquarters suite has been sublet effective March 1, 2021 and the headquarters moved to a smaller office within San Diego. We maintain an office in Ottawa, Canada and Mexico City, México for our employees and business in those markets. The Tokyo, Japan office was closed in 2020.

ITEM 3.

LEGAL PROCEEDINGS

There is currently 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.

ITEM 4.

MINE SAFETY DISCLOSURES

N/A.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Common Stock does not trade on an established securities exchange. Our Common Stock is quoted under the symbol “IWSY” on the OTCQB marketplace. Any OTCQB marketplace quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

Holders

As of March 2618, ~~2021~~2022, we had approximately ~~278~~ 275 registered holders of record of our Common Stock. A significant number of our shares of Common Stock were held in street name and, as such, we believe that the actual number of beneficial owners of our Common Stock is significantly higher.

Dividends

We have never declared or paid cash dividends on our Common Stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.

As of December 31, ~~2020~~2021 and ~~2019~~2020, we had cumulative undeclared dividends of approximately $0 relating to our Series A Preferred, $0 related to our Series A-1 Preferred, $8,000 relating to our Series B Preferred, ~~$0 related to our Series C Preferred,~~ and $0 related to our Series D Preferred.

Securities Authorized for Issuance under Equity Compensation Plans

For a discussion of our equity compensation plans, please see Item 11 of this Annual Report.

Recent Sales of Unregistered Securities

We issued certain equity securities in unregistered transactions during ~~2020~~2021 and fiscal year ~~2019~~2020. All of the securities issued in non-registered transactions were issued in reliance on Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act and were reported in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K filed with the Securities and Exchange Commission during the fiscal year ended December 31, ~~2020~~2021 and through the date of this report.

ITEM 6.

SELECTED FINANCIAL DATA

The disclosures in this section are not required because we qualify as a smaller reporting company under federal securities laws.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Readers are also urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors which affect our business, including (without limitation) the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”, and in the audited consolidated financial statements and related notes included in this Annual Report on Form 10-K.

-19- ~~Overview~~

The Company is a pioneer and leader in biometric identification and authentication software. Using 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 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 mugshot, 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 leveraged by our patented IWS Biometric Engine®

The IWS 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. It allows different types of biometrics to be operated at the same time on a seamlessly integrated platform. It is also offered as a Software Development Kit (“SDK”), enabling developers and system integrators to implement biometric solutions or integrate biometric capabilities into existing applications. 

Our secure credential solutions empower customers to design and create smart digital identification wristbands and badges for access control systems. We develop, sell and support software and design systems that utilize digital imaging and biometrics for photo identification cards, credentials and identification systems. Our products in this market consist of IWS EPI Suite and IWS EPI Builder. These products allow for production of digital identification badges and related databases and records and can be used by, among others, schools, airports, hospitals, corporations and governments. We have added the ability to incorporate multiple biometrics into the ID systems with the integration of IWS Biometric Engine®.

The Company is also a developer of a biometric based multi-factor authentication (MFA) Cloud-based service. ImageWare Authenticate brings together Cloud and mobile technologies to offer multi-factor authentication for the enterprise, and across industries. ImageWare Authenticate consists of mobile and desktop clients, and the backend system which is a Cloud-based Software-as-a-Service (“SaaS”) servicing Cloud-based biometric template matching requests. ImageWare Authenticate comes in two offerings, Workforce and Customer. ImageWare Authenticate Customer is leveraged by product developers to enable biometric authentication for their consumers. For the enterprise, ImageWare Authenticate Workplace provides turnkey integration with Microsoft Windows, Microsoft Active Directory, CA SSO, IBM Security Access Manager (“ISAM”), SAP Cloud Platform, Fujitsu's RunMyProcess, Palo Alto Networks VPN and HPE’s Aruba ClearPass. These integrations provide multi-modal biometric authentication to replace or augment passwords for use with enterprise and consumer class systems.

Our law enforcement solutions enable 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 Web-based platform. We develop, sell and support a suite of modular software products used by law enforcement and public safety agencies to create and manage criminal history records and to investigate crime. Our IWS Law Enforcement solution consists of five software modules: Capture and Investigative modules, which provide a criminal booking system with related databases as well as the ability to create and print mug photo/scars, marks, and tattoos (SMT), as well as image lineups and electronic mug-books; a Facial Recognition module, which uses biometric facial recognition to identify suspects; a Web module, which provides access to centrally stored records over the Internet in a connected or wireless fashion; and a LiveScan module, which incorporates LiveScan capabilities into IWS Law Enforcement platform providing integrated fingerprint and palm print biometric management for civil and law enforcement use. The IWS Biometric Engine® is also available to our law enforcement clients and allows them to capture and search using multiple biometrics.

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Overview

Imageware Systems, Inc. (“Imageware,” the “Company,” “we,” “our”) provides biometric solutions to identify, verify, and authenticate people based on their true identity, rather than on what keys and codes they have. A pioneer in the field, Imageware was the first multimodal biometric solution provider in history and holds dozens of patents, including some of the most cited patents in the industry. Our Cloud-based and on-premises solutions provide faster, more accurate identification to better secure communities, data, and assets. In fact, governments, law enforcement agencies, and public and private enterprises worldwide trust Imageware with critical identity solutions which manage millions of identities every day.

Our patented Imageware Biometric Engine® is one of the most accurate and 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.

Our product portfolio, called the Imageware Identity Platform, is built around three key areas: Enroll & Identify, Badge & Credential, and Authenticate. All of these areas are built on top of the Imageware Biometric Engine. The Platform is a fully-modular, customizable, and pre-integrated portfolio of capabilities to support state and local law enforcement, Federal agencies, and enterprises alike.

Enroll & Identify

The Enroll & Identify area includes four key modules: Imageware Proof, Imageware Capture, Imageware Identify, and Imageware Investigate.

Badge & Credential

Authenticate

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.

Recent Market Conditions

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”).

The pandemic has significantly impacted the economic conditions both in the United States and worldwide, with accelerated effects in February 2020 through the date of this Annual Report, as federal, state and local governments react to the public health crisis, creating significant uncertainties in both the worldwide and the United States economies. The situation is rapidly changing and additional impacts to our business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or office closure requirements.

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.

OnIn ~~March~~addition ~~27,~~to ~~2020,~~the ~~President~~impact ~~Trump~~resulting ~~signed~~from ~~into~~COVID-19, ~~law the~~recent ~~“Coronavirus~~geopolitical ~~Aid~~conflicts, ~~Relief~~specifically ~~and~~the ~~Economic~~war ~~Security~~in ~~Act (“CARES~~Ukraine, ~~Act”).~~may ~~The~~have ~~CARES~~an ~~Act,~~additional ~~among~~impact ~~other~~on ~~things, includes~~purchasing ~~provisions~~decisions ~~relating~~both toin ~~refundable~~the ~~payroll~~United ~~tax~~States ~~credits~~and worldwide, ~~deferment~~ ofwhich ~~employer~~creates ~~side~~additional ~~social~~uncertainties ~~security~~in ~~payments,~~both ~~net~~the ~~operating loss~~worldwide ~~carryback~~and ~~periods,~~the ~~alternative~~United ~~minimum~~States ~~tax~~economies. These ~~credit~~factors ~~refunds, modifications~~could toaffect ~~the~~our ~~net~~ability ~~interest~~to ~~deduction~~obtain ~~limitations,~~additional ~~increased limitations~~financing onor ~~qualified~~consummate ~~charitable~~a ~~contributions~~strategic ~~and~~transaction, ~~technical corrections~~although tono ~~tax~~assurances ~~depreciation~~can ~~methods~~be ~~for qualified improvement property~~given.

~~The Company continues to examine the impact that~~ -20- ~~the CARES Act may have on our business. Currently the Company is unable to determine the impact that the CARES Act will have on our financial condition, results of operation or liquidity.~~

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Critical Accounting 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 accounting principles generally accepted in the United States of America (“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 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.

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 Series D Preferred and financial instruments issued with and affected by the Series D Preferred Financing (defined below), fair value of financial instruments with and affected by the Series C Preferred (defined below), fair value of Series A Preferred (defined below), fair value of Series A-1 Preferred (defined below), assumptions used in the application of revenue recognition policies, assumptions used in the derivation of the Company’s incremental borrowing rate used in the computation of the Company’s operating lease liabilities and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.

The following are our critical accounting policies because we believe they are both important to the portrayal of our financial condition and results of operations and require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

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Revenue Recognition. Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method.

In accordance with ASC 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:

1. Identify the contract with the customer;

2. Identify the ~~contract~~performance ~~with~~obligation in the ~~customer~~contract;

23. Determine the transaction price;

~~Identify~~ 4. Allocate the transaction price to the performance ~~obligation~~obligations in the contract; and

35. Recognize revenue when (or as) each performance obligation is satisfied.

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.

Determining the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations requires judgement.

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We disclose disaggregation of our customer revenue by classes of similar products and services as follows:

● Software licensing and royalties;

~~Software licensing~~● Sales of computer hardware and ~~royalties~~identification media;

● Services; and

~~Sales of~~● ~~computer~~Post-contract ~~hardware~~customer ~~and identification media;~~support.

●

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.

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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”)

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 customer support on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service and (ii) the percent discount off of list price approach.

Contract costs

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less.

Other items

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

Sales tax collected from customers is excluded from revenue.

~~Allowance~~ -22- for Doubtful Accounts. We provide an allowance for our accounts receivable for estimated losses that may result from our customers’ inability to pay. We determine the amount of allowance by analyzing historical losses, customer concentrations, customer creditworthiness, current economic trends, and the age of the accounts receivable balances and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Impairment of Goodwill, Other Intangible and Long-Lived Assets. The Company accounts for its intangible assets under the provisions of ASC 350, “Intangibles - Goodwill and Other”. In accordance with ASC 350, intangible assets with a definite life are analyzed for impairment under ASC 360-10-05 “Property, Plant and Equipment” and intangible assets with an indefinite life are analyzed for impairment under ASC 360 annually, or more often if circumstances dictate. The Company performs its annual simplified 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 did not record any goodwill impairment charges for the years ended December 31, 2020 or 2019.

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Impairment of Goodwill, Other Intangible and Long-Lived Assets. The Company accounts for its intangible assets under the provisions of ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”). In accordance with ASC 350, intangible assets with a definite life are analyzed for impairment under ASC 360-10-05 “Property, Plant and Equipment” and intangible assets with an indefinite life are analyzed for impairment under ASC 360 annually, or more often if circumstances dictate. The Company performs its annual simplified 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 did not record any goodwill impairment charges for the years ended December 31, 2021 or 2020.

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s management currently believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.

There are many management assumptions and estimates underlying the determination of an impairment loss, and estimates using different, but reasonable, assumptions could produce significantly different results. Significant assumptions include estimates of future levels of revenue and operating expense. Therefore, the timing and recognition of impairment losses by us in the future, if any, may be highly dependent upon our estimates and assumptions. There can be no assurance that goodwill impairment will not occur in the future.

Stock-Based Compensation. At December 31, ~~2020~~2021 and ~~2019~~2020, the Company had one stock-based compensation plan for employees and nonemployee directors, which authorizes the granting of various equity-based incentives including stock options and restricted stock.

The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 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 general and administrative, sales and marketing, engineering and customer service expense based upon the departments to which substantially all of the associated employees report and credited to additional paid-in capital.

ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. For the years ended December 31, ~~2020~~2021 and ~~2019~~2020, the Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. Historical volatility factors utilized in the Company’s Black-Scholes computations for options granted during the years ended December 31, ~~2020~~2021 and ~~2019~~2020 ranged from 57% and 8399%. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14. The expected term used by the Company to value the grants issued in ~~2020~~2021 and ~~2019~~2020 as computed by this method ~~was~~ranged from 3.33 to 5.17 years. The effect of the difference between the actual historical expected life and the simplified method was immaterial. The interest rate used is the risk-free interest rate and is based upon U.S. Treasury rates appropriate for the expected term. Interest rates used in the Company’s Black-Scholes calculations ~~averaged~~ranged from 1.37% to 2.58%% for the years ended December 31, ~~2020~~2021 and ~~2019~~2020. Dividend yield is zero, as the Company does not expect to declare any dividends on the Company’s common shares in the foreseeable future.

~~In addition to the key assumptions used in the Black~~ -~~Scholes model,~~23- the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has estimated an annualized forfeiture rate of approximately 5.0% for corporate officers, 4.1% for members of the Board of Directors and 15.0% for all other employees. The Company reviews the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.

Income Taxes. The Company accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes”. Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

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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 utilized an estimated annualized forfeiture rate ranging from approximately 5.0% to 10% for corporate officers, 4.1% to 10% for members of the Board of Directors and 15.0% to 25% for all other employees for options granted during the years ended December 31, 2021 and 2020. The Company reviews the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.

Income Taxes. The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes (“ASC 740”). Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary, based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

ASC 740-10 requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

We recognize and measure uncertain tax positions in accordance with GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Any tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our analysis of income tax reserves reflects the most likely outcome. We adjust these reserves, if any, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.

Significant judgment is required in evaluating the Company’s uncertain tax positions and determining the Company’s provision for income taxes. No assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

The Internal Revenue Code (the “Revenue Code”) limits the availability of certain tax credits and net operating losses that arose prior to certain cumulative changes in a corporation’s ownership resulting in a change of control of the Company. The Company’s use of its net operating loss carryforwards and tax credit carryforwards will be significantly limited because the Company believes it underwent “ownership changes”, as defined under Section 382 of the Revenue Code, in 1991, 1995, 2000, 2003, 2004, 2011, 2012, 2018 and 2020, though the Company has not performed a study to determine the limitation. The Company has reduced its deferred tax assets to zero relating to its federal and state research credits because of such limitations. The Company continues to disclose the tax effect of the net operating loss carryforwards at their original amount as the actual limitation has not yet been quantified. The Company has also established a full valuation allowance for substantially all deferred tax assets due to uncertainties surrounding its ability to generate future taxable income to realize these assets. Since substantially all deferred tax assets are fully reserved, future changes in tax benefits will not impact the effective tax rate. Management periodically evaluates the recoverability of the deferred tax assets. If it is determined at some time in the future that it is more likely than not that deferred tax assets will be realized, the valuation allowance would be reduced accordingly at that time.

-24- On March 27, 2020, President Trump signed the CARES Act into law, which, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified improvement property.

The Company continues to examine the impact that the CARES Act may have on our business. Currently the Company is unable to determine the impact that the CARES Act will have on our financial condition, results of operation or liquidity.

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Fair-Value Measurements. The Company accounts for fair value measurements in accordance with ASC Topic 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).

Assessing the significance of a particular input to the fair value measurement requires judgment, considering factors specific to the asset or liability. Determining whether a fair value measurement is based on Level 1, Level 2, or Level 3 inputs is important because certain disclosures are applicable only to those fair value measurements that use Level 3 inputs. The use of Level 3 inputs may include information derived through extrapolation or interpolation which involves management assumptions as well as valuation techniques employing Monte Carlo simulation methodologies.

Lease Liabilities and Operating Lease Right-of-Use Assets

The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ~~Accounting Standards Codification (“~~ ASC”) Topic 842 – Leases (“ASC 842”). In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5%. The Company has utilized the practical expedient regarding lease and nonlease components and has combined such items into a single combined component. The Company has also utilized the practical expedient regarding leases of twelve months or less and has excluded such leases from its computation of lease liability and related right-of-use assets. The Company has also elected the optional transition package of practical expedients which include:

A package of practical expedient to not reassess:

● Whether a contract is or contains a lease

~~Whether~~● aLease ~~contract is or contains a lease~~classification

● Initial direct costs

~~Lease classification~~The company evaluates its operating lease right-of-use assets for impairment. As of December 31, 2021, and through the date of this report, management’s review indicated that there was an impairment of an operating lease right-of-use asset and the Company recorded an impairment loss of approximately $333,000. 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. Such amount is included in the Company’s Consolidated Statement of Operations for the year ended December31, 2021 under the caption “General and administrative” expense.

●For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Notes to the Consolidated Financial Statements for the Year Ended December 31, 2021.

~~Initial~~Comparison ~~direct costs~~of Results for Fiscal Years Ended December 31, 2021 and 2020

For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Notes to the Consolidated Financial Statements for the Year Ended December 31, 2020.

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Comparison of Results for Fiscal Years Ended December 31, 2020 and 2019

Product Revenue

	~~Twelve Months Ended December 31,~~	Twelve Months Ended December 31,
Net Product Revenue	~~2020~~	~~2019~~2021	~~$ Change~~	~~% Change~~	2020			$ Change			% Change
(dollars in thousands)
Software and royalties	~~$872~~	$~~489~~	$383	~~78%~~	$	872		$	(489	)		(56	)%
Percentage of total net product revenue	~~39%~~	~~53%~~	45	%		39	%
Hardware and consumables	~~$84~~	$96	~~$(12)~~290	~~(13)%~~	$	84		$	206			245	%
Percentage of total net product revenue	4%	~~10%~~	34	%		4	%
Services	~~$1,275~~	$~~338~~	~~$937~~181	~~277%~~	$	1,275		$	(1,094	)		(86	)%
Percentage of total net product revenue	~~57%~~	~~37%~~	21	%		57	%
Total net product revenue	~~$2,231~~	$~~923~~	~~$1,308~~854	~~142%~~	$	2,231		$	(1,377	)		(62	)%

Software and royalty revenue increased 78% or approximately $383,000 during the year ended December 31, 2020 as compared to the corresponding period in 2019. This increase is attributable to higher identification project related revenue of approximately $539,000, offset by lower law enforcement project related revenue of approximately $11,000, lower royalty revenue of approximately $116,000 and lower sales of boxed identity management software sold through our distribution channel of approximately $29,000. The increase in identification project related revenue is reflective of the expansion of the Company’s identity management software base combined with the sale of additional software licenses into existing identification projects caused by increased end -~~user~~25- utilization during the year ended December 31, 2020 as compared to the corresponding period in 2019. The decrease in our law enforcement project revenue resulted from a decrease in the timing of procurement by our law enforcement customers. The decrease in boxed identity management software sold through our distribution channel reflects slightly lower procurement from both domestic and international customers and the decrease in royalty revenue reflects the expiration of a minimum royalty contract.

Revenue from the sale of hardware and consumables decreased approximately $12,000 during the year ended December 31, 2020 as compared to the corresponding period in 2019 due to a decrease in project related solutions containing hardware and consumable sales primarily to law enforcement customers.

Services revenue is comprised primarily of software integration services, system installation services and customer training. Such revenue increased $937,000 during the year ended December 31, 2020 as compared to the corresponding period in 2019, due to an increase in the service element of project related work completed during the year ended December 31, 2020.

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; 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 Annual 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 our ability to close sales transactions and 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.

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~~During~~Software ~~the~~and ~~year~~royalty ~~ended~~revenue ~~December~~decreased ~~31,~~56% ~~2020,~~or weapproximately ~~have~~$489,000 ~~focused~~during ~~on strategically~~the ~~updating~~year ~~our~~ended ~~products~~December ~~with~~31, ~~the~~2021 ~~latest~~as ~~mobile~~compared ~~and cloud~~to ~~technology~~the ~~prioritized~~corresponding byperiod ~~market~~in ~~opportunities~~2020. WeThis ~~relaunched ImageWare~~decrease ~~Authenticate~~is ~~(formerly~~attributable ~~GoVerify~~to ~~ID®)~~lower inidentification ~~July~~project ~~2020.~~related ~~This~~revenue ~~relaunch~~of ~~includes~~approximately a$442,000 ~~new container~~ and ~~microservices-based~~lower ~~architecture~~royalty ~~along~~revenue ~~with~~of ~~refreshed mobile~~approximately ~~and~~$110,000 ~~desktop~~offset ~~clients.~~by Wehigher ~~believe~~law ~~these~~enforcement ~~updates~~project ~~will~~related ~~result~~revenue ~~in additional~~of ~~customers~~approximately ~~implementing~~$33,000 ~~our~~and ~~ImageWare~~higher ~~Authenticate solution.~~sales ~~Additionally,~~of weboxed ~~have~~identity ~~focused~~management onsoftware ~~the~~sold ~~integration~~through ofour ~~the suite~~distribution channel of ~~products~~approximately ~~that~~$30,000. ~~comprise~~The ~~our~~decrease ~~Identity~~in ~~Platform.~~identification ~~Throughout 2021~~project werelated ~~plan~~revenue tois ~~continue~~reflective toof ~~enhance~~lower ~~our~~software ~~Identity~~licenses ~~Platform~~sold ~~products, including~~into ~~our~~identification ~~EPI~~projects ~~(our~~during ~~biometric~~the ~~smart~~year ~~access~~ended ~~cards)~~December ~~and~~31, ~~law enforcement~~2021 ~~offerings~~and bythe ~~leveraging~~decrease ~~cloud~~in ~~and~~royalty ~~mobile~~revenue ~~technologies to~~results ~~improve~~primarily ~~both~~from ~~functionality~~lower ~~and~~reported ~~value~~usage tofrom ~~the~~certain ~~customer~~customers. ~~Management believes~~The ~~that~~increase ~~these~~in ~~initiatives~~boxed ~~will~~identity ~~result~~management insoftware ~~the~~sold ~~expansion~~through of our ~~solutions~~ ~~into~~distribution ~~both~~channel ~~law~~reflects ~~enforcement~~higher ~~and~~procurement ~~non-governmental~~from ~~sectors including~~certain ~~commercial,~~international ~~consumer~~customers and ~~healthcare~~the ~~applications,~~increase ~~further resulting~~ in ~~additional~~law ~~implementations~~enforcement ofsoftware ~~both~~reflects the expansion of our ~~ImageWare Authenticate~~installed ~~products~~base ~~and~~among ~~Identity~~existing ~~Platform products~~customers.

Revenue from the sale of hardware and consumables increased approximately $206,000 during the year ended December 31, 2021 as compared to the corresponding period in 2020 due to an increase in project related solutions containing hardware and consumable sales primarily to law enforcement customers.

Services revenue consists primarily of software integration services, system installation services and customer training. Such revenue decreased $1,094,000 during the year ended December 31, 2021 as compared to the corresponding period in 2020, due to a decrease in the service element of project related work completed during the year ended December 31, 2021.

As discussed more fully elsewhere in this Annual 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 our ability to close sales transactions and 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 year ended December 31, 2021, we have focused on strategically modernizing our modules within the Imageware Identity Platform, prioritized by market opportunities. We relaunched Imageware Authenticate (formerly GoVerify ID®) in February 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 solution in October 2021 and Imageware Investigate in December 2021. These are the first of many modules that we plan to build and modernize throughout 2022 and beyond. Prior to releasing Imageware Investigate, we closed our largest software-as-a-service (SaaS) deal in company history with Imageware Investigate. Management believes that these initiatives will result in the expansion of our solutions into state & local law enforcement, federal government, and enterprises alike.

Maintenance Revenue

~~Twelve Months Ended December 31,~~

Twelve Months Ended December 31,

Maintenance Revenue

~~2020~~

~~2019~~2021

~~$ Change~~

~~% Change~~

2020

$ Change

% Change

(dollars in thousands)

Total maintenance revenue

~~$2,554~~

$~~2,583~~

~~$(29)~~2,618

~~(1)%~~

2,554

Maintenance revenue was approximately $2,~~554~~618,000 for the year ended December 31, ~~2020~~2021, as compared to approximately $2,~~583~~554,000 for the corresponding periods in ~~2019~~2020. For the year ended December 31, ~~2020~~2021, identity management maintenance revenue was approximately $1,~~264~~385,000 as compared to $1,~~275~~264,000 for the comparable period in ~~2019~~2020. The ~~decrease~~increase of $11121,000 in identification software maintenance revenue for the year ended December 31, ~~2020~~2021 as compared to the corresponding period of ~~2019~~2020 is reflective of ~~the expiration of~~ certain additional maintenance ~~contracts~~services ~~combined~~provided ~~with~~by the ~~timing~~ ofCompany during the ~~commencement~~year ofended December 31, 2021. For the year ended December 31, 2021, law enforcement maintenance ~~services~~revenue ~~related~~was approximately $1,233,000 as compared to ~~a certain~~$1,290,000 ~~customer.~~for the comparable period in 2020. The decrease of $1857,000 in law enforcement maintenance revenue for the year ended December 31, ~~2020~~2021 as compared to the corresponding period of ~~2019~~2020 isreflects ~~reflective of~~ the expiration of certain maintenance contracts.

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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

	~~Twelve Months Ended December 31,~~	Twelve Months Ended December 31,
Cost of Product Revenue:	~~2020~~	~~2019~~2021	~~$ Change~~	~~% Change~~	2020			$ Change			% Change
(dollars in thousands)
Software and royalties	~~$54~~	$36	~~$18~~28	~~50%~~	$	54		$	(26	)		(48	)%
Percentage of software and royalty product revenue	6%	7%	7	%		6	%
Hardware and consumables	~~$52~~	$66	~~$(14)~~200	~~(21)%~~	$	52		$	148			285	%
Percentage of hardware and consumables product revenue	~~62%~~	~~69%~~	69	%		62	%
Services	~~$694~~	$~~116~~	~~$578~~94	~~498%~~	$	694		$	(600	)		(86	)%
Percentage of services product revenue	~~54%~~	~~34%~~	52	%		54	%
Total product cost of revenue	~~$800~~	$~~218~~	~~$582~~322	~~267%~~	$	800		$	(478	)		60	%
Percentage of total product revenue	~~36%~~	~~24%~~	38	%		36	%

The cost of software and royalty product revenue ~~increased~~ decreased approximately $1826,000 ~~from~~due ~~higher~~to lower software and royalty revenue for the year ended December 31, ~~2020~~2021 of approximately $~~383~~489,000 ~~due to a significant percentage of the revenue increase containing solutions with extremely minimal third-party software costs~~. 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 product revenue for our hardware and consumable sales during the year ended December 31-, 2021 increased approximately $148,000 as compared to the corresponding period in 2020 due primarily to higher hardware and consumable product revenue of approximately $206,000 during the 2021 period.

~~Table~~The cost of ~~Contents~~services revenue decreased approximately $600,000 during the year ended December 31, 2021 as compared to the corresponding period in 2020 due to lower service revenue of approximately $1,094,000. Although changes in costs of services product revenue are sometimes caused by revenue level fluctuations, costs of services can also 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.

The cost of product revenue for our hardware and consumable sales during the year ended December 31, 2020 decreased approximately $14,000 as compared to the corresponding period in 2019 due primarily to lower hardware and consumable product revenue of approximately $12,000 during the 2020 period.

The cost of services revenue increased approximately $578,000 during the year ended December 31, 2020 as compared to the corresponding period in 2019 due to higher service revenue of approximately $937,000. Cost of services revenue as a percentage of service revenue increased to 54% for the year ended December 31, 2020 as compared to 34% for the corresponding 2019 period. This increase reflects the one-time impact of additional service costs incurred in the completion of the service element for a particular customer. Although changes in costs of services product revenue are sometimes caused by revenue level fluctuations, costs of services can also 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.

Cost of Maintenance Revenue

Maintenance cost of revenue	~~Twelve Months Ended December 31,~~	Twelve Months Ended December 31,
(dollars in thousands)	~~2020~~	~~2019~~2021	~~$ Change~~	~~% Change~~	2020			$ Change			% Change
Total maintenance cost of revenue	~~$448~~	$~~425~~	~~$23~~346	5%	$	448		$	(102	)		(23	)%
Percentage of total maintenance revenue	~~18%~~	~~16%~~	13	%		18	%

Cost of maintenance revenue ~~increased~~decreased approximately $23102,000 during the year ended December 31, ~~2020~~2021 as compared to the corresponding period in ~~2019~~2020 despite ~~lower~~higher maintenance revenue of approximately $2964,000. This ~~increase~~decrease is reflective of ~~higher~~lower maintenance labor costs incurred during the year ended December 31, ~~2020~~2021 as compared to the corresponding period in ~~2019~~2020 due primarily to the ~~composition~~ ofheadcount ~~engineering~~reductions ~~resources~~in ~~used~~our incustomer ~~the~~support ~~provision~~department of and a reduction in fixed maintenance ~~services~~costs.

Product Gross Profit

	~~Twelve Months Ended December 31,~~	Twelve Months Ended December 31,
Product gross profit	~~2020~~	~~2019~~2021	~~$ Change~~	~~% Change~~	2020			$ Change			% Change
(dollars in thousands)
Software and royalties	~~$818~~	$~~453~~	~~$365~~355	~~81%~~	$	818		$	(463	)		(57	)%
Percentage of software and royalty product revenue	~~94%~~	~~93%~~	93	%		94	%
Hardware and consumables	~~$32~~	$30	$290	7%	$	32		$	58			181	%
Percentage of hardware and consumables product revenue	~~38%~~	~~31%~~	31	%		38	%
Services	~~$581~~	$~~222~~	~~$359~~87	~~162%~~	$	581		$	(494	)		(85	)%
Percentage of services product revenue	~~46%~~	~~66%~~	48	%		46	%
Total product gross profit	~~$1,431~~	$~~705~~	~~$726~~532	~~103%~~	$	1,431		$	(899	)		(63	)%
Percentage of total product revenue	~~64%~~	~~76%~~	62	%		64	%

Software and royalty gross profit increased 81% or approximately $365,000 for the year ended December 31, 2020 as compared to the corresponding period in 2019, due primarily to higher software and royalty revenue of approximately $383,000 combined with higher software and royalty cost of revenue of $18,000 for the same period. This revenue increase with only a minimal increase in software and royalty cost of revenue reflects extremely low third -party software costs. 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 third27-~~party software license content~~ ~~included in product sales during a given period.~~

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~~Hardware~~Software and ~~consumables~~royalty gross profit ~~increased~~ decreased 57% or approximately $2463,000 for the year ended December 31, ~~2020,~~2021 as compared to the ~~2019~~corresponding period in 2020, due primarily to lower ~~hardware~~software and ~~consumable~~ royalty revenue of approximately $12489,000 combined with lower ~~cost~~software ofand ~~hardware~~royalty ~~and consumable~~cost of revenue of ~~approximately~~ $1426,000 for the same period. ~~These~~This ~~decreases~~revenue ~~result from~~decrease with only a minimal decrease in ~~project~~software ~~related~~and ~~solutions~~royalty ~~containing~~cost ~~hardware~~ of revenue reflects low third-party software costs. In addition to changes in costs of software and ~~consumable~~royalty ~~components~~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.

~~Services~~ Hardware and consumables gross profit increased approximately $~~359~~58,000 for the year ended December 31, ~~2020~~2021, as compared to the ~~corresponding~~2020 period, ~~in 2019~~ due primarily to higher ~~service~~hardware and consumable revenue of approximately $~~937~~206,000 combined with higher ~~service~~ cost of ~~revenue~~hardware ofand ~~$578,000~~consumable ~~for~~revenue ~~the~~of ~~year~~approximately ~~ended December 31~~$148, ~~2020 as compared to the corresponding period in 2019~~000. ~~The~~ ~~decrease~~These inincreases ~~services~~result ~~gross profit as a percentage of services revenue~~ from ~~66%~~an inincrease ~~the year ended December 31, 2019 to 46%~~ in ~~the corresponding~~project ~~period~~related ofsolutions ~~2020~~containing ~~reflects~~hardware the one-time impact of additional service costs incurred in the completion of the service element for a particular customer. Although changes in costs of services product revenue are sometimes caused by revenue level fluctuations, costs of services can also vary as a percentage of service revenue from period to period depending upon both the level and ~~complexity~~consumable ~~of professional service resources utilized in the completion of the service element~~components.

Services gross profit decreased approximately $494,000 for the year ended December 31, 2021 as compared to the corresponding period in 2020 due to lower service revenue of approximately $1,094,000 combined with lower service cost of revenue of $600,000 for the year ended December 31, 2021 as compared to the corresponding period in 2020. Although changes in costs of services product revenue are sometimes caused by revenue level fluctuations, costs of services can also 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 Gross Profit

Maintenance gross profit

~~Twelve Months Ended December 31,~~

Twelve Months Ended December 31,

(dollars in thousands)

~~2020~~

~~2019~~2021

~~$ Change~~

~~% Change~~

2020

$ Change

% Change

Total maintenance gross profit

~~$2,106~~

$~~2,158~~

~~$(52)~~2,272

~~(2)%~~

2,106

166

Percentage of total maintenance revenue

~~82%~~

~~84%~~

Gross profit related to maintenance revenue ~~decreased~~increased 28% or approximately $52166,000 for the year ended December 31, ~~2020~~2021 as compared to the corresponding period in ~~2019~~2020. This ~~decrease~~increase reflects ~~lower~~ higher maintenance revenue of approximately $2964,000 combined with ~~higher~~ lower cost of maintenance revenue of approximately $23102,000. The ~~decrease~~ increase in maintenance revenue results from the ~~timing~~provision of ~~maintenance revenue~~certain ~~recognition~~additional ~~related~~maintenance services to a certain customer ~~combined~~during ~~with~~ the ~~expiration~~ ofyear ~~certain~~ended ~~maintenance~~December ~~contracts~~31, 2021. The ~~increase~~decrease cost of maintenance revenues for the year ended December 31, ~~2020~~2021 as compared to the corresponding period in ~~2019~~2020 is due primarily to ~~the~~ ~~composition~~reductions ofin ~~engineering~~headcount ~~resources used~~ in ~~the~~our ~~provision~~customer ~~of maintenance~~support ~~services.~~department ~~The~~and ~~decrease~~reductions in ~~maintenance~~certain ~~revenue~~fixed ~~results from the timing of~~ maintenance ~~revenue recognition related to a certain contract~~costs. Maintenance gross profit can change from period to period depending upon both the level and complexity of ~~engineering~~ labor resources utilized in the provision of the maintenance services.

Operating Expense

	~~Twelve Months Ended December 31,~~	Twelve Months Ended December 31,
Operating expense	~~2020~~	~~2019~~2021	~~$ Change~~	~~% Change~~	2020			$ Change			% Change
(dollars in thousands)
General and administrative	~~$4,102~~	$~~3,614~~	~~$488~~6,151	~~14%~~	$	4,102		$	2,049			50	%
Percentage of total net revenue	~~86%~~	~~103%~~	177	%		86	%
Sales and marketing	~~$2,936~~	$~~3,937~~	~~$(1~~2,~~001)~~892	~~(25)%~~	$	2,936		$	(44	)		(1	)%
Percentage of total net revenue	~~61%~~	~~112%~~	83	%		61	%
Research and development	~~$5,706~~	$~~7,488~~	~~$(1~~4,~~782)~~461	~~(24)%~~	$	5,706		$	(1,245	)		(22	)%
Percentage of total net revenue	~~119%~~	~~214%~~	128	%		119	%
Depreciation and amortization	~~$72~~	$71	$156	1%	$	72		$	(16	)		(22	)%
Percentage of total net revenue	2%	2%	2	%		2	%

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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~~ -28- dollar increase of approximately $488,000 in general and administrative expense for the year ended December 31, 2020 as compared to the corresponding period in 2019 is comprised of the following major components:

● Table of Contents

~~Overall~~The ~~decrease~~dollar inincrease ~~personnel related expense~~ of approximately $552,049,000 isin ~~due~~general toand ~~reductions~~administrative inexpense ~~employer contributions~~for tothe ~~employee~~year ~~benefit~~ended ~~plans~~December ~~of approximately $230~~31,~~000 offset~~ by2021 ~~higher~~as ~~personnel~~compared ~~expenses~~to ofthe ~~approximately $175,000~~corresponding ~~due~~period toin ~~the~~2020 ~~effects~~is comprised of ~~various~~ ~~senior~~the ~~management~~following ~~changes;~~major components:

● Overall decrease in personnel related expense of approximately $417,000 is due to reductions in headcount of various senior management positions changes;

● Increases in professional services of approximately $~~252~~679,000 which includes higher legal fees of approximately $~~197~~93,000, higher ~~patent-related legal~~ ~~and~~Board ~~other~~of Director fees of approximately $~~155~~70,000 ~~resulting~~, ~~from~~higher ~~the~~auditing ~~Company’s~~fees ~~efforts~~of toapproximately ~~monetize certain patents~~$25,000, higher contractor and contract service expenses of approximately $23635,000 ~~and higher general corporate expense of $16,000~~ offset by reductions in ~~Board~~patent-related oflegal ~~Director~~and other fees of approximately $6115,000, ~~lower~~reductions ~~investor~~in ~~and~~general ~~public~~corporate ~~relations~~expense ~~fees~~ of ~~approximately~~ $~~106~~11,000 and lower ~~audit~~investor and public relations fees of approximately $2718,000,;

● Increase in insurance related expense of approximately $191,000 driven by higher director & officer insurance premiums, increases in licenses, dues and subscription expense of approximately $213,000, increases in travel of approximately $17,000 and increases of approximately $10,000 in other miscellaneous expense offset by reductions in office related costs of approximately $99,000 driven by the sublet of our former San Diego office facility;

~~Increase in~~● ~~insurances~~Recognition of impairment loss on an operating lease right-of-use asset of $333,000; ~~licenses~~As of December 31, ~~dues~~2021, ~~rent~~and through the date of this report, ~~office~~management’s ~~related~~review ~~costs~~indicated that there was an impairment of an operating lease right-of-use asset and ~~other~~ the Company recorded an impairment loss based on the excess of ~~approximately~~the ~~$21~~carrying amount over the fair value,~~000;~~ based on market value when available, or expected future economic benefits to the company from the operating lease right-of-use asset.

● Increase in financing expense of approximately $829,000; and

● Increase in ~~financing~~stock-based compensation expense related to options and restricted stock units (“RSU’s”) of approximately $66293,000~~; and~~.

●

Increase in stock-based compensation expense related to options and restricted stock units ("RSU’s") of approximately $204,000.

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 Expense

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 personnel.

The dollar decrease of approximately $144,~~001,~~000 during the year ended December 31, ~~2020~~2021 as compared to the corresponding period in ~~2019~~ 2020 is primarily comprised of the following major components:

● Decrease in personnel related expense of approximately $269,000 driven primarily by headcount reductions;

~~Decrease~~● Increase in ~~personnel~~contractor ~~related~~and ~~expense~~contract services of approximately $~~369~~148,000 ~~driven primarily~~resulting from reduced utilization of certain sales consultants of approximately $150,000 offset by ~~headcount~~higher ~~reductions~~contract service expense of approximately $298,000;

● Increase in travel, trade show expense and office related expense of approximately $121,000;

~~Decrease~~● Increase in ~~contractor~~stock-based ~~and~~compensation ~~contract services of approximately $388,000 resulting from lower contract service~~ expense of approximately $~~303~~234,000; ~~which includes lower dues~~ and ~~subscription expense, and reduced utilization of certain sales consultants of approximately $85,000.;~~

● Decrease in our Mexico sales office expense of approximately $278,000 due to the shutdown of this sales office.

Decrease in travel, trade show expense and office related expense of approximately $257,000;

●

Decrease in stock-based compensation expense of approximately $45,000; and

●

Increase in our Mexico sales office expense of approximately $58,000 due to certain personnel separation expenses.

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Research and Development Expense

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.

Research and development expense decreased approximately $1,~~782~~245,000 for the year ended December 31, ~~2020~~2021, as compared to the corresponding period in ~~2019~~2020, due primarily to the following major components:

● Decrease in personnel related expense of approximately $1,498,000 due to headcount reductions;

~~Decrease~~● Increase in ~~personnel~~contractor ~~related~~fees ~~expense~~and contract services of approximately $1109,~~092,~~000 ~~due to headcount reductions~~;

● Decrease in rent, office related expense and engineering tools and supplies of approximately $61,000; and

~~Decrease in~~● ~~contractor~~Increase ~~fees~~in ~~and~~stock ~~contract~~based-compensation ~~services~~expense of approximately $~~537~~205,000;.

● -29-

Decrease in rent, office related expense and engineering tools and supplies of approximately $128,000; and

●

Decrease in stock based-compensation expense of approximately $25,000.

Depreciation and Amortization

During the year ended December 31, 2020, depreciation and amortization expense increased approximately $1,000 as compared to the corresponding period in 2019. The relatively small amount of depreciation and amortization reflects the relatively small property and equipment carrying value.

Interest Expense (Income), Net

For the year ended December 31, 2020, we recognized interest income of $2,000 and interest expense of $104,000. Interest expense for the year ended December 31, 2020 was comprised of approximately $94,000 on our related party notes payable and approximately $10,000 on notes payable under the PPP Loan program. For the year ended December 31, 2019, we recognized interest income of $90,000 and interest expense of $0.

Other Expense

For the year ended December 31, 2020, we recognized other income of approximately $0 and other expense of approximately $4,000. Other expense for the year ended December 31, 2020 is comprised of approximately $4,000 in late payment penalty fees.

For the year ended December 31, 2019, we recognized other income of approximately $0 and other expense of $1,000. Other expense for the year ended December 31, 2019 is comprised of approximately $1,000 in foreign transaction expense.

Change in Fair Value of Derivative Liabilities

For the year ended December 31, 2020, we recognized approximately $369,000 from the decrease of derivative liabilities arising from the consummation of the Series C Convertible Preferred Stock financing in September 2019 (“Series C Financing”). Such decrease was determined by management using fair value methodologies and is included as non-cash income under the caption “Change in fair value of derivative liabilities” in our consolidated statement of operations for twelve months ended December 31, 2020. Also for the year ended December 31, 2020, we recognized approximately $1,883,000 from the change in fair value of derivative liabilities arising from the Series D Financing. Such decrease was determined by management using fair value methodologies and is included as non-cash income under the caption “Change in fair value of derivative liabilities” in our consolidated statement of operations for twelve months ended December 31, 2020.

For the year ended December 31, 2019, we recognized approximately $696,000 from the decrease of derivative liabilities arising from the consummation of the Series C Financing in September 2019. Such decrease was determined by management using fair value methodologies and is included as non-cash income under the caption “Change in fair value of derivative liabilities” in our consolidated statement of operations for twelve months ended December 31, 2019.

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Depreciation and Amortization

During the year ended December 31, 2021, depreciation and amortization expense decreased approximately $16,000 as compared to the corresponding period in 2020. The relatively small amount of depreciation and amortization reflects the relatively small property and equipment carrying value.

Interest (Income) Expense, Net

For the year ended December 31, 2021, we recognized interest income of $0 and interest expense of $2,000. Interest expense for the year ended December 31, 2021 was comprised of approximately $1,000 on our related party notes payable and approximately $1,000 in deferred financing fee amortization on our related party notes payable classified as interest expense. For the year ended December 31, 2020, we recognized interest income of $2,000 and interest expense of $104,000.

Other (Income) Expense, Net

For the year ended December 31, 2021, we recognized other income of approximately $156,000 and other expense of approximately $82,000. The primary components of other income were approximately $131,000 from the write-off of liabilities at amounts less than their carrying value and $25,000 from sublease income. Other expense for the year ended December 31, 2021 is comprised of approximately $82,000 from the write-off of abandoned furniture. For the year ended December 31, 2020, we recognized approximately $2,000 in other expense related to late payment penalty fees.

(Gain) on Change in Fair Value of Derivative Liabilities

For the year ended December 31, 2021, we recognized approximately $18,809,000 from the change in fair value of derivative liabilities arising from the Series D Financing. Such decrease was determined by management using fair value methodologies and is included as non-cash income under the caption “(Gain on change in fair value of derivative liabilities” in our consolidated statement of operations for the year ended December 31, 2021.

For the year ended December 31, 2020, we recognized approximately $369,000 from the decrease of derivative liabilities arising from the consummation of the Series C Financing in September 2019. Such decrease was determined by management using fair value methodologies and is included as non-cash income under the caption “Change in fair value of derivative liabilities” in our consolidated statement of operations for twelve months ended December 31, 2020. Also for the year ended December 31, 2020, we recognized approximately $1,883,000 from the decrease in fair value of derivative liabilities arising from the Series D Financing. Such decrease was determined by management using fair value methodologies and is included as non-cash income under the caption “Change in fair value of derivative liabilities” in our consolidated statement of operations for the year ended December 31, 2020.

(Gain) on Extinguishment of Debt

For the year ended December 31, 2021, we recognized a gain on debt extinguishment from the forgiveness of our PPP Loan. In September 2021, we received notification from the Small Business Administration (“SBA”) that our Paycheck Protection Program (“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 debt” in our consolidated statement of operations for the year ended December 31, 2021.

Loss on Extinguishment of Derivative Liabilities

For the year ended December 31, 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 “Loss on extinguishment of derivative liabilities” in our consolidated statement of operations for the year ended December 31, 2021.

Income Tax Expense

During the years ended December 31, ~~2020~~2021 and ~~2019~~2020, we recorded an expense for income taxes of $710,000 and $107,000, respectively. These tax expenses relate to taxes on income generated in certain foreign jurisdictions offset by research and development tax credits generated in certain foreign jurisdictions.

We have incurred consolidated pre-tax losses during the years ended December 31, ~~2020~~2021, and ~~2019~~2020, and have incurred operating losses in all prior periods. Management has determined that it is more likely than not that a tax benefit from such losses will not be realized and has established a full valuation allowance for any tax benefits. Accordingly, we did not record a benefit for income taxes for these periods.

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Liquidity, Capital Resources and Going Concern

Historically, our principal sources of cash have included ~~customer~~proceeds ~~payments~~ from the ~~sale~~issuance of ~~our~~common ~~products,~~and preferred stock and proceeds from the issuance of ~~common~~debt, and ~~preferred~~, ~~stock~~to ~~and~~a ~~proceeds~~lesser extent, customer payments from the ~~issuance~~sale of ~~debt~~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 ~~income~~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.

~~Lincoln~~At ~~Park~~December ~~Capital~~31, ~~Fund~~2021 and 2020, ~~LLC~~we had negative working capital of $8,046,000 and $19,349,000, respectively. Included in our negative working capital as of December 31, 2021 and 2020 are $5,292,000 and $24,128,000, 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 December 31, 2021 the Liquidation Preference Amount totaled $23,216,000. 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 in the near term, and for the next twelve months from the date of this filing. At April 12, 2022, cash on hand approximated $588,000. Based on the Company’s rate of cash consumption during the year ended December 31, 2021 and the first quarter ended March 31, 2022, the Company estimates it will need additional capital in the second quarter of 2022 and its prospects for obtaining that capital are uncertain. As a result of the Company’s historical losses, 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.

~~On April~~To ~~28,~~address ~~2020~~our working capital requirements, management has instituted several cost cutting measures and has utilized cash proceeds available under the ~~Company~~Credit ~~entered~~Facility ~~into~~with aNantahala ~~purchase~~and ~~agreement~~other lenders, ~~and~~ as ~~amended~~described onbelow, ~~June~~and 11under the purchase agreement with Lincoln Park Capital Fund, ~~2020~~LLC (~~the~~ “Lincoln ~~Purchase Agreement~~Park”), ~~and~~as adescribed ~~registration~~below, ~~rights~~to ~~agreement~~satisfy its working capital requirements (~~the~~ “~~Lincoln~~LPC ~~Registration~~Purchase ~~Rights~~ Agreement”). In addition, as reported in the Company’s Quarterly Report on Form 10-Q filed with ~~Lincoln Park~~the ~~Capital~~SEC ~~fund~~on August 23, ~~LLC~~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, (~~“Lincoln~~i) ~~Park”~~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) ~~pursuant~~the private placement of securities to ~~which~~ 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 ~~committed~~and our Credit Facility with Nantahala, which are currently restricted in our ability to ~~purchase~~access upadditional capital, there are currently no financing arrangements to ~~$10~~support our projected cash shortfall. We currently have no other commitments to purchase additional debt and/or equity securities,~~250~~ or other agreements,~~000~~ ofand 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 ~~Common~~ ~~Stock~~ability to continue as a going concern. The consummation of a transaction will involve substantial dilution to the Company’s stockholders.

~~Under the~~In ~~terms~~view ~~and~~of ~~subject to~~ the ~~conditions~~matters ofdescribed in the ~~Lincoln~~preceding ~~Purchase Agreement~~paragraphs, ~~including~~recoverability ~~stockholder approval~~ of ana ~~amendment~~major toportion ~~the Company’s Certificate~~ of ~~Incorporation,~~the asrecorded ~~amended~~asset ~~from~~amounts ~~time to~~shown ~~time~~in (the ~~"Certificate~~accompanying ofconsolidated ~~Incorporation"),~~balance tosheet ~~increase~~is ~~the number~~dependent ofupon ~~shares~~continued operations of the Company’s, ~~capital~~which, ~~stock~~in ~~to 350 million shares~~turn, ~~obtained~~is ~~from~~dependent ~~our~~upon ~~shareholders~~the ~~effective~~Company’s ~~June~~ability ~~9, 2020,~~to wecontinue ~~have~~to ~~the~~raise ~~right~~capital, ~~but~~generate ~~not~~positive ~~the~~cash ~~obligation,~~flows tofrom ~~sell to Lincoln Park~~operations, ~~and~~or ~~Lincoln~~otherwise ~~Park~~consummate isa ~~obligated~~transaction tothat ~~purchase~~addresses upthe toCompany’s ~~$10,250,000 of~~working ~~shares~~capital ~~of Common Stock~~requirements. ~~Future~~There ~~sales~~is ofno ~~Common~~assurance ~~Stock~~that ~~under~~ the ~~Lincoln~~ ~~Purchase~~Company ~~Agreement, if any,~~ will be ~~subject~~able to ~~certain limitations,~~obtain ~~and~~additional ~~may~~capital, ~~occur~~consummate ~~from~~a ~~time~~transaction tothat ~~time,~~addresses atits ~~our~~liquidity ~~sole discretion~~concerns, ~~over~~or ~~the~~operate ~~24-month~~at ~~period~~a ~~commencing~~profit onor ~~July~~generate 8,positive ~~2020, and~~cash ~~the~~flows ~~other conditions set forth~~ in the ~~Purchase~~future. ~~Agreement are satisfied (such date on which all of such conditions are satisfied~~Therefore, ~~the~~ ~~“Commencement~~management’s ~~Date”).~~plans ~~During~~do ~~the~~not ~~year~~alleviate ~~ended December 31, 2020,~~ the ~~Company~~substantial ~~sold~~doubt ~~an aggregate~~ of ~~5,700,000 shares of Common Stock to Lincoln Park under~~ the ~~terms~~Company’s ofability ~~the Lincoln Purchase Agreement resulting in gross cash proceeds~~ to ~~the Company~~continue ofas ~~approximately~~a ~~$918,000~~going concern.

~~After the~~The ~~Commencement~~consolidated ~~Date,~~financial onstatements ~~any~~do ~~business~~not ~~day~~include ~~over~~any ~~the~~adjustments ~~term~~relating ~~of the Lincoln Purchase Agreement, the Company has the right, in its sole discretion,~~ to ~~direct Lincoln Park to purchase up to 125,000 shares of its Common Stock on such business day (~~the ~~“Regular Purchase”),~~recoverability ~~subject~~and toclassification ~~increases under certain circumstances as provided in the Lincoln Purchase Agreement. The purchase price per share~~ of ~~Common~~recorded ~~Stock~~asset ~~for~~amounts ~~each~~and ~~such~~classifications ~~Regular Purchase will be based on prevailing market prices~~ of ~~the~~liabilities Company’s Common Stock immediately preceding the time of sale as computed under the Lincoln Purchase Agreement. In each case, Lincoln Park’s maximum commitment in any single Regular Purchase may not exceed $500,000. In addition to Regular Purchases, provided that ~~the Company~~might ~~presents~~be ~~Lincoln~~necessary ~~Park~~should ~~with a Lincoln Park Purchase Notice for~~ the ~~full amount allowed for a Regular Purchase, the~~ Company ~~may also~~be ~~direct~~unable ~~Lincoln Park~~ to ~~make~~continue ~~accelerated purchases and additional accelerated purchases~~ as ~~described~~a ingoing ~~the Lincoln Purchase Agreement~~concern.

Pursuant to the terms of the Lincoln Purchase Agreement, in no event may the Company issue or sell to Lincoln Park shares of Common Stock under the Lincoln Purchase Agreement which, when aggregated with all other shares of Common Stock then beneficially owned by Lincoln Park and its affiliates (as calculated pursuant to Section 13(d) of the Exchange Act and Rule 13d -~~3 promulgated thereunder), would~~31- ~~result in the beneficial ownership by Lincoln Park and its affiliates of more than 4.99% of the then issued and outstanding shares of Common Stock (the “Beneficial Ownership Limitation”).~~

The Lincoln Purchase Agreement and the Lincoln Registration Rights Agreement contain customary representations, warranties, agreements and conditions and indemnification obligations of the parties. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. The Company issued to Lincoln Park 2,500,000 shares of Common Stock in consideration for entering into the Lincoln Purchase Agreement. Pursuant to this issuance, $400,000 was recorded by the Company as a deferred stock issuance cost. Such amount is recorded in the Company’s consolidated balance sheet under the caption “Other assets”. Such deferred stock issuance costs will be recognized as a charge against paid in capital in proportion to securities sold under this Lincoln Purchase Agreement. During the year ended December 31, 2020, the Company recognized approximately $36,000, respectively, as a charge against paid in capital relating to securities sold under the Lincoln Purchase Agreement.

Due to the terms of the Lincoln Purchase Agreement as described above, management is not currently expecting the related proceeds from the Lincoln Purchase Agreement to be sufficient to sustain operations for an extended period of time.

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~~Series~~December 2021 DCredit ~~Preferred Stock Financings~~Facility

On ~~November~~ ~~12, 2020 and~~ December 2329, ~~2020,~~2021 (the ~~Company~~“Closing ~~consummated private placements of 12~~Date”),~~060~~ ~~shares~~the ofCompany ~~its~~entered ~~Series~~into Da ~~Convertible Preferred~~Term ~~Stock,~~Loan ~~par~~and ~~value~~Security ~~$0.01~~Agreement ~~per share~~ (the ~~"Series~~“Agreement”) Dwith ~~Preferred"),~~certain ~~resulting~~funds ~~in gross~~and ~~proceeds~~separate toaccounts ~~the~~managed ~~Company~~by ofNantahala ~~$12.06~~Capital ~~million~~Management, ~~less~~LLC ~~fees and expenses~~ (~~the~~collectively, “~~Series D Financing~~Nantahala”)., ~~The~~as ~~gross~~lenders, ~~proceeds~~and ~~included~~the ~~approximately $2.2~~other ~~million~~lenders inset ~~principal~~forth ~~amount~~on ~~due and payable under~~ the ~~terms~~signature ~~of certain~~pages ~~term~~thereto ~~loans~~(together ~~issued~~with byNantahala, the ~~Company on September 29, 2020 (~~“~~Bridge Notes~~Lenders”), ~~which~~pursuant ~~Bridge~~to ~~Notes~~which ~~were~~the ~~converted~~Lenders ~~into~~will ~~Series D~~provide ~~Preferred~~to ~~at Closing (~~the ~~“Conversion”).~~Company ~~The~~a ~~issuance~~secured ofterm ~~the Series~~loan Dcredit ~~Preferred~~facility ~~was~~in ~~made~~an ~~pursuant~~aggregate toamount ~~securities~~of ~~purchase agreements,~~up ~~dated~~to ~~September 28~~$2,500,000 ~~2020~~ (the ~~"Series~~“Credit ~~D Purchase Agreement"~~Facility”),. All byloans ~~and between~~(each ~~the~~a ~~Company~~“Loan", and ~~certain~~collectively, ~~accredited investors (~~the ~~"Purchasers"~~ “Loans”), ~~for~~under the ~~sale of~~Credit ~~the~~Facility ~~Series~~will Dbear ~~Preferred~~interest at a ~~purchase~~rate ~~price~~ of ~~$1,000~~12% ~~per~~for ~~share of~~the ~~Series~~initial Dsix ~~Preferred.~~months ~~The~~after ~~holders~~the ofClosing ~~Series~~Date, Dand ~~Preferred~~at ~~may voluntarily~~17% ~~convert~~thereafter ~~their~~until ~~shares~~the ofmaturity ~~Series~~date Dof ~~Preferred~~12 ~~into~~months ~~shares of~~from the ~~Company’s~~Closing ~~Common~~Date ~~Stock~~(the at“Maturity ~~any~~Date”). All ~~time~~amounts ~~that~~borrowed isby atthe ~~least ninety~~Company ~~days~~under ~~following~~ the ~~issuance~~Credit ~~date,~~Facility atare ~~the~~secured ~~conversion price calculated~~ by ~~dividing~~a ~~the~~first-priority ~~Stated~~lien ~~Value~~on byall the ~~conversion~~assets ~~price~~ of ~~$0.0583~~ ~~per~~the ~~share~~Company. On ofthe ~~Common~~Closing ~~Stock~~Date, ~~subject~~the toCompany ~~adjustments~~received ~~as set forth~~ in ~~Section~~initial ~~5(e)~~draw-downs ofon the ~~Certificate~~Credit Facility of ~~Designations~~$600, ~~Preferences,~~000. As ~~and Rights~~ of ~~Series~~April D12, ~~Convertible~~2022, ~~Preferred Stock (~~the ~~"Series~~Company ~~D Certificate").~~received ~~Dividends~~two onsubsequent ~~shares~~draw-down ofaggregating ~~Series~~$1,050,000. DThe ~~Preferred will~~Company beexpects ~~paid prior~~ to ~~any~~use ~~junior securities, and are to be paid at~~ the ~~rate~~proceeds offrom ~~4% of~~ the ~~Stated~~Credit ~~Value~~Facility ~~(as~~for ~~defined~~working incapital ~~the~~requirements ~~Series~~and ~~D Certificate)~~corporate ~~per share per annum in the form of cash or shares of Series D Preferred~~purposes.

~~Concurrently~~The ~~with the~~Company ~~execution~~may ofprepay ~~the~~amounts ~~Purchase~~borrowed ~~Agreement,~~under the ~~Company~~Credit ~~and~~Facility ~~the Investors~~in ~~executed~~whole ~~(i)~~or ain ~~Registration Rights Agreement~~part, ~~pursuant~~at ~~to which~~a ~~the~~price ~~Company~~equal ~~agreed~~ to ~~file~~105% aof ~~registration~~the ~~statement~~principal ~~with~~amount borrowed under the ~~SEC~~ ~~within~~Credit ~~thirty~~Facility ~~days~~(including ofany ~~closing~~interest tocapitalized ~~register~~thereon). Upon the ~~shares~~occurrence of: ~~Common Stock~~(I) ~~issuable~~any ~~upon~~Debt ~~conversion~~Issuances, ofDispositions, ~~the~~or ~~Series~~Equity DInterests ~~Preferred;~~ (~~ii)~~each ~~a Series~~as Cdefined ~~Exchange~~in ~~Agreement (~~the ~~"Exchange~~ Agreement"), ~~pursuant to which~~ the Company ~~and~~must ~~certain~~prepay ~~holders~~the ofLoans ~~the~~in ~~Company’s~~an ~~Series C~~aggregate ~~Preferred~~amount ~~agreed~~equal to ~~exchange~~the ~~their~~lesser ~~Series~~of C(a) ~~Preferred,~~the ~~with~~outstanding ~~a liquidation~~principal ~~preference~~balance ofoutstanding ~~approximately~~under ~~$10.0~~the ~~million,~~Credit ~~for~~Facility ~~Series~~(including ~~D Preferred~~any atinterest ~~closing;~~capitalized thereon), and (~~iii~~b) a100% ~~Term~~of ~~Loan~~the ~~and~~Net ~~Security~~Cash ~~Agreement~~ Proceeds (~~“Loan~~ as defined in the Agreement”), ~~pursuant~~received tothereunder; ~~which~~and ~~each~~(II) ~~investor~~a ~~signatory thereto~~Change ~~agreed~~of toControl ~~make~~(as adefined ~~term~~in ~~loan~~the toAgreement), the Company, ~~secured~~must byprepay ~~all assets of~~ the ~~Company,~~Loans in an aggregate amount equal to ~~20%~~the lesser of ~~such investor’s~~(y) ~~purchase~~the ~~commitment~~outstanding asprincipal ~~set~~balance ~~forth~~outstanding inunder the ~~Purchase Agreement~~Credit Facility (~~“Bridge Loan”),~~including ~~which~~any ~~Bridge~~interest ~~Loan~~capitalized thereon), ~~plus~~and ~~accrued~~(z) ~~interest, rolled~~105% ~~into,~~of ~~and~~the ~~was~~Net ~~used~~Cash toProceeds ~~purchase,~~received ~~Series~~in Dconnection ~~Preferred at Closing~~therewith.

~~Bridge~~ 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.

~~Concurrently~~The ~~with~~Agreement ~~the~~contains ~~execution~~customary events of ~~the~~default ~~Series~~(each ~~D Purchase~~an ~~Agreement~~“Event of Default”). If an Event of Default occurs, ~~the~~all ~~Company~~amounts due and ~~certain~~payable ~~investors~~under in the ~~Series D~~Credit ~~Financing~~Facility ~~executed~~shall ~~the~~incur ~~Loan~~interest ~~Agreement,~~at ~~pursuant~~the tocurrent ~~which~~rate ~~each such~~of ~~investor~~interest ~~signatory~~plus ~~thereto~~4%. ~~(the~~The ~~"Investors")~~Agreement ~~agreed~~further tocontains: ~~the~~(i) ~~Bridge~~customary ~~Loan~~representations, ~~secured~~warranties byand ~~all assets~~covenants of the Company, inincluding anamong ~~amount~~others, ~~equal~~covenants toby ~~20%~~the ofCompany ~~such Investor’s~~regarding ~~purchase~~title ~~commitment~~to asthe ~~set~~Company's ~~forth~~Assets, in the ~~Series~~Company's ~~D Purchase~~rights ~~Agreement,~~to ~~which~~its ~~Bridge~~intellectual ~~Loan~~property, ~~plus~~the ~~accrued~~Company's ~~interest~~use of the proceeds received thereunder, ~~rolled~~ ~~into~~tax liabilities, and ~~was~~status ~~used~~of tothe ~~purchase,~~Company's ~~Series~~material Dcontracts; ~~Preferred~~and ~~at Closing.~~(ii) ~~For~~customary ~~more~~indemnification ~~information~~provisions ~~regarding~~whereby the ~~Series~~Company Dwill ~~Purchase Agreement,~~indemnify the ~~Investors,~~Lenders ~~the~~for ~~Loan~~certain ~~Agreement,~~losses ~~and~~arising ~~the~~out ~~Bridge~~of ~~Loan~~inaccuracies in, ~~see~~ ~~Note~~or 1breaches of, ~~Description~~the ofrepresentations, ~~Business~~warranties and ~~Operations~~covenants to of the ~~consolidated~~Company, ~~financial~~and ~~statements~~certain other matters.

~~-37-~~2021 Lincoln Park Financing

On May 17, 2021 (the “Execution Date”), the Company entered into a purchase agreement, dated as of the Execution Date (the “2021 LPC Purchase Agreement”), and a registration rights agreement, dated as of the Execution Date (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15,100,000 of the Company's Common Stock.

Under the terms and subject to the conditions of the 2021 LPC Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15,100,000 worth of shares of Common Stock. Such sales of Common Stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company's sole discretion, over the 24-month period commencing on July 23, 2021, the date that the registration statement covering the resale of shares of Common Stock that have been and may be issued under the 2021 LPC Purchase Agreement, which was filed with the SEC pursuant to the Registration Rights Agreement, and was declared effective by the SEC and a final prospectus in connection therewith is filed and the other conditions set forth in the 2021 LPC Purchase Agreement are satisfied, all of which are outside the control of Lincoln Park (such date on which all of such conditions are satisfied, the “Commencement Date”).

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~~Pursuant to~~Under the ~~Bridge~~2021 ~~Loan~~LPC Purchase Agreement, ~~the~~on ~~Company~~any ~~received~~business ~~proceeds~~day over the term of $2the 2021 LPC Purchase Agreement,~~187~~ the Company has the right,~~000~~ in ~~September~~ ~~2020. The~~its ~~Bridge~~sole ~~Loan~~discretion, ~~bears~~to ~~interest~~present atLincoln Park with a ~~fixed rate~~purchase notice (each, a “Purchase Notice”) directing Lincoln Park to purchase up to 250,000 shares of ~~12%~~Common ~~and~~Stock isper ~~due~~business ~~and~~day ~~payable~~(“Regular Purchase”), which (i) increases to up to 300,000 shares in ~~arrears~~the onevent the ~~earlier~~price of the ~~Loan~~ ~~Conversion~~Company’s ~~Date,~~Common asStock ~~such~~is ~~term~~not isbelow ~~defined~~$0.10 inper ~~the~~share, ~~Loan Agreement~~(ii) increases to 350,000 orshares ~~six~~of ~~months~~Common ~~after~~Stock per Business Day in the ~~disbursement~~event the price of the ~~Bridge~~Company’s ~~Loan~~Common Stock is not below $0. ~~All~~25 ~~amounts~~per ~~due~~share, and ~~payable~~(iii) ~~pursuant~~increases to 500,000 shares in the ~~Bridge~~event ~~Loan~~the ~~are automatically~~price ~~convertible~~of the Company’s Common Stock is not below $0.50 per share (in each case, ~~without~~subject ~~further~~to ~~action~~adjustment byfor ~~the~~any ~~Investors~~reorganization, ~~into~~ ~~shares~~recapitalization, ofnon-cash ~~Series~~dividend, Dstock ~~Preferred~~split, atreverse ~~closing~~stock atsplit aor ~~purchase~~other ~~price~~similar ~~of $1,000~~transaction ~~for~~as provided in the 2021 LPC Purchase Agreement). In each ~~share~~case, ofLincoln ~~Series~~Park's Dmaximum ~~Preferred~~commitment in any single Regular Purchase may not exceed $500,000. The ~~repayment~~parties ofmay ~~all amounts~~mutually ~~due~~agree ~~under~~to increase the ~~terms~~number of ~~the~~shares ~~Loan~~to ~~Agreement~~be ~~are~~purchased ~~secured~~ by ~~all~~ ~~assets~~Lincoln ofPark ~~the~~pursuant ~~Company.~~to Onany ~~November~~Regular ~~12,~~Purchase ~~2020,~~up ~~contemporaneously with~~to ~~the~~2,000,000 ~~closing~~shares. ofThe ~~the~~2021 ~~Series~~LPC DPurchase ~~Preferred~~Agreement ~~Financing,~~provides ~~all~~for ~~amounts due~~a ~~under~~purchase ~~the~~price ~~Bridge~~per ~~Loan~~Purchase ~~were~~Share ~~converted~~(the ~~into~~“Purchase ~~shares~~Price”) ofequal ~~Series~~to ~~D Preferred~~the ~~Stock.~~lesser of:

~~Going~~● ~~Concern~~The ~~and~~lowest ~~Management’~~sale price of the Company's ~~Plan~~Common Stock on the purchase date; and

At● ~~December~~The ~~31,~~average ~~2020, we had negative working capital~~ of ~~approximately~~the ~~$19,349,000~~three aslowest ~~compared to~~closing ~~negative~~sale ~~working~~prices ~~capital~~for of approximately $1,653,000 at December 31, 2019. Included in our negative working capital as of December 31, 2020 are $24,128,000 of derivative liabilities which are not required to be settled in cash except in the ~~event~~Company's ofCommon ~~the~~Stock ~~consummation~~during ~~of a Change of Control or at any time after~~ the ~~fourth~~fifteen ~~anniversary~~consecutive ofbusiness ~~the~~days ~~Series~~ending Don ~~Preferred issuance, at which time~~ the ~~holders~~business ofday ~~the~~immediately ~~Series~~preceding ~~D Preferred may require~~ the ~~Company~~purchase todate ~~redeem in cash any or all~~ of ~~the holder’s~~such ~~outstanding Series D Preferred at an amount equal to the Series D Liquidation Preference Amount~~shares. ~~At December 31, 2020 the Liquidation Preference Amount totaled $22,863,000.~~

~~On March 11~~In addition, ~~2020~~on any date on which the Company submits a Purchase Notice to Lincoln Park, the ~~World~~Company ~~Health~~also ~~Organization~~has ~~declared~~ the ~~COVID-19 outbreak~~ aright, ~~pandemic. The COVID-19 pandemic~~in isits ~~affecting~~sole discretion, to present Lincoln Park with an accelerated purchase notice (each, an “Accelerated Purchase Notice”) directing Lincoln Park to purchase an amount of stock (the ~~United~~“Accelerated ~~States~~Purchase”) ~~and global~~equal ~~economies~~to ~~and~~up ~~may~~to ~~affect~~the lesser of (i) three times the ~~Company's~~number ~~operations~~of shares of Common Stock purchased pursuant to such Regular Purchase; and ~~those~~ (ii) 30% of ~~third~~the ~~parties~~aggregate onshares ~~which~~of the Company's ~~relies.~~Common ~~Additionally~~Stock traded during all or, asif ~~the duration~~certain oftrading volume or market price thresholds specified in the ~~COVID-19 pandemic~~ is2021 ~~difficult~~LPC toPurchase ~~assess or~~Agreement ~~predict~~are crossed on the applicable Accelerated Purchase Date, the ~~impact~~portion of the ~~COVID-19 pandemic~~ normal trading hours on the ~~financial~~ ~~markets~~applicable ~~may~~Accelerated ~~reduce~~Purchase ~~our~~Date ~~ability~~prior to ~~access~~such ~~capital,~~time ~~which could~~that ~~negatively~~any ~~impact~~one of such thresholds is crossed (such period of time on the ~~Company's~~applicable ~~short-term~~Accelerated ~~and~~Purchase ~~long-term liquidity.~~Date, ~~These~~the ~~effects~~“Accelerated ~~could~~Purchase ~~have~~Measurement aPeriod”), ~~material~~provided ~~impact~~that Lincoln Park will not be required to buy shares of Common Stock pursuant to an Accelerated Purchase Notice that was received by Lincoln Park on any business day on which the last closing trade price of the Company's ~~liquidity,~~Common ~~capital~~Stock ~~resources,~~on ~~operations~~the ~~and~~OTC ~~business~~Markets ~~and those~~(or ofalternative national exchange in accordance with the ~~third~~2021 LPC Purchase Agreement) is below $0.25 per share. The parties onmay ~~which~~mutually agree to increase the ~~Company relies~~number of shares to be purchased by Lincoln Park pursuant to any Accelerated Purchase. The purchase price per share of Common Stock for each such Accelerated Purchase will be equal to 95% of the lesser of:

~~To address~~● ~~our~~The ~~working~~volume ~~capital~~weighted ~~requirements,~~average ~~management~~price ~~has instituted several cost cutting measures and has utilized cash proceeds from borrowing under the PPP loan, sales~~ of ~~our Common Shares utilizing~~ the ~~Lincoln Park facility and closing of the Series D Financing to satisfy the~~ Company’'s ~~working~~Common ~~capital~~Stock ~~requirements.~~during ~~However, we believe our available cash balances will be insufficient to satisfy our cash requirement for~~ the ~~next~~applicable ~~twelve~~Accelerated ~~months~~Purchase ~~from~~Measurement ~~the date~~Period ofon ~~this filing. To address our working capital requirements, management intends to seek additional equity and/or debt financing through~~ the ~~issuance~~applicable ofAccelerated ~~additional debt and/or equity securities. Other than the Lincoln~~ Purchase ~~Agreement,~~Date; ~~there are currently no formal committed financing arrangements to support our projected cash shortfall, including commitments to purchase additional debt~~ and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional 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.

~~However, in~~● ~~view~~The ofclosing ~~the~~sale ~~matters~~price ~~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~~ toCommon ~~generate~~Stock ~~positive~~on ~~cash flows from operations. The Company, however, operates in markets that are emerging and highly competitive. There is no assurance that~~ the ~~Company~~applicable ~~will~~Accelerated bePurchase ~~able to obtain additional capital, operate at a profit or generate positive cash flows in the future~~Date. ~~Therefore, management’s plans do not alleviate the substantial doubt regarding the Company’s ability to continue as a going concern.~~

The ~~consolidated~~ ~~financial~~Company ~~statements~~may doalso ~~not~~direct ~~include~~Lincoln Park on any ~~adjustments relating~~business day on which an Accelerated Purchase has been completed and all of the shares to be purchased thereunder have been properly delivered to Lincoln Park in accordance with the ~~recoverability~~2021 ~~and~~LPC ~~classification~~Purchase Agreement, to purchase an amount of ~~recorded~~stock ~~asset amounts~~(the “Additional Accelerated Purchase”) equal to up to the lesser of (i) three times the number of shares purchased pursuant to such Regular Purchase; and ~~classifications~~(ii) 30% of ~~liabilities~~the ~~that~~aggregate ~~might~~number beof ~~necessary should~~shares of the Company's Common Stock traded during a certain portion of the normal trading hours on the applicable Additional Accelerated Purchase date as determined in accordance with the 2021 LPC Purchase Agreement (such period of time on the applicable Additional Accelerated Purchase date, the “Additional Accelerated Purchase Measurement Period”). The parties may mutually agree to increase the number of shares to be ~~unable~~purchased by Lincoln Park pursuant to ~~continue~~any asAdditional aAccelerated ~~going concern~~Purchase. Additional Accelerated Purchases will be equal to 95% of the lower of:

~~Operating~~● ~~Activities~~The volume weighted average price of the Company's Common Stock during the applicable Additional Accelerated Purchase Measurement Period on the applicable Additional Accelerated Purchase date; and

~~Net~~● ~~cash~~The ~~used~~closing insale ~~operating~~price activities was approximately $8,009,000 during the year ended December 31, 2020 as compared to $11,267,000 during the year ended December 31, 2019. During the year ended December 31, 2020, net cash used in operating activities consisted of net loss of $7,253,000 and an increase in working capital and other assets and liabilities of $438,000. Those amounts in addition to approximately $1,194,000 of non-cash income, including $2,252,000 in income from the ~~change~~Company's inCommon ~~fair~~Stock ~~value~~on ~~of derivative liabilities offset by $862,000 in stock-based compensation, $72,000 in depreciation and amortization and $124,000 from~~ the ~~application~~applicable ofAdditional ~~rent~~Accelerated ~~deposits.~~Purchase During the year ended December 31, 2020, we generated cash of $690,000 from decreases in current assets offset by $20,000 from increases in our operating leases right-of-use assets and used cash of $410,000 through decreases in current liabilities and deferred revenue offset by increases of $178,000 in pension liabilitydate.

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~~Net cash~~The ~~used~~aggregate innumber ~~operating~~of ~~activities~~shares ~~was~~that ~~$11,267,000 during~~ the ~~year ended~~Company ~~December~~can ~~31,~~sell ~~2019 as compared~~ to ~~$10,310,000~~Lincoln ~~during~~Park ~~the~~under ~~year ended December 31, 2018. During~~ the ~~year~~2021 ~~ended~~LPC ~~December 31,~~Purchase ~~2019,~~Agreement ~~net~~may ~~cash used~~ in ~~operating~~no ~~activities~~case ~~consisted~~exceed ofthat ~~net loss~~number ~~of $11~~which,~~581,000~~ ~~and~~together anwith ~~increase~~Lincoln inPark’s ~~working~~then ~~capital~~current ~~and~~holdings ~~other assets and liabilities~~ of ~~$287,000.~~Common ~~Those amounts were offset by approximately $723~~Stock,~~000~~ ofexceed ~~non-cash costs and $696,000 in non-cash income~~4.99% ~~Non-cash costs were $652,000 in stock-based compensation and $71,000 in depreciation and amortization. Non-cash income consisted~~ of ~~$696,000 in~~ the ~~change~~Common inStock ~~fair~~outstanding ~~value~~immediately ofprior ~~derivative liabilities.~~to ~~During~~ the ~~year~~delivery ~~ended December 31, 2019, we used cash~~ of ~~$209,000~~the ~~from~~Purchase increases in current assets offset by $168,000 from decreases in our operating leases right-of-use assets and generated cash of $357,000 through increases in current liabilities and deferred revenue offset by $32,000 used from decreases in contract costsNotice.

Lincoln Park has no right to require the Company to sell any shares of Common Stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. There are no upper limits on the price per share that Lincoln Park must pay for shares of Common Stock.

The Company has agreed with Lincoln Park that it will not enter into any “variable rate" transactions with any third party for a period defined in the 2021 LPC Purchase Agreement.

The Company issued to Lincoln Park 1,000,000 shares of Common Stock as commitment shares in consideration for entering into the 2021 LPC Purchase Agreement on the Execution Date.

The 2021 LPC Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the 2021 LPC Purchase Agreement at any time, at no cost or penalty, subject to the survival of certain provisions set forth in the 2021 LPC Purchase Agreement. During any “event of default" under the 2021 LPC Purchase Agreement, all of which are outside of Lincoln Park's control, Lincoln Park does not have the right to terminate the 2021 LPC Purchase Agreement; however, the Company may not initiate any regular or other purchase of shares by Lincoln Park, until such event of default is cured. In addition, in the event of bankruptcy proceedings by or against the Company, the 2021 LPC Purchase Agreement will automatically terminate.

Actual sales of shares of Common Stock to Lincoln Park under the 2021 LPC Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the Common Stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. Lincoln Park has no right to require any sales by the Company but is obligated to make purchases from the Company as it directs in accordance with the 2021 LPC Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company's shares.

In connection with the execution of the 2021 LPC Purchase Agreement, the Company has agreed to sell, and Lincoln Park has agreed to purchase, 1,000,000 shares of Common Stock for a purchase price of $100,000 (“Original Purchase”).

Due to the terms of the 2021 LPC Purchase Agreement as described above, management is not currently expecting the related proceeds from this agreement to be sufficient to sustain operations for an extended period of time.

Prior to entering into the 2021 LPC Purchase Agreement, the Company and Lincoln Park terminated the previous agreement between the Company and Lincoln Park entered into on June 11, 2020 (the “2020 LPC Purchase Agreement”).

The Series D Preferred Stock Financing

On November 12, 2020 and December 23, 2020, the Company consummated private placements of 12,060 shares of its Series D Convertible Preferred Stock, par value $0.01 per share resulting in gross proceeds to the Company of $12.06 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 Notes”), which Bridge Notes were converted into Series D Preferred at Closing (the “Conversion”). The issuance of the Series D Preferred was made pursuant to securities purchase agreements, dated September 28, 2020 (the “Purchase Agreement”), by and between the Company and certain accredited investors (the “Purchasers”), for the sale of the Series D Preferred at a purchase price of $1,000 per share of Series D Preferred. The holders of Series D Preferred may voluntarily convert their shares of Series D Preferred into shares of the Company’s 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 Certificate of Designations, Preferences, and Rights of Series D Convertible Preferred Stock (the “Series D Certificate”). 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.

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On the fourth anniversary of the Issuance Date (as defined in the Series D Certificate), or in the event of the consummation of a Change of Control (as defined in the Series D Certificate), 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.

In connection with the sale of the Series D Preferred, we granted certain registration rights to the Investors with respect to the Conversion Shares and Dividend Shares, pursuant to a Registration Rights Agreement by and among us and the Investors. The registration statement registering the Conversion Shares and Dividend Shares was declared effective by the SEC on February 12, 2021.

Operating Activities

Net cash used in operating activities was approximately $7,737,000 during the year ended December 31, 2021 as compared to $8,009,000 during the year ended December 31, 2020. During the year ended December 31, 2021, net cash used in operating activities consisted of net income of $9,282,000 and an increase in working capital and other assets and liabilities of $589,000. Those amounts in addition to approximately $17,608,000 of non-cash income, including $18,809,000 in income from the change in fair value of derivative liabilities and $1,581,000 in income from the extinguishment of debt offset by $1,528,000 in stock-based compensation, $56,000 in depreciation and amortization, $82,000 in non-cash expense from the disposal of fixed assets, $364,000 in non-cash expense from the write-off of deferred stock issuance costs, $311,000 in non-cash expense from the extinguishment of derivative liabilities, $333,000 from the recognition of an impairment loss of an operating lease right-of -use asset, $50,000 from the write-off of an abandoned patent and $58,000 from the issuance of common stock as compensation in lieu of cash. During the year ended December 31, 2021, we generated cash of $139,000 from decreases in current assets offset by $44,000 from increases in our operating leases right-of-use assets and generated cash of $531,000 through increases in current liabilities and deferred revenue offset by increases of $37,000 in pension liability.

Net cash used in operating activities was $8,009,000 during the year ended December 31, 2020 as compared to $11,267,000 during the year ended December 31, 2019. During the year ended December 31, 2020, net cash used in operating activities consisted of net loss of $7,253,000 and an increase in working capital and other assets and liabilities of $438,000. Those amounts in addition to approximately $1,194,000 of non-cash income, including $2,252,000 in income from the change in fair value of derivative liabilities offset by $862,000 in stock-based compensation, $72,000 in depreciation and amortization and $124,000 from the application of rent deposits.

Investing Activities

~~There~~Net ~~was no net~~ cash used orin ~~generated from~~ investing activities ~~for~~during the year ended December 31, 2021 was $53,000 as compared to $0 for the corresponding period in 2020. For the year ended December 31, ~~2019~~2021, we used cash of $3153,000 to fund capital expenditures of computer hardware.

Financing Activities

Cash generated from financing activities ~~was approximately $15,475,000~~ for the year ended December 31, ~~2020, which~~2021 ~~consisted~~was ~~of cash of~~ approximately $12572,~~060,~~000, ~~generated~~which ~~from the~~consisted ~~sale~~ of ~~12,060~~approximately ~~shares of Series D Preferred. Such amount includes~~ $2600,~~187,~~000 received by the Company in the form of a ~~Bridge~~draw-down ~~Loan~~from ~~which~~its ~~was~~Credit ~~converted~~Facility, ~~into shares~~net of ~~Series D Preferred before recognition of approximately $726,000 in cash~~ direct ~~stock~~financing ~~issuance~~ costs. ~~We also generated cash~~ of ~~approximately~~ $~~900~~77,000 ~~from the issuance of related party notes payable~~ and ~~generated cash of~~ $1100,~~571,~~000 from the ~~issuance~~sale of ~~the~~ ~~PPP Loan under the CARES Act. Also in the year ended December 31~~1, ~~2020, we generated cash of approximately $2,360,~~000 ~~from the sales of 15~~,~~700,~~000 shares of Common Stock ~~before~~for ~~recognition of approximately~~ $~~64,000 in direct stock issuance costs~~0.10 Weper ~~used~~share ~~cash of approximately $575,000 to repay certain related party notes payable~~ and used cash of approximately $51,000 for the payment of dividends on our Series B Preferred Stock.

Cash generated from financing activities ~~was approximately $6,635,000~~ for the year ended December 31, ~~2019~~2020 was approximately $15,475,000, which consisted of ~~cash~~ approximately $12,060,000 generated from the sale of ~~approximately~~12,060 shares of Series D Preferred. Such amount includes $~~166~~2,187,000 ~~from~~received by the ~~exercise~~Company in the form of ~~351~~a Bridge Loan which was converted into shares of Series D Preferred before recognition of approximately $726,~~334~~ 000 in cash direct stock ~~options~~issuance ~~resulting~~costs. inWe also generated cash of approximately $900,000 from the issuance of ~~351~~related party notes payable and generated cash of $1,~~334~~571,000 ~~shares~~from the issuance of ~~Common Stock~~the PPP Loan under the CARES Act. Also in the year ended December 31, ~~and~~2020, ~~cash~~we generated cash of approximately $62,~~520~~360,000 from the ~~sale~~sales of 515,~~954~~700,~~545~~ 000 shares of Common Stock before recognition of approximately $64,000 ~~offset~~in bydirect stock issuance costs. We used cash of approximately $575,000 to repay certain related party notes payable and used cash of approximately $51,000 for the payment of dividends on our Series B Preferred ~~Stock~~.

-35- ~~Real Property 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 and this new lease commenced on March 1, 2021 and is on a month-to-month basis. In addition to our corporate headquarters, we also occupied the following spaces at December 31, 2020:

●

1,508 square feet in Ottawa, Province of Ontario, Canada, at a cost of approximately $3,000 per month until the expiration of the lease on March 31, 2021. The Company extended this lease for a 30-day period and is currently evaluating alternative premises which the Company believes are readily available;

●

9,720 square feet in Portland, Oregon, at a cost of approximately $23,000 per month until the expiration of the lease on February 28, 2023; and

●

183 square feet of office space in Mexico City, Mexico, at a cost of approximately $2,000 per month until September 30, 2021.

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 $30,000 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 commences on April 1, 2021 and expires on April 20, 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.

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Real Property 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.

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.

Stock-Based Compensation

Stock-based compensation related to equity options and restricted stock has been classified as follows in the accompanying consolidated statements of operations (in thousands):

	~~Year Ended December 31,~~	Year Ended December 31,
	2020	2019
		2021		2020
Cost of revenue	~~$15~~	$13	29	$	15
General and administrative	~~550~~	~~347~~	842		550
Sales and marketing	~~163~~	~~148~~	336		163
Research and development	~~134~~	~~135~~	321		134
Total	~~$862~~	$~~643~~	1,528	$	862

Off-Balance Sheet Arrangements

At December 31, ~~2020~~2021, 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 Annual Report.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, the Company’s management believes the impact of recently issued standards not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. See Note 2 to these consolidated financial statements for a detailed discussion of recently issued accounting pronouncements.

Impact of Inflation

The primary inflationary factor affecting our operations is labor costs, and we do not believe that inflation has materially affected earnings during the past four years. Substantial increases in costs and expense, particularly labor and operating expense, could have a significant impact on our operating results to the extent that such increases cannot be passed along to customers and end users.

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ITEM 7A.

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.

We had approximately $23111,000 and $~~104~~23,000 in revenue from sources outside the United States for the years ended December 31, ~~2020~~2021 and ~~2019~~ 2020, respectively. We made payments in foreign currencies to fund our foreign operations of approximately $1894,~~015,~~000 and $~~983~~1,015,000 for the years ended December 31, ~~2020~~2021 and ~~2019~~2020, respectively. 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 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements as of and for the years ended December 31, ~~2020~~2021 and ~~2019~~2020 and the report of our independent registered public accounting firm are included in Item 15 of this Annual Report.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

~~Under~~Our ~~the~~management, ~~supervision~~Chief Executive Officer and ~~with~~Principal ~~the~~Financial ~~participation of~~and ~~our~~Accounting ~~Management~~Officer, ~~including~~evaluated ~~our~~the ~~principal~~effectiveness ~~executive~~of ~~officer~~our ~~and principal~~disclosure ~~financial~~controls ~~officer,~~and weprocedures ~~conducted~~as ~~an evaluation~~ of ~~the effectiveness~~December of31, ~~the~~2021. ~~design~~The ~~and~~term ~~operations of our~~ "disclosure controls and procedures," as defined in Rules 13a-~~15I~~15(e) and 15d-15(e) under the ~~Securities~~ Exchange Act ~~of 1934~~, asmeans ~~amended~~controls ~~(the “Exchange Act”), as of December 31, 2020. Based on this evaluation, the Company’s Chief Executive Officer~~ and ~~Chief~~other ~~Financial~~procedures ~~Officer~~of ~~concluded~~a company that ~~our~~are ~~disclosure controls~~designed ~~and procedures were effective~~ to ensure that information required to be disclosed by us in the reports ~~submitted~~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. ~~In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control—Integrated Framework.~~

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 was not effective at the reasonable assurance level as of December 31, 2021. This conclusion was based on the material weaknesses in our internal control over financial reporting as further described below.

Material Weaknesses

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.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis.

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.

●

Establishing additional review procedures through the adding of additional personnel to achieve segregation of duties and performance of review procedures over the preparation and review of journal entries, account reconciliations and consolidation.

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

(b) Management’s Annual Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our Chief Executive Officer and ~~Chief~~Principal Financial and Accounting Officer evaluated the effectiveness of our internal control over financial reporting as of December 31, ~~2020~~2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control—Integrated Framework. Based on this evaluation, our Chief Executive Officer and ~~Chief~~Principal Financial and Accounting Officer concluded that, as of December 31, ~~2020~~2021 our internal control over financial reporting was not effective.

(c) Changes in Internal Controls over Financial Reporting.

The Company’s Chief Executive Officer and ~~Chief~~Principal Financial and Accounting Officer have determined that there have been no changes in the Company’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Not applicable.

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PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following sets forth certain information regarding each of our directors and executive officers.

Name	Age	Title/Position Held with the Company
Kristin Taylor	5354	President, Chief Executive Officer, Director
Jay B. Lewis	62	Senior Vice President, Chief Financial Officer
James M. Demitrieus	73	Director
James M. Demitrieus	72	Director
Douglas Morgan	69	Director
Douglas Morgan	68	Director
Lauren C. Anderson	64	Director
Lauren C. Anderson	63	Director

There are no familial relationships between any of the Company’s executive officers and directors listed above.

The following biographical information regarding the foregoing directors and officers of the Company following the Board Restructuring is presented below:

Kristin Taylor, President, Chief Executive Officer and Director. Ms. Taylor serves as our President and Chief Executive Officer since her appointment in March 2020 and as a member of our Board since May 2020, and is a seasoned innovative technology executive with over 20 years of experience in leading organizational modernization and developing go-to-market strategies. She formerly served as Principal of Veritas Lux since November 2019 and principal of Kristin Taylor Consulting since 2012, in which she developed a proprietary algorithmic methodology to weigh and rank the most influential global technical analysts. From 2017 to 2019, Ms. Taylor served as Global Vice President of Worldwide Analyst Relations at IBM and led the efforts to modernize and transform IBM's analyst relations organization to drive revenue, not just influence. From 2013 to 2017, she served as Vice President, Global Analyst and Public Relations at MediaTek, the third largest fabless semiconductor company in the world with a $30 billion market cap, where she led the buildout of a new global Public and Analyst Relations organization to penetrate the North American, European, Latin American, Russian and Indian markets. Prior to that, she served in various positions of increasing responsibility with Qualcomm from 1998 to 2010 including: Head of Industry Analyst Relations, Senior Director of Business Development, and Director of Information Technology. Ms. Taylor developed and commercialized a highly successful embedded computing module, designed for notebook computers which thrust Qualcomm into the computing sector in 2006 to create hundreds of millions of valuation as they expanded from mobile. Ms. Taylor earned her Bachelor's degree in Sociology and Business Management from the University of New Hampshire in Durham, New Hampshire.

Jay B. Lewis, Senior Vice President and Chief Financial Officer. Mr. Lewis serves as our Senior Vice President and Chief Financial Officer since his appointment on January 8, 2021. On March 23, 2021, Mr. Lewis resigned from his position as Senior Vice President and Chief Financial Officer, effective April 7, 2021. Mr. Lewis has over 20 years of experience as a senior financial officer of high growth public companies, and has raised over $300 million of capital including public and private equity, high-yield and other debt and executed over $400 million of M&A transactions. Mr. Lewis previously served as the Chief Financial Officer of ID Watchdog, Inc. from 2011 until 2017. ID Watchdog provided subscription-based identity theft protection and resolution services to individuals throughout the United States. Prior to the August 2017 sale to Equifax, Inc. it was a public company traded on the TSX Venture Exchange. As Chief Financial Officer he managed all finance, accounting, public company reporting, investor relations, tax matters and human resources as well as other administrative functions. Prior to ID Watchdog, Lewis served in various senior finance roles, including as Chief Financial Officer of Jones Media Networks, Ltd., which owned cable television networks and the fourth largest network radio company in the United States, and as Vice President of Finance and Treasurer of Jones International, Ltd., a holding company with controlling interests in cable television and other media and technology companies. Mr. Lewis is a Certified Public Accountant, an alumnus of EY, a Big-4 public accounting firm, and holds a Bachelor's degree in accounting from the University of Wyoming.

James M. Demitrieus. Mr. Demitrieus was appointed as a member of the Board of Directors on November 13, 2020. From March 2018 to present, Mr. Demitrieus has served as Managing Director of Jameson Associates, a specialty investment management and financial advisory firm. Prior to Jameson, he served in multiple positions at Eyelock Corporation beginning in 2009, including Chief Executive Officer from 2010 to 2018. Eyelock Corporation provides iris based biometric solutions to various business verticals. Prior to Eyelock Corporation, he served in various senior executive roles, including as President of Sherwood Valve, a division of Harsco Corporation, and as Chief Executive Officer at Aluma Systems. Earlier in Mr. Demitrieus’ career, he served in numerous senior accounting and finance roles, including with the public accounting firm of Arthur Andersen & Co. Mr. Demitrieus holds a Bachelor's in Business Administration from Adelphi University in New York.

Mr. Demitrieus was selected as a member of the Board due to his experience in the field of biometrics, as well as his extensive management, finance and accounting experience, that management believes will provide the Board with valuable insights regarding monetizing the Company’s product offerings and intellectual property.

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Douglas Morgan. Mr. Morgan was appointed as a member of the Board of Directors on November 24, 2020. From March 2019 to present, Mr. Morgan has served as an Advisory Board member and Consultant to Clyra Medical Technologies, a biotechnology company specializing in wound healing and antimicrobial solutions, and prior to that as a Consultant to the public parent company, BioLargo (symbol: BLGO) on business strategy and a capital raise. He is CEO of Performance Strategies, Inc., a business and technology consulting firm where he has worked with companies across numerous sectors including security, payments and biotech, assisting them with financing strategies, market positioning, technology development and IP strategy. Earlier in his career, he helped found Hirsch Electronics, a security systems company known for its patented ScamblePad product. He served as Hirsch’s VP Engineering managing the development of their entire line of security systems and controllers, and later as a Director helped negotiate Hirsch’s merger with publicly traded Identiv (symbol: INVE) where he again served on the Board of Directors. He graduated Summa Cum Laude from both MIT with a BS in Computer Science, and Stanford University with an MS in Electrical Engineering, and was also a National Science Foundation Fellow.

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Mr. Morgan was selected as a member of the Board due to his past experience in the Security industry, his background in intellectual property development and strategies, and his work and broad experience in business strategy, product definition and market positioning for technology-based companies.

Lauren C. Anderson. Ms. Anderson joined the Company’s Board in February 2021. She is the founder and Chief Executive Officer of LC Anderson International Consulting, founded in 2013. Ms. Anderson, a former Federal Bureau of Investigation ("“FBI"”) Senior Executive, has a background in high risk, complex, domestic, and international environments and currently serves as an advisor to the U.S. Comptroller General at the Government Accountability Office on international security, intelligence, criminal justice, law enforcement, and women’s leadership. Ms. Anderson also serves as an advisor and special skilled role player for the U.S. Army, and she is an advisor with Stellar Solutions. Ms. Anderson worked in various leadership roles for the FBI from February 1984 until December 2012, and was the FBI Legal Attaché at United States Embassies in France and Morocco from March 2002 through November 2006. Ms. Anderson holds numerous professional awards and certifications, including achievement awards from the Director of National Intelligence, Legal Momentum, LIM College and Muhlenberg College. She is a member of the Council on Foreign Relations, a director emeritus for the Women's Forum of NY, served as a judge for the Women's Safety XPrize and the Stevie Awards, and is a mentor with the Women's Foreign Policy Group and Girl Security. She holds a security clearance and numerous certifications with the United States government. Ms. Anderson has an Honorary Doctorate of Humane Letters, awarded in 2019, by LIM College, New York City, a Bachelor of Arts in Psychology from Muhlenberg College, in Allentown, Pennsylvania, and completed executive programs at each of Harvard Business School, Northwestern University's Kellogg School of Management, Cambridge Judge Business School, and the George C. Marshall European Center for Security Studies in Garmisch, Germany.

Ms. Anderson was selected as a member of the Board due to her extensive experience as a security expert at the highest level within the Federal government, and her relationships with law enforcement and government agencies, each key markets for the Company.

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or nominee set forth above during the past ten years.

Board of Directors; Attendance at Meetings

The Board held ~~four~~19 meetings and acted by unanimous written consent ~~five~~ 6 times during the year ended December 31, ~~2020~~2021. Each director attended at least 75% of Board meetings during the year ended December 31, ~~2020~~2021. We have no formal policy with respect to the attendance of Board members at annual meetings of shareholders, but encourage all incumbent directors and director nominees to attend each annual meeting of shareholders.

Director Independence

Our Board has determined that all of its current members, other than Ms. Taylor, are “independent” within the meaning of the Nasdaq Stock Market Rules and SEC rules regarding independence.

Board Committees and Charters

Our Board has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each of which has the composition and responsibilities described below.

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Audit Committee

The Audit Committee provides assistance to the Board in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The Audit Committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy it that the accountants are independent of management. The Audit Committee currently consists of Messrs. Demitrieus (Committee Chair), and Morgan, each of whom is a non-management member of our Board. Mr. Demitrieus is also our Audit Committee financial expert, as currently defined under current SEC rules. The Audit Committee met four times during the year ended December 31, ~~2020~~2021. We believe that the composition of our Audit Committee meets the criteria for independence under, and the functioning of our Audit Committee complies with the applicable Nasdaq Stock Market Rules and SEC rules and regulations.

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Compensation Committee

The Compensation Committee determines our general compensation policies and the compensation provided to our directors and officers. The Compensation Committee also reviews and determines bonuses for our officers and other employees. In addition, the Compensation Committee reviews and determines equity-based compensation for our directors, officers, employees and consultants and administers our stock option plans. The Compensation Committee currently consists of Messrs. Morgan (Committee Chair) and Demitrieus, each of whom is a non-management member of our Board. The Compensation Committee did not meet during the year ended December 31, ~~2020~~2021. All members of the Compensation Committee currently meet the criteria for independence under the applicable Nasdaq Stock Market Rules and SEC rules and regulations.

Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee is responsible for making recommendations to the Board regarding candidates for directorships and the size and composition of the Board. In addition, the Nominating and Corporate Governance Committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the Board concerning corporate governance matters. The Nominating and Corporate Governance Committee currently consists of all the members of the Board. The Nominating and Corporate Governance Committee did not meet during the year ended December 31, ~~2020~~2021.

Board Leadership Structure

Our Board has discretion to determine whether to separate or combine the roles of Chief Executive Officer and Chair of the Board. Prior to the appointment of Kristin Taylor as President and Chief Executive Officer on March 2, 2020, and during the year ended December 31, ~~2019~~2020, S. James Miller held the roles of both Chief Executive Officer and Chair of the Board since 1996, and our Board believed that at the time, his combined role was advantageous to the Company and its shareholders. Currently, Ms. Taylor serves as both Chief Executive Officer and Chair of the Board as the Board believes, at this time, her combined role is advantageous to the Company and its shareholders.

The Board maintains effective independent oversight through a number of governance practices, including open and direct communication with management, input on meeting agendas, and regular executive sessions.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and other equity securities. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, ~~2019~~2021, all Section 16(a) filing requirements were complied with in a timely manner. other than the below:

~~-44-~~● Kristin Taylor, Chief Executive Officer and Chair of the Board of the Company, filed a Form 4 reporting one late transaction;

●

Douglas Morgan, a director of the Company, filed a Form 4 reporting one late transaction;

●

James Demitrieus, a director of the Company, filed a Form 4 reporting one late transaction; and

●

Lauren C. Anderson, a director of the Company, filed a Form 4 reporting one late transaction.

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Board Role in Risk Assessment

Management, in consultation with outside professionals, as applicable, identifies risks associated with the Company’s operations, strategies and financial statements. Risk assessment is also performed through periodic reports received by the Audit Committee from management, counsel and the Company’s independent registered public accountants relating to risk assessment and management. Audit Committee members meet privately in executive sessions with representatives of the Company’s independent registered public accountants. The Board also provides risk oversight through its periodic reviews of the financial and operational performance of the Company.

Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics policy that applies to our directors and employees (including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions). The Company intends to promptly disclose (i) the nature of any amendment to this code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of this code of ethics that is granted to one of these specified individuals, the name of such person who is granted the waiver and the date of the waiver on our website in the future. A copy of our Code of Business Conduct and Ethics can be obtained from our website at http://www.~~iwsinc~~imageware.~~com~~io.

Indemnification of Officers and Directors

To the extent permitted by Delaware law, the Company will indemnify its directors and officers against expenses and liabilities they incur to defend, settle, or satisfy any civil or criminal action brought against them on account of their being or having been Company directors or officers unless, in any such action, they are adjudged to have acted with gross negligence or willful misconduct.

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ITEM 11.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth certain information about the compensation paid or accrued during the years ended December 31, ~~2020~~2021 and ~~2019~~2020 to our Chief Executive Officer and each of our two most highly compensated executive officers other than our Chief Executive Officer who were serving as executive officers at December 31, ~~2020~~2021, and whose annual compensation exceeded $100,000 during such year or would have exceeded $100,000 during such year if the executive officer were employed by the Company for the entire fiscal year (collectively the “Named Executive Officers”).

Name and Principal Position (1)	Year	Salary			Bonus			Stock Awards				Option Awards(2)(3)				All Other Compensation				Total
Name and Principal Position	Year	Salary					Bonus		Stock Awards (1)					Option Awards(2)(3)				All Other Compensation					Total
Kristin Taylor (4)	~~2020~~2021	$	~~275~~348,~~000~~333		$	-$	-	$	-$	1,080,000	(1)	$	-	$	-	$	~~11,561~~	~~(8)~~$	21,773	$(5)	~~286,561~~	$	1,450,106
Chief Executive Officer and Chair of the Board	~~2019~~2020	$	-275,000		$	-$	-	$	-$	-			-	$	-	$	-	$	11,561	$(5)	-	$	286,561
Sudheer Koganti	2020	$	131,629		$	12,500		$	-			$				$	-			$	144,129
Daniel Dlab	2021	$	216,608			$	-		$	280,000	(1)			$	-			$	991	(6)		$	497,599
Vice President of Engineering	~~2019~~2020	$	-		$	-$	-	$	-$	-		$	-	$	-	$	-	$	-	$	-	$	-
Chris Dickson	2020	$	113,352		$	10,359		$	-			$				$	40,680	(9)		$	164,391
AJ Naddell	2021	$	235,417	(8)		$	-		$	400,000	(1)			$	-			$	8,838	(7)		$	644,255
Vice President of Sales	2019	$	-		$	-		$	-			$	-			$	-			$	-
Senior Vice President, Product Management and Sales	2020	$	-			$	-		$	-				$	-			$	-			$	-
S. James Miller, Jr. (5)	2020	$	227,359		$	-		$	-			$	47,250			$	72,665	(10)		$	347,274
Former Chair of the Board and Former Chief Executive Officer	2019	$	400,856		$	-		$	-			$	-			$	16,799			$	417,655
Jonathan Morris (6)	2020	$	168,000		$	-		$	-			$	-			$	-			$	168,000
Former Senior Vice President and Chief Financial Officer	2019	$	-		$	-		$	-			$	-			$	-			$	-
David Harding (7)	2020	$	152,778		$	-		$	-			$	-			$	26,086	(11)		$	178,864
Former Vice President and Chief Technical Officer	2019	$	275,000		$	-		$	-			$	-			$	-			$	275,000

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(1)	This amount does not reflect the cash value or realizable value of Restricted Stock Units (“RSUs”) grants to the named executive officer during the year ended December 31, 2021 or 2020. During the year ended December 31, 2021 and 2020, no RSUs vested for the benefit of this named executive officer and therefore no value was realized during the reporting period. The amounts reflect the grant date fair value of the RSUs awarded in the fiscal years ended December 31, 2021 and 2020. There were not RSUs granted to the named executive in 2020.

(2)	All option awards were granted under the Company’s 2020 Plan or the 1999 Plan.

(3)	The amounts presented in this column do not reflect the cash value or realizable value of option grants to the named executive officers during the year ended December 31, 2021 or 2020. During the year ended December 31, 2021 and 2020, no named executive officer exercised an option and therefore no value was realized during the reporting period. The amounts reflect the grant date fair value of the options awarded in the fiscal years ended December 31, 2021 and 2020, respectively, in accordance with the provisions of FASB ASC Topic 718. We have elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. We are required to make various assumptions in the application of the Black-Scholes option-pricing model and have determined that the best measure of expected volatility is based on the historical weekly volatility of our Common Stock. Historical volatility factors utilized in our Black-Scholes computations for options granted during the years ended December 31, 2021 and 2020 ranged from 57% to 99%. We have elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14. The expected term used by the Company during the years ended December 31, 2021 and 2020 ranged from 3.33 years to 5.17 years. The interest rate used is the risk-free interest rate and is based upon U.S. Treasury rates appropriate for the expected term. Interest rates used in the Company’s Black-Scholes calculations for the years ended December 31, 2021 and 2020 ranged from 1.37% to 2.58%. Dividend yield is zero, as we do not expect to declare any dividends on shares of our Common Stock in the foreseeable future. In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. We have estimated an annualized forfeiture rate ranging from 5% to 10% for corporate officers, 4.1% to 10% for members of the Board and 15.0% to 25% for all other employees. We review the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.

(4)	Ms. Taylor was appointed as the Company’s President and Chief Executive Officer on March 2, 2020, and received no compensation prior to her employment.

(5)	Includes $19,961 and $11,561 paid to Ms. Taylor during fiscal years 2021 and 2020, respectively, in group benefits paid to all employees of the Company and $1,812 in 401(k) contributions.
(6)	Includes $991 paid to Mr. Dlab in group benefits paid to all employees of the Company.
(7)	Includes $7,400 paid to Mr. Naddell during fiscal 2021 in group benefits paid to all employees of the Company and $1,438 in 401(k) contributions.
(8)	Includes $14,659 in deferred salary owed to Mr. Naddell as of December 31, 2021.

(1)	Jay B. Lewis was appointed as Senior Vice President and Chief Financial Officer of the Company on January 8, 2021, after the fiscal year end date of December 31, 2020, and therefore has been excluded from the Summary Compensation Table above. On March 23, 2021, Mr. Lewis resigned from his position as Senior Vice President and Chief Financial Officer, effective April 7, 2021.
(2)	All option awards were granted under the Company’s 2020 Plan or the 1999 Plan.
(3)	The amounts presented in this column do not reflect the cash value or realizable value of option grants to the named executive officers during the year ended December 31, 2020 or 2019. During the year ended December 31, 2020 and 2019, no named executive officer exercised an option and therefore no value was realized during the reporting period. The amounts reflect the grant date fair value of the options awarded in the fiscal years ended December 31, 2020 and 2019, respectively, in accordance with the provisions of FASB ASC Topic 718. We have elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. We are required to make various assumptions in the application of the Black-Scholes option-pricing model and have determined that the best measure of expected volatility is based on the historical weekly volatility of our Common Stock. Historical volatility factors utilized in our Black-Scholes computations for options granted during the years ended December 31, 2020 and 2019 ranged from 57% to 83%. We have elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14. The expected term used by the Company during the years ended December 31, 2020 and 2019 was 5.17 years. The difference between the actual historical expected life and the simplified method was immaterial. The interest rate used is the risk-free interest rate and is based upon U.S. Treasury rates appropriate for the expected term. Interest rates used in the Company’s Black-Scholes calculations for the years ended December 31, 2020 and 2019 was 2.58%. Dividend yield is zero, as we do not expect to declare any dividends on shares of our Common Stock in the foreseeable future. In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. We have estimated an annualized forfeiture rate of 5.0% for corporate officers, 4.1% for members of the Board and 15.0% for all other employees. We review the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.
(4)	Ms. Taylor was appointed as the Company’s President and Chief Executive Officer on March 2, 2020, and received no compensation prior to her employment. Under the terms of Kristin Taylor’s Employment Agreement, dated March 2, 2020, Ms. Taylor is entitled to an option to purchase 1,750,000 shares of Common Stock, which option has not been granted as of the date of this Annual Report, pending the negotiation of a new grant since the consummation of the offering of Series D Preferred in November 2020.
(5)	Effective November 12, 2020, Mr. Miller, Former Chief Executive Officer of the Company, resigned from his position as a member of the Board of Directors of the Company. Although Mr. Miller currently provides consulting services to the Company under the terms of an Amended and Restated Consulting Agreement (“Consulting Agreement”), such Consulting Agreement terminates on April 12, 2021.
(6)	Mr. Morris was appointed as the Company’s Senior Vice President and Chief Financial Officer on May 1, 2020, and received no compensation prior to his employment. Effective December 31, 2020, Mr. Morris’s employment as an officer and employee of the Company was terminated by mutual agreement between Mr. Morris and the Company.
(7)	Effective July 21, 2020, Mr. Harding resigned from his position with the Company.
(8)	Includes group benefits paid to all employees of the Company.
(9)	Includes $31,126 paid to Mr. Dickson in commissions earned during the fiscal year, and $9,554 in group benefits paid to all employees of the Company.
(10)	Includes $39,315 in accrued paid time off paid to Mr. Miller upon his resignation, and $33,350 in group benefits paid to all employees of the Company.
(11)	Includes $17,029 in accrued paid time off paid to Mr. Harding upon his resignation, and $9,057 in group benefits paid to all employees of the Company.

-42-

-47-

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information regarding unexercised options, stock that has not vested and equity incentive awards held by each of the then Named Executive Officers outstanding as of December 31, 2020:

	Option Awards					Stock Awards
	Number of Securities Underlying Unexercised Options: Exercisable (#)	Number of Securities Underlying Unexercised Options: Unexercisable (#)	Option Exercise Price ($)	Option Expiration Date	Number of Shares That Have Not Vested (#)	Market Value of Shares That Have Not Vested ($)
Named Executive Officers (1)
Sudheer Koganti	-	100,000	0.13	7/29/2030	100,000	$-
Chris Dickson	-	100,000	0.13	7/29/2030	100,000	$-
Former Named Executive Officers
David Harding	-	-	$N/A	N/A	-	$-
S. James Miller, Jr.	-	-	$N/A	N/A	-	$-

(1)

Jay B. Lewis was appointed as Senior Vice President and Chief Financial Officer of the Company on January 8, 2021, after the fiscal year end date of December 31, 2020, and therefore has been excluded from the Outstanding Equity Awards at Fiscal Year-End Table above. On March 23, 2021, Mr. Lewis resigned from his position as Senior Vice President and Chief Financial Officer, effective April 7, 2021.

Under the terms of Kristin Taylor’s Employment Agreement, dated March 2, 2020, Ms. Taylor is entitled to an option to purchase 1,750,000 shares of Common Stock, which option has not been granted as of the date of this Annual Report, pending the negotiation of a new grant since the consummation of the offering of Series D Preferred in November 2020.

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Table of Contents

Outstanding Equity Awards at Fiscal Year-End

	Option Awards									Stock Awards
	Number of Securities Underlying Unexercised Options: Exercisable (#)		Number of Securities Underlying Unexercised Options: Unexercisable (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares That Have Not Vested (#)		Market Value of Shares That Have Not Vested ($)
Named Executive Officers (1)

Kristin Taylor		-		-		N/A		N/A		27,000,000	$	1,080,000

Dan Dlab		-		-		N/A		N/A		7,000,000	$	280,000

AJ Naddell		-		-		N/A		N/A		10,000,000	$	400,000

Employment Agreements

Kristin Taylor. On March 2, 2020, we entered into an employment agreement with Ms. Kristin Taylor, the Company’s President and Chief Executive Officer, which agreement was amended March 2, 2021. ~~This~~The agreement ~~provides~~initially provided for an annual base salary of $330,000 for a period of 24 months effective April 10, 2020., ~~Ms. Taylor’s~~which ~~annual base salary~~ was increased to $350,000 effective February 1, 2021 for a period of 48 months from the initial employment agreement date of March 2, 2020. Ms. Taylor’s employment agreement also provides for (i) the grant of a stock option to purchase 127.75 0 million shares of the Company's Common Stock, which stock option ~~has~~ ~~not~~shall ~~been~~vest ~~issued~~(a) as10% ofimmediately on the date of ~~this~~the ~~Annual~~grant; ~~Report.~~and ~~Upon issuance,~~(b) the ~~stock~~remainder ~~option~~over ~~shall~~the ~~vest~~following in three ~~equal~~years ~~annual installments~~ beginning ~~one~~March ~~year~~1, ~~from the date of the employment agreement~~2021; and (ii) an annual bonus equal to 100% of Ms. Taylor's annual salary ~~upon~~which ~~meeting~~bonus ~~the~~and ~~following~~its ~~performance~~amount ~~objectives: (a)~~shall ~~the~~be ~~Company~~solely ~~establishing~~at ~~a major partnership that generates $1.5 million in revenue during~~ the ~~calendar~~discretion ~~year 2020; (b) the Company achieving positive cash flow by the year ended December 31, 2020; (c) the Company's operating loss being reduced by a minimum~~ of ~~50% by~~ the ~~year ended December 31, 2020; and (d) total sales exceeding $10~~Board.0 million in 2020, with each objective equal to 25% of the total bonus objective. If all performance objectives are met, Ms. Taylor will be granted an additional stock option to purchase 500,000 shares of Common Stock. In the event of termination of her employment other than by reason of death or disability, or for cause, the employment agreement is also anticipated to provide Ms. Taylor with certain severance payments, including continuation of her salary for the greater of one year or the remaining term under her employment agreement.

~~Jay Lewis.~~For ~~Mr.~~purposes ~~Lewis~~of ~~joined~~the above-referenced agreement, termination for “cause” means the ~~Company~~ asexecutive’s ~~its~~commission ~~Senior~~of ~~Vice~~a ~~President~~criminal ~~and~~act ~~Chief~~or ~~Financial~~an ~~Officer~~act ~~on January~~of 7fraud, ~~2021.~~embezzlement, ~~The~~breach of trust or other act of gross misconduct; violations of policies or rules of the Company; ~~and~~refusal ~~Mr.~~to ~~Lewis~~follow ~~are~~the ~~parties~~direction given by the Company from time to atime ~~letter agreement~~or breach of any covenant or obligation under the above-referenced agreements or other agreements with the Company; neglect of duty; misappropriation, ~~pursuant~~concealment, toor conversion of any money or property of the Company; intentional damage or destruction of property of the Company; reckless conduct which ~~Mr.~~endangers ~~Lewis~~the ~~will~~safety beof ~~paid~~other anpersons ~~annual~~or ~~base salary~~property during the course of ~~$240,000~~employment or while on premises leased or owned by the Company; or a breach of any obligation or requirement set forth in the above-referenced agreements. A In“change ~~addition~~in tocontrol” ~~other~~as ~~benefits~~used ~~provided~~in tothese agreements generally means the occurrence of any of the following events: (i) the acquisition by any person or group of 50% or more of the Company’s ~~executives~~outstanding voting stock; (ii) the consummation of a merger, heconsolidation, ~~will~~reorganization, beor ~~issued~~similar antransaction ~~option~~other tothan ~~purchase that~~a ~~number~~transaction: (1) in which substantially all of ~~shares~~the holders of the Company’s ~~Common~~voting ~~Stock~~stock ~~equal~~hold or receive directly or indirectly 50% or more of the voting stock of the resulting entity or a parent company thereof, in substantially the same proportions as their ownership of the Company immediately prior to ~~not~~ ~~less~~the ~~than~~transaction, or (2%) in which the holders of the Company’s capital stock immediately before such transaction will, immediately after such transaction, hold as a group on a fully diluted ~~shares~~basis the ability to elect at least a majority of ~~Common~~ ~~Stock,~~the ~~determined~~directors inof the ~~discretion~~surviving corporation (or a parent company); (iii) there is consummated a sale, lease, exclusive license, or other disposition of all or substantially all of the ~~Board~~consolidated assets of ~~Directors~~ the Company and the Company’s subsidiaries, atother than a sale, lease, license, or other disposition of all or substantially all of the consolidated assets of the Company and the Company’s subsidiaries to an ~~exercise~~entity, ~~price~~50% ~~based~~or onmore of the ~~fair~~combined ~~market~~voting ~~value~~power of the voting securities of which are owned by the Company’s ~~Common~~shareholders ~~Stock~~in substantially the same proportions as their ownership of the Company immediately prior to such sale, lease, license, or other disposition; or (iv) individuals who, on the date ofthe ~~grant.~~applicable ~~The~~agreement ~~option shall~~was ~~vest~~adopted ~~ratably~~by ~~over~~the Board, are directors (the “Incumbent Board”) cease for any reason to constitute at least a ~~three-year~~majority ~~period~~of ~~from~~the directors; provided, however, that if the ~~date~~appointment or election (or nomination for election) of ~~grant. As~~any new director was approved or recommended by a majority vote of the ~~date~~members of ~~this~~the ~~Annual~~Incumbent ~~Report~~Board then still in office, such new member shall, for purposes of the ~~Company~~applicable ~~has~~agreement, ~~not~~be ~~issued~~ considered as a member of the ~~option~~Incumbent Board.

OnOther ~~March~~than ~~23,~~as ~~2021~~set forth above, ~~Mr.~~ ~~Lewis~~there ~~resigned~~were ~~from~~no ~~his~~arrangements ~~position~~or asunderstandings ~~Senior~~between ~~Vice~~the ~~President~~Company’s Named Executive Officers and ~~Chief~~ ~~Financial~~any ~~Officer~~other person pursuant to which they were appointed as officers as of December 31, ~~effective~~2021. ~~April~~None 7of the Company’s Named Executive Officers as of December 31, 2021 had a family relationship that is required to be disclosed under Item 401(d) of Regulation S-K.

-4943-

Former Named Executive Officers

S. James Miller, Jr. On October 1, 2005, the Company entered into an employment agreement with Mr. Miller, pursuant to which Mr. Miller served as President and Chief Executive Officer until his resignation on March 2, 2020. On March 2, 2020, the Company entered into a Transition Services Agreement (the “Transition Agreement”) with Mr. Miller, whereby Mr. Miller continued to serve the Company as its Executive Chairman of the Board of Directors until May 2, 2021; however, the Transition Agreement was terminated on November 13, 2020, when the Company and Mr. Miller entered into the Consulting Agreement (the “Consulting Agreement”). Under the Consulting Agreement, Mr. Miller is to provide consulting services for up to 16 hours per week in consideration for the payment to Mr. Miller of a monthly consulting fee of $19,000 payable for five months or through until April 12, 2021 (the “Termination Date”). In addition, Mr. Miller is entitled to a commission equal to 1.0% of all amounts actually paid to the Company resulting from certain contracts and/or purchase orders received by the Company prior to the Termination Date, provided the Company receives at least $1.7 million in revenue from such contracts and/or purchase orders. In all cases, the maximum commission that Mr. Miller may receive based on the foregoing is $228,000. In addition, Mr. Miller was entitled to 525,000 vested restricted stock units (“RSUs”), and his remaining 262,000 RSUs were terminated.

David Harding. On January 1, 2013, the Company entered into an Employment Agreement with Mr. David Harding, pursuant to which Mr. Harding served as the Company’s Vice President and Chief Technical Officer until his resignation on July 21, 2020. The Agreement was originally for a one-year term, ending on December 31, 2013; however, the Agreement was amended to extend the expiration date to December 31, 2020. Under the terms of the Agreement, Mr. Harding was paid a semi-monthly base salary of $9,375. Following his resignation, Mr. Harding received his then current salary accrued through the effective date of his resignation, plus accrued compensation in connection with unused vacation.

For purposes of the above-referenced agreements, termination for “cause” means the executive’s commission of a criminal act or an act of fraud, embezzlement, breach of trust or other act of gross misconduct; violations of policies or rules of the Company; refusal to follow the direction given by the Company from time to time or breach of any covenant or obligation under the above-referenced agreements or other agreements with the Company; neglect of duty; misappropriation, concealment, or conversion of any money or property of the Company; intentional damage or destruction of property of the Company; reckless conduct which endangers the safety of other persons or property during the course of employment or while on premises leased or owned by the Company; or a breach of any obligation or requirement set forth in the above-referenced agreements. A “change in control” as used in these agreements generally means the occurrence of any of the following events: (i) the acquisition by any person or group of 50% or more of the Company’s outstanding voting stock; (ii) the consummation of a merger, consolidation, reorganization, or similar transaction other than a transaction: (1) in which substantially all of the holders of the Company’s voting stock hold or receive directly or indirectly 50% or more of the voting stock of the resulting entity or a parent company thereof, in substantially the same proportions as their ownership of the Company immediately prior to the transaction, or (2) in which the holders of the Company’s capital stock immediately before such transaction will, immediately after such transaction, hold as a group on a fully diluted basis the ability to elect at least a majority of the directors of the surviving corporation (or a parent company); (iii) there is consummated a sale, lease, exclusive license, or other disposition of all or substantially all of the consolidated assets of the Company and the Company’s subsidiaries, other than a sale, lease, license, or other disposition of all or substantially all of the consolidated assets of the Company and the Company’s subsidiaries to an entity, 50% or more of the combined voting power of the voting securities of which are owned by the Company’s shareholders in substantially the same proportions as their ownership of the Company immediately prior to such sale, lease, license, or other disposition; or (iv) individuals who, on the date the applicable agreement was adopted by the Board, are directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors; provided, however, that if the appointment or election (or nomination for election) of any new director was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of the applicable agreement, be considered as a member of the Incumbent Board.

Other than as set forth above, there were no arrangements or understandings between the Company’s Named Executive Officers and any other person pursuant to which they were appointed as officers as of December 31, 2020. None of the Company’s Named Executive Officers as of December 31, 2020 had a family relationship that is required to be disclosed under Item 401(d) of Regulation S-K.

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Table of Contents

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

As of ~~March~~April 127, ~~2021~~2022, we had ~~five~~three classes of voting stock issued and outstanding: (i) Common Stock; (ii) our Series ~~A Preferred; (iii) our Series A-1 Preferred; (iv) our Series~~ B Preferred; and (viii) our Series D Preferred. The following tables sets forth information regarding shares of Series ~~A Preferred, Series A-1 Preferred, Series~~ B Preferred, Series D Preferred and Common Stock beneficially owned as of ~~March~~April 127, ~~2021~~2022.

The following tables set forth information regarding shares of Series ~~A Preferred, Series A-1 Preferred, Series~~ B Preferred, Series D Preferred, and Common Stock beneficially owned as of ~~March~~April 127, ~~2021~~2022 by

(i) Each of our officers and directors;

~~Each of~~(ii) ~~our~~All ~~officers~~officer and directors as a group; and

(iiiii) Each person known by us to beneficially own five percent or more of the outstanding shares of our Common Stock, Series B Preferred and Series D Preferred.

~~All officer~~Percent ownership is calculated based on 239,400 shares of Series B Preferred, 23,216.4 shares of Series D Preferred and ~~directors~~347,275,242 shares Common Stock outstanding as aof ~~group;~~April ~~and~~7, 2022.

(iii)

Beneficial Ownership of Series B Preferred Name, Address and Title (if applicable) (1)	Series B Preferred Stock (2)		% Ownership of Class (2)
Darrelyn Carpenter		28,000		12	%
Howard Harrison		20,000		8	%
Wesley Hampton		16,000		7	%
Frederick C. Orton		20,000		8	%

(1) Each ~~person~~of ~~known by~~the usCompany’s toNamed ~~beneficially~~Executive ~~own~~Officers ~~five~~and ~~percent~~directors orwho ~~more~~do ofnot ~~the~~hold ~~outstanding~~ shares of ~~our~~Series ~~Common~~B ~~Stock,~~Preferred ~~Series~~are Aexcluded ~~Preferred,~~from ~~Series~~this ~~A-1 Preferred,~~table. ~~Series~~The Bbusiness ~~Preferred~~address of each of the executive officers and ~~Series~~directors Dis ~~Preferred~~11440 W. Bernardo Court, Suite 300, San Diego, California 92127.

~~Percent~~(2) Beneficial ownership is ~~calculated~~determined ~~based~~in onaccordance ~~6,148.7~~with ~~shares~~the ofrules ~~Series A Preferred, 5,922.0 shares~~ of ~~Series~~the ~~A-1~~SEC ~~Preferred,~~and ~~239,400~~generally ~~shares~~includes ofvoting ~~Series~~or ~~B Preferred,~~investment ~~22,661.3~~power ~~shares~~with ofrespect ~~Series~~to ~~D Preferred and 274,959,927 shares Common Stock outstanding as of March 12, 2021~~securities.

Beneficial Ownership of Series A Preferred Name, Address and Title (if applicable) (1)	Series A Preferred Stock (2)(3)	% Ownership of Class (3)
5% Shareholders:
CAP 1 LLC (4) 14000 Quail Spring Parkway, Suite 2200 Oklahoma City, OK 73134	750	12.2%
Wynnefield Partners (5) 450 7th Ave. Suite 509 New York, NY, 10123	375	6.1%
Charles Frischer 4404 52nd Avenue NE Seattle, WA 98105	576	9.4%
Neal Goldman 767 Third Avenue, 16th Floor New York, NY 10017	2,358.5	38.4%

-44-

* less than 1%

(1)

Each of the Company’s Named Executive Officers and directors who do not hold shares of Series A Preferred are excluded from this table. The business address of each of the executive officers and directors is 11440 W. Bernardo Court, Suite 300, San Diego, California 92127.

(2)

In connection with a private placement transaction completed in November and December 23, 2020 (the “Series D Financing”), all of the outstanding shares of Series A-1 Preferred will be converted into shares of Common Stock over a period of time with 100% of the such outstanding shares being converted by August 1, 2021.

(3)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

(4)

Mr. David Sackler, President of CAP I LLC, may be deemed to have voting and investment discretion over the securities identified herein.

(5)

Wynnefield Partners owns shares in its Wynnefield Partners SmallCap Value Fund, Wynnefield Partners SmallCap Value LP 1 Funds, and its Wynnefield SmallCap Value Offshore Fund.

-51-

Beneficial Ownership of Series A-1 Preferred Name, Address and Title (if applicable)(1)	Series A-1 Preferred Stock(2)(3)	% Ownership of Class (3)
5% Shareholders:
CAP 1 LLC (4) 14000 Quail Spring Parkway, Suite 2200 Oklahoma City, OK 73134	750	12.7%
Wynnefield Partners (5)	375	6.3%
450 7th Ave. Suite 509 New York, NY, 10123
Charles Frischer 4404 52nd Avenue NE Seattle, WA 98105	576.5	9.7%
Neal Goldman 767 Third Avenue, 16th Floor New York, NY 10017	2,358.5	39.8%

(1)

Each of the Company’s Named Executive Officers and directors who do not hold shares of Series A-1 Preferred are excluded from this table. The business address of each of the executive officers and directors is 11440 W. Bernardo Court, Suite 300, San Diego, California 92127.

(2)

In connection with the Series D Financing, all of the outstanding shares of Series A-1 Preferred will be converted into shares of Common Stock over a period of time with 100% of such outstanding shares being converted by August 1, 2021.

(3)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

(4)

Mr. David Sackler, President of CAP I LLC, may be deemed to have voting and investment discretion over the securities identified herein.

(5)

Wynnefield Partners owns shares in its Wynnefield Partners SmallCap Value Fund, Wynnefield Partners SmallCap Value LP 1 Funds, and its Wynnefield SmallCap Value Offshore Fund.

Beneficial Ownership of Series B Preferred Name, Address and Title (if applicable) (1)	Series B Preferred Stock (2)	% Ownership of Class (2)
Darrelyn Carpenter	28,000	12%
Howard Harrison	20,000	8%
Wesley Hampton	16,000	7%
Frederick C. Orton	20,000	8%

(1)

Each of the Company’s Named Executive Officers and directors who do not hold shares of Series B Preferred are excluded from this table. The business address of each of the executive officers and directors is 11440 W. Bernardo Court, Suite 300, San Diego, California 92127.

(2)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

-52-

Beneficial Ownership of Series D Preferred	Series D Preferred	% Ownership of
Name, Address and Title (if applicable) (1)	Stock (2)	Class (2)
Blackwell Partners LLC (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	2,421.7	10.7%
Nantahala Capital Partners Limited Partnership (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	945.4	4.2%
Nantahala Capital Partners II Limited Partnership (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	2,755.9	12.2%
Nantahala Capital Partners SI LP (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	7,146.9	31.5%
NCP QR LP (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	1,095.5	4.8%
Plum Investments L.P. (4)
1807 S. San Gabriel Blvd.
San Gabriel, CA 91776	1,509.0	6.7%
Silver Creek CS SAV, L.L.C. (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	721.6	3.2%

* less than 1%

(1)

Each of the Company’s Named Executive Officers and directors who do not hold shares of Series D Preferred are excluded from this table.

(2)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

(3)

Nantahala Capital Management, LLC is a Registered Investment Adviser and has been delegated the legal power to vote and/or direct the disposition of securities on behalf of these entities as a General Partner or Investment Manager and would be considered the beneficial owner of such securities. The above shall not be deemed to be an admission by the record owners that they are themselves beneficial owners of these shares of Series C Preferred for purposes of Section 13(d) of the Exchange Act or any other purpose.

(4)

Tom Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold voting and dispositive power over the shares identified herein.

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Beneficial Ownership of Common Stock
	Number	Percent
Name and Address	of Shares (1)	of Class (2)
Directors and Named Executive Officers:
Kristin Taylor, President and Chief Executive Officer	-	*
Jay Lewis, Senior Vice President and Chief Financial Officer	-	*
James M. Demitrieus	-	*
Douglas Morgan	-	*
Lauren C. Anderson	-	*
Total beneficial ownership of Directors and Named Executive Officers as a group (five persons):	-	*
5% Shareholders:
Blackwell Partners LLC (3)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	42,426,169	15.46%
Nantahala Capital Partners Limited Partnership (5)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	16,652,077	6.1%
Nantahala Capital Partners II Limited Partnership (6)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	48,134,518	17.57%
Nantahala Capital Partners SI LP (7)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	125,675,253	46.2%
NCP QR LP (8)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	19,473,850	7.2%
Neal Goldman (9) 767 Third Avenue, 16th Floor New York, NY10017	86,667,547	28.9%
Plum Investments (10) 1807 S. San Gabriel Blvd. San Gabriel, CA 91776	39,421,295	14.5%
Silver Creek CS, SAV, L.L.C (11)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	12,744,891	4.7%
W Ryan Goldman (12) 570 Lawrence Ave Westfield, NJ. 07060	17,152,659	6.3%
Shellback Financial (13) 16045 54th Ave N Minneapolis, MN. 55446	17,255,575	6.3%

* less than 1%

-54-

(1) All entries exclude beneficial ownership of shares issuable pursuant to options, warrants, or other convertible securities that have not vested, are not convertible, or that are not otherwise exercisable as of the date hereof, or which will not become vested, convertible or exercisable within 60 days of March 12, 2021.

(2) Percentages are rounded to the nearest one-tenth of one percent. Percentages are based on 272,239,927 shares of Common Stock outstanding as of March 12, 2021. Options, warrants, and other convertible securities that are presently convertible or exercisable, or convertible or exercisable within 60 days of March 12, 2021 are deemed to be beneficially owned by the shareholder holding the options, warrants, or other convertible securities for the purpose of computing the percentage ownership of that shareholder, but are not treated as outstanding for the purpose of computing the percentage of any other shareholder.

(3) Includes 41,538,593 shares issuable upon the conversion of approximately 2,421.7 shares of Series D Preferred issued in the Series D Financing, of which 1,280 shares of Series D Preferred were received in exchange for 128 shares of Series C Preferred on November 12, 2020.

(4)	Nantahala Capital Management, LLC is a Registered Investment Adviser and has been delegated the legal power to vote and/or direct the disposition of securities on behalf of this entity as a General Partner or Investment Manager and would be considered the beneficial owner of such securities. Wilmot B. Harkley and Daniel Mack, as principles of Nantahala Capital Management, LLC, may be deemed to hold voting and dispositive power over the shares identified herein. The above shall not be deemed to be an admission by the record owners or these selling shareholders that they are themselves beneficial owners of these shares of securities for purposes of Section 13(d) of the Exchange Act or any other purpose.
(5)	Includes 16,216,124 shares issuable upon the conversion of approximately 945.4 shares of Series D Preferred.
(6)	Includes 47,271,012 shares issuable upon the conversion of approximately 2,755.9 shares of Series D Preferred.
(7)	Includes 122,588,336 shares issuable upon the conversion of approximately 7,146.9 shares of Series D Preferred issued in the Series D Financing, of which 3,970 shares of Series D Preferred were received in exchange for 397 shares of Series C Preferred on November 12, 2020.
(8)	Includes 18,790,738 shares issuable upon the conversion of approximately 1,095.5 shares of Series D Preferred.
(9)	Includes 11,792,500 shares issuable upon the conversion of Series A Preferred, 11,792,500 shares issuable upon the conversion of Series A-1 Preferred, 4,006,861 shares issuable upon the conversion of Series D Preferred, and 112,838 shares issuable upon the exercise of warrants exercisable within 60 days of March 12, 2021. Mr. Goldman exercises sole voting and dispositive power over 72,158,770 shares, including the aforementioned Series A conversion shares, Series A-1 conversion shares, Series D conversion shares, stock options and warrants, and shared voting and dispositive power over 14,508,777 reported shares, of which 3,000,000 shares are owned by the Goldman Family 2012 GST Trust, 11,361,077 are held in an individual retirement account, and 147,700 shares are owned by The Neal and Marlene Goldman Foundation.
(10)	Includes 25,883,362 shares issuable upon the conversion of 1,509 shares of Series D Preferred. Tom Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold voting and dispositive power over the shares identified herein.
(11)	Includes 12,377,358 shares issuable upon the conversion of approximately 721.6 shares of Series D Preferred.
(12)	Includes 17,152,659 shares issuable upon the conversion of approximately 1,000 shares of Series D Preferred.
(13)	Includes 17,255,575 shares issuable upon the conversion of approximately 1,006 shares of Series D Preferred.

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Table of Contents

Beneficial Ownership of Series D Preferred	Series D Preferred		% Ownership of
Name, Address and Title (if applicable) (1)	Stock (2)		Class (2)
Blackwell Partners LLC (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		2,547.7		10.9	%
Nantahala Capital Partners Limited Partnership (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		995.4		4.2	%
Nantahala Capital Partners II Limited Partnership (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		2,898.9		12.4	%
Nantahala Capital Partners SI LP (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		5,661.9		24.1	%
NCP QR LP (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		1,154.5		4.9	%
NCP QR LP (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		1,853.9		7.9	%
Plum Investments L.P. (4)
1807 S. San Gabriel Blvd.
San Gabriel, CA 91776		1,589.0		6.8	%
Silver Creek CS SAV, L.L.C. (3)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820		761.6		3.2	%

(1)

Each of the Company’s Named Executive Officers and directors who do not hold shares of Series D Preferred are excluded from this table.

(2)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

(3)

Nantahala Capital Management, LLC is a Registered Investment Adviser and has been delegated the legal power to vote and/or direct the disposition of securities on behalf of these entities as a General Partner or Investment Manager and would be considered the beneficial owner of such securities. The above shall not be deemed to be an admission by the record owners that they are themselves beneficial owners of these shares of Series D Preferred for purposes of Section 13(d) of the Exchange Act or any other purpose.

(4)

Tom Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold voting and dispositive power over the shares identified herein.

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Table of Contents

Beneficial Ownership of Common Stock
	Number of	Percent of
Name and Address	Shares (1)	Class(2)
Directors and Named Executive Officers:
Kristin Taylor, President and Chief Executive Officer	-	-
James M. Demitrieus	-	-
Douglas Morgan	-	-
Lauren C. Anderson	-	-
Total beneficial ownership of Directors and Named Executive Officers as a group (four persons):	-	-

5% Shareholders:
Blackwell Partners LLC (3)(4) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	43,699,828	12.6	%
Nantahala Capital Partners Limited Partnership (4)(5) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	17,073,756	4.9	%
Nantahala Capital Partners II Limited Partnership (4)(6) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	49,723,842	14.3	%
Nantahala Capital Partners SI LP (4)(7) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	97,116,638	28.0	%
NCP QR LP (4)(8) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	19,802,744	5.7	%
NCP QR LP (4)(9)
c/o Nantahala Capital Management, LLC
19 Old Kings Highway South, Suite 200
Darien, CT 06820	31,799,811	9.2	%
Neal Goldman (10) 767 Third Avenue, 16th Floor New York, NY10017	68,327,334	19.7	%
Plum Investments (11) 1807 S. San Gabriel Blvd. San Gabriel, CA 91776	27,255,575	7.8	%
Silver Creek CS, SAV, L.L.C (8)(12) c/o Nantahala Capital Management, LLC 19 Old Kings Highway South, Suite 200 Darien, CT 06820	13,063,465	3.8	%
W Ryan Goldman (13) 570 Lawrence Ave Westfield, NJ. 07060	18,078,902	5.2	%
Shellback Financial (17) 16045 54th Ave N Minneapolis, MN. 55446	18,198,971	5.2	%

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Table of Contents

(1)

All entries exclude beneficial ownership of shares issuable pursuant to options, warrants, or other convertible securities that have not vested, are not convertible, or that are not otherwise exercisable as of the date hereof, or which will not become vested, convertible or exercisable within 60 days of April 7, 2022.

(2)

Percentages are rounded to the nearest one-tenth of one percent. Percentages are based on 347,275,242 shares of Common Stock outstanding as of April 7, 2022. Options, warrants, and other convertible securities that are presently convertible or exercisable, or convertible or exercisable within 60 days of April 7, 2022 are deemed to be beneficially owned by the shareholder holding the options, warrants, or other convertible securities for the purpose of computing the percentage ownership of that shareholder, but are not treated as outstanding for the purpose of computing the percentage of any other shareholder.

(3)	Includes 43,698,828 shares issuable upon the conversion of approximately 2,547.7 shares of Series D Preferred.

(4)	Nantahala Capital Management, LLC is a Registered Investment Adviser and has been delegated the legal power to vote and/or direct the disposition of securities on behalf of this entity as a General Partner or Investment Manager and would be considered the beneficial owner of such securities. Wilmot B. Harkley and Daniel Mack, as principals of Nantahala Capital Management, LLC, may be deemed to hold voting and dispositive power over the shares identified herein. The above shall not be deemed to be an admission by the record owners or these selling shareholders that they are themselves beneficial owners of these shares of securities for purposes of Section 13(d) of the Exchange Act or any other purpose.
(5)	Includes 17,073,756 shares issuable upon the conversion of approximately 995.4 shares of Series D Preferred.

(6)	Includes 49,723,842 shares issuable upon the conversion of approximately 2,898.9 shares of Series D Preferred.

(7)	Includes 97,116,638 shares issuable upon the conversion of approximately 5,661.9 shares of Series D Preferred.

(8)	Includes 19,802,744 shares issuable upon the conversion of approximately 1,154.5 shares of Series D Preferred.
(9)	Includes 31,799,313 shares issuable upon the conversion of approximately 1,853.9 shares of Series D Preferred.

(10)	Includes 4,264,151 shares issuable upon the conversion of Series D Preferred. Mr. Goldman exercises sole voting and dispositive power over 49,554,406 shares, including the aforementioned Series D conversion shares and shared voting and dispositive power over 14,508,777 reported shares, of which 3,000,000 shares are owned by the Goldman Family 2012 GST Trust, 11,361,077 are held in an individual retirement account, and 147,700 shares are owned by The Neal and Marlene Goldman Foundation.

(11)	Includes 27,255,575 shares issuable upon the conversion of 1,589 shares of Series D Preferred. Tom Y. Lee, G.P. of Plum Investments L.P., may be deemed to hold voting and dispositive power over the shares identified herein.

(12)	Includes 13,063,465 shares issuable upon the conversion of approximately 761.6 shares of Series D Preferred.

(13)	Includes 18,078,902 shares issuable upon the conversion of approximately 1,054 shares of Series D Preferred.

(14)	Includes 18,198,971 shares issuable upon the conversion of approximately 1,061 shares of Series D Preferred.

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Table of Contents

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

December 2021 Credit Facility with Nantahala Capital Management

On December 29, 2021 (the “Closing Date”), the Company entered into a Term Loan and Security Agreement (the “Agreement”) with certain funds and separate accounts managed by Nantahala Capital Management, LLC (collectively, “Nantahala”), as lenders, and other lenders set forth on the signature pages thereto (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 $2.5 million (the “Credit Facility”). Nantahala collectively owns, or otherwise controls, 37.3% 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 an initial draw-down on the Credit Facility of $600,000. As of April 12, 2022, the Company received two subsequent draw-downs aggregating $1,050,000 under the Credit Facility. The Company expects to use the proceeds from the Credit Facility for working capital requirements and corporate purposes.

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.

Notes Payable

Factoring Agreement

On February 12, 2020, the Company entered into a factoring agreement (the "“Factoring Agreement"”) with a former member of the Company’s Board of Directors (the " “Factoring Lender"”). Under the Factoring Agreement, the Company received $350,000 in proceeds (the " “Factoring Principal"”) in the form of a loan, bearing interest at a rate of 1% for every seven days until the Factoring Principal and accrued interest are paid in full, with a maturity date of March 4, 2020. Pursuant to the Factoring Agreement, repayment of the Factoring Principal and accrued interest was secured by certain of the Company’s trade accounts receivable approximating $500,000 (the " “Factoring Collateral"”). During the twelve months ended December 31, 2020, the Company recorded approximately $45,000 in interest expense related to the Factoring Agreement. In May 2020, the Company repaid $35,000 in accrued interest to the Factoring Lender. As a condition to the consummation of the Company's offer and sale (the "“Closing"”) of shares of its Series D Convertible Preferred Stock, par value $0.01 (~~"Series D Preferred") (~~the " “Series D Financing"”), the Factoring Lender agreed to settle the entire Factoring Principal plus accrued interest and release the Company from liabilities due under the Factoring Agreement in exchange for a one-time payment of $360,000 (the "“Factoring Settlement"”) to be made upon the Closing, and out of the proceeds, of the Series D Financing. On November 16, 2020, the Company fulfilled its obligation under the Factoring Settlement, thereby releasing it from its obligation under the Factoring Agreement.

Convertible Promissory Notes

During the year ended December 31, 2020, the Company received advances from ~~another~~ a second former member of the Board of Directors (the " “Board Lender"”) in the aggregate amount of $450,000. On June 29, 2020, the Company executed a promissory note (the "“Board Note"”) in the favor of the Board Lender in the principal amount of $450,000 (the "“Board Note Principal"”), pursuant to which the Board Note Principal accrued simple interest at the rate of 5% per annum, and was convertible into shares of the Company's Common Stock at $0.16 per share of Common Stock at the election of the Board Lender. The Board Note was to mature on the earlier to occur of (i) October 13, 2020, or (ii) on such date that the Company consummates a debt and/or equity financing resulting in net proceeds to the Company of at least $3,000,000.~~0 million.~~

~~-56-~~Also during the year ended December 31, 2020, the Company received advances from a third former member of the Board of Directors (the “Second Board Lender”) in the aggregate amount of $100,000. On June 29, 2020, the Company executed a promissory note (the “Second Board Note", and collectively with the Board Note, the “Board Notes”) in the principal amounts of $100,000 (the “Second Board Note Principal”), pursuant to which the Second Board Note Principal accrued simple interest at the rate of 5% per annum, and was convertible into shares of the Company’s Common Stock at $0.16 per share of Common Stock at the election of the Second Board Lender. The Second Board Note was to mature on the earlier to occur of (i) October 13, 2020, or (ii) on such date that the Company consummates a debt and/or equity financing resulting in net proceeds to the Company of at least $3,000,000.

~~Table~~On November 12, 2020, in connection with the Closing of ~~Contents~~the Series D Financing, the Board Lenders entered into (i) Debt Exchange Agreements (collectively, the “Debt Exchange Agreements”), and (ii) Satisfaction and Release Agreements (collectively, the “Release Agreements”), for the purpose of satisfying certain obligations of the Company arising under (i) the Board Note, and (ii) the Second Board Note. Pursuant to the Debt Exchange Agreements and Release Agreements: (a) one-half of the Board Note Principal plus accrued interest, totaling approximately $232,000 was converted into 231.6 shares of Series D Preferred at a rate of $1,000 per share of Series D Preferred, with the remaining one-half of the Board Note Principal plus accrued interest, totaling approximately $232,000, to be paid to the Board Lender in cash out of proceeds of the Series D Financing, in full satisfaction of the Company's obligations under the Board Note; and (b) the entire Second Board Note Principal plus accrued interest, totaling approximately $103,000, was converted into 102.8 shares of Series D Preferred at a rate of $1,000 per share of Series D Preferred, in full satisfaction of the Company's obligations under the Second Board Note.

Also, during the year ended December 31, 2020, the Company received advances from an additional former member of the Board of Directors (the "Second Board Lender") in the aggregate amount of $100,000. On June 29, 2020, the Company executed a promissory note (the "Second Board Note", and collectively with the Board Note, the "Board Notes") in the principal amounts of $100,000 (the "Second Board Note Principal"), pursuant to which the Second Board Note Principal accrued simple interest at the rate of 5% per annum and was convertible into shares of the Company’s Common Stock at $0.16 per share of Common Stock at the election of the Second Board Lender. The Second Board Note was to mature on the earlier to occur of (i) October 13, 2020, or (ii) on such date that the Company consummates a debt and/or equity financing resulting in net proceeds to the Company of at least $3.0 million.

On November 12, 2020, in connection with the Closing of the Series D Financing, the Board Lenders entered into (i) Debt Exchange Agreements (collectively, the "Debt Exchange Agreements"), and (ii) Satisfaction and Release Agreements (collectively, the "Release Agreements"), for the purpose of satisfying certain obligations of the Company arising under (i) the Board Note, and (ii) the Second Board Note. Pursuant to the Debt Exchange Agreements and Release Agreements: (a) one-half of the Board Note Principal plus accrued interest, totaling approximately $232,000 was converted into 231.6 shares of Series D Preferred at a rate of $1,000 per share of Series D Preferred, with the remaining one-half of the Board Note Principal plus accrued interest, totaling approximately $232,000, to be paid to the Board Lender in cash out of proceeds of the Series D Financing, in full satisfaction of the Company's obligations under the Board Note; and (b) the entire Second Board Note Principal plus accrued interest, totaling approximately $103,000, was converted into 102.8 shares of Series D Preferred at a rate of $1,000 per share of Series D Preferred, in full satisfaction of the Company's obligations under the Second Board Note.

Professional Services Agreement

During the year ended December 31, 2020, the Company entered into professional services agreement with a firm affiliated with a member of the Company’s Board at the time the parties entered into the agreement. The Company made no payments pursuant to this agreement during the twelve months ended December 31, 2020 and has made approximately $34,000 during 2021. The Company ~~anticipates~~has ~~no further~~the ~~payments~~right ~~for~~to terminate the ~~remainder~~agreement ofon ~~2021~~thirty days written notice at any time.

Review, Approval or Ratification of Transactions with Related Persons

As provided in the charter of our Audit Committee, it is our policy that we will not enter into any transactions required to be disclosed under Item 404 of the SEC’s Regulation S-K unless the Audit Committee or another independent body of our Board first reviews and approves the transactions.

In addition, pursuant to our Code of Ethical Conduct and Business Practices, all employees, officers and directors of ours and our subsidiaries are prohibited from engaging in any relationship or financial interest that is an actual or potential conflict of interest with us without approval. Employees, officers and directors are required to provide written disclosure to the Chief Executive Officer as soon as they have any knowledge of a transaction or proposed transaction with an outside individual, business or other organization that would create a conflict of interest or the appearance of one.

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Table of Contents

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The ~~following~~Audit ~~table~~Committee ~~represents~~of ~~aggregate~~Imageware ~~fees billed~~Systems, toInc.’s Board of Directors has engaged Baker Tilly US, LLP (“Baker Tilly”) as the independent registered public accounting firm for the Company and its subsidiaries for the fiscal ~~years~~year ended December 31, ~~2020~~ 2021. The Audit Committee regularly reviews and ~~2019~~determines whether any non-audit services provided by ~~Mayer~~Baker ~~Hoffman~~Tilly ~~McCann P.C. (“MHM”),~~ potentially affects its independence with respect to the Company. The Audit Committee’s ~~independent~~ ~~registered public~~policy ~~accounting firm.~~is ~~Substantially~~to pre-approve all ofaudit ~~MHM’s~~and ~~personnel,~~permissible ~~who~~non-audit ~~work~~services ~~under~~ provided by Baker Tilly. Pre-approval is generally provided by the ~~control~~Audit ofCommittee ~~MHM~~for ~~shareholders~~up to one year, ~~are~~is ~~employees~~detailed as to the particular service or category of ~~wholly~~services to be rendered and is generally subject to a specific budget. The Audit Committee may also pre-~~owned subsidiaries~~approve ofadditional ~~CBIZ,~~services ~~Inc~~or specific engagements on a case-by-case basis., ~~which~~Management provides ~~personnel~~annual ~~and~~updates ~~various~~ to the Audit Committee regarding the extent of any services toprovided ~~MHM~~in accordance with this pre-approval. To date, all services performed by Baker Tilly have been pre-approved by the Audit Committee in anaccordance ~~alternative~~with ~~practice structure~~this policy.

	Fiscal Year Ended
	2020	2019
Audit fees	$291,000	$374,000
Audit-related fees	—	—
Tax fees	—	—
All other fees	—	—
Total Fees	$291,000	$374,000

On June 20, 2021, the Board of Directors of Imageware Systems, Inc., notified Mayer Hoffman McCann P.C. (“MHM”), the Company’s independent registered public accounting firm, that it would be dismissing MHM effective immediately following the Company’s filing of its Quarterly Report on Form 10-Q for the quarter ending June 30, 2021. Prior to June 20, 2021, the Audit Committee had engaged Mayer Hoffman McCann P.C. (“MHM”) as the independent registered public accounting firm for the Company. The Company filed its Quarterly Report on Form 10-Q for the quarter ending June 30, 2021 on August 23, 2021.

On October 13, 2021, the Board of Directors of Imageware Systems, Inc. approved the engagement of Baker Tilly as the Company's independent registered public accounting firm for the Company's fiscal year ended December 31, 2021.

During the fiscal year ended December 31, 2020 and the subsequent interim period through August 23, 2021, there were (i) no disagreements within the meaning of Item 304(a)(1)(iv) of Regulation S-K between the Company and MHM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, of which, if not resolved to MHM’s satisfaction, would have caused MHM to make reference thereto in their reports, and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S-K.

Substantially all of MHM’s personnel, who work under the control of MHM shareholders, are employees of wholly-owned subsidiaries of CBIZ, Inc., which provides personnel and various services to MHM in an alternative practice structure.

The following table sets forth the aggregate fees billed, or expected to be billed, by Baker Tilly with respect to audit and non-audit services for the Company during the year ended December 31, 2021, and the aggregate fees billed by MHM with respect to audit and non-audit services for the Company during the year ended December 31, 2020, and the subsequent interim periods in 2021 before the change in auditors became effective:

	Fiscal Year Ended
	2021		2021		2020
	Baker Tilley		MHM		MHM
Audit fees	$	102,600	$	187,000	$	291,000

Audit-related fees		-		-		-

Tax fees		-		-		-

All other fees		-		-		-

Total Fees	$	102,600	$	187,000	$	291,000

The Audit Committee of the Company’s Board of Directors approved all fees described above.

~~Pre~~ -~~Approval Policies and Procedures.~~49-

The Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent auditor, currently MHM. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to the full Audit Committee at its next scheduled meeting.

During 2019, the Audit Committee has applied the de minimis exception to fees paid of approximately $2,000 or 1% total fees paid to the Company’s independent accountant. Such fees relate to tax return preparation fees for one of the Company’s dormant foreign subsidiaries. There were no such fees paid in 2020.

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PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	The following documents are filed as part of this Annual Report:

Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated October 27, 2005 (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A, filed November 15, 2005).
3.1		Certificate of Incorporation (incorporated by reference to Annex B to the Company’s Definitive Proxy Statement on Schedule 14A, filed November 15, 2005).
3.2		Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed October 14, 2011).
3.3		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed February 16, 2017).
3.4		Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 2, 2015).
3.5		Certificate of Designations, Preferences and Rights of the Series F Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed September 9, 2016).
3.6		Certificate of Designations, Preferences and Rights of the Series G Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed December 30, 2016).
3.7		Amendment No. 1 to the Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed December 30, 2016).
3.8		Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed September 19, 2017).
3.9		Certificate of Elimination of the Series E Convertible Preferred Stock, Series F Convertible Preferred Stock and Series G Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed October 19, 2017).
3.10		Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 13, 2018).
3.11		Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
3.12		Amendment No. 1 to the Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
3.13		Amended and Restated Certificate of Incorporation of ~~ImageWare~~Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
3.14		Amended and Restated Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of ~~ImageWare~~Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
3.15		Amended and Restated Certificate of Designations, Preferences, and Rights of Series A-1 Convertible Preferred Stock of ~~ImageWare~~Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
3.16		Amended and Restated Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock of ~~ImageWare~~Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
3.17		Certificate of Designations, Preferences, and Rights of Series D Convertible Preferred Stock of ~~ImageWare~~Imageware Systems, Inc., dated November 12, 2020 (incorporated by reference to Exhibit 3.5 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
3.18		Amended and Restated Certificate of Designations, Preferences, and Rights of Series D Convertible Preferred Stock of Imageware Systems, Inc (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated December 30, 2020).
3.19		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Imageware Systems, Inc., dated April 21, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated April 26, 2021).

~~4.1 Form of Amendment to Warrant, dated March 21, 2012, (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10~~ -~~K, filed April 4, 2012).~~50-

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4.1

Form of Amendment to Warrant, dated March 21, 2012, (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K, filed April 4, 2012).

4.2		Form of Warrant, dated September 10, 2018 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
10.1		Employment Agreement, dated September 27, 2005, between the Company and S. James Miller (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 30, 2005).
10.2		Form of Indemnification Agreement entered into by the Company with its directors and executive officers (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form SB-2 (No. 333-93131), filed December 20, 1999, as amended).
10.3		Amended and Restated 1999 Stock Plan Award (incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement on Schedule 14A, filed November 21, 2007).
10.4		Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed July 14, 2005).
10.5		2001 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-QSB, filed November 14, 2001).
10.6		Securities Purchase Agreement, dated September 25, 2007, by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 26, 2007).
10.7		Office Space Lease between I.W. Systems Canada Company and GE Canada Real Estate Equity, dated July 25, 2008 (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.8		Form of Securities Purchase Agreement, dated August 29, 2008 by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.9		Change of Control and Severance Benefits Agreement, dated September 27, 2008, between Company and Charles Aubuchon (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.10		Change of Control and Severance Benefits Agreement, dated September 27, 2008, between Company and David Harding (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.11		First Amendment to Employment Agreement, dated September 27, 2008, between the Company and S. James Miller (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.12		Form of Convertible Note dated November 14, 2008 (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.13		Second Amendment to Employment Agreement, dated April 6, 2009, between the Company and S. James Miller (incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.14		Office Space Lease between the Company and Allen W. Wooddell, dated July 25, 2008 (incorporated by reference to Exhibit 10.54 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.15		Third Amendment to Employment Agreement, dated December 10, 2009, between the Company and S. James Miller (incorporated by reference to Exhibit 10.60 to the Company’s Annual Report on Form 10-K, filed February 24, 2010).
10.16		Securities Purchase Agreement, dated December 12, 2011, by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 21, 2011).
10.17		Note Exchange Agreement, dated December 12, 2011, by and between the Company and certain accredited investors (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed December 21, 2011).
10.18		Fourth Amendment to Employment Agreement, dated March 10, 2011, between the Company and S. James Miller, (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K, filed January 17, 2012).
10.19		Fifth Amendment to Employment Agreement, dated January 31, 2012, between the Company and S. James Miller, Jr., (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K, filed April 4, 2012.
10.20		Employment Agreement, dated January 1, 2013, between the Company and Wayne Wetherell (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 7, 2013).
10.21		Employment Agreement, dated January 1, 2013, between the Company and David Harding (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 7, 2013).

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10.22		Convertible Promissory Note dated March 27, 2013 issued by the Company to Neal Goldman (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K, filed April 1, 2013).
10.23		Amendment to Convertible Promissory Note, dated March 12, 2014 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 13, 2014).
10.24		Note Exchange Agreement, dated January 29, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 2, 2015).
10.25		Sixth Amendment to Employment Agreement, by and between S. James Miller and the Company, dated November 1, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed November 7, 2013).
10.26		Seventh Amendment to Employment Agreement, by and between S. James Miller, Jr. and the Company, dated January 9, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2015).
10.27		Second Amendment to Employment Agreement, by and between Wayne Wetherell and the Company, dated January 9, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2015).
10.28		Second Amendment to Employment Agreement, by and between David E. Harding and the Company, dated January 9, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2015).
10.29		Amendment No. 3 to Convertible Promissory Note, dated December 8, 2014 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 10, 2014).
10.30		Third Amendment to Employment Agreement, by and between Wayne Wetherell and the Company, dated December 14, 2015 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed December 21, 2015).
10.31		Third Amendment to Employment Agreement, by and between David E. Harding and the Company, dated December 14, 2015 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed December 21, 2015).
10.32		Eighth Amendment to Employment Agreement, by and between S. James Miller and the Company, dated December 14, 2015 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed December 21, 2015).
10.33		Amendment No. 4 to Convertible Promissory Note, dated March 8, 2016 (incorporated by reference to the Company's Current Report on Form 8-K, filed March 10, 2017).
10.34		Convertible Promissory Note, dated March 9, 2016 (incorporated by reference to the Company's Current Report on Form 8-K, filed March 10, 2017).
10.35		Form of Securities Purchase Agreement, dated September 7, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 9, 2016).
10.36		Amendment No. 5 to Convertible Promissory Note, dated January 23, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K, filed January 26, 2017).
10.37		Form of Subscription Agreement for Series G Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 30, 2016).
10.38		Form of Exchange Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed December 30, 2016).
10.39		Ninth Amendment to Employment Agreement, by and between James Miller, Jr. and the Company, dated October 20, 2016 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed December 30, 2016).
10.40		Fourth Amendment to Employment Agreement, by and between Wayne Wetherell and the Company, dated October 20, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed December 30, 2016).
10.41		Fourth Amendment to Employment Agreement, by and between David E. Harding and the Company, dated October 20, 2016 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, dated December 30, 2016).
10.42		Amendment No. 2 to Convertible Promissory Note, dated May 10, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed May 12, 2017).
10.43		Amendment No. 6 to Convertible Promissory Note, dated May 10, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed May 12, 2017).
10.44		Form of Subscription Agreement for Series A Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 19, 2017).
10.45		Form of Exchange Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed September 19, 2017).

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10.46		Fifth Amendment to Employment Agreement, by and between David E. Harding and the Company, dated February 7, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 13, 2018).
10.47		Tenth Amendment to Employment Agreement, by and between James Miller, Jr. and the Company, dated February 8, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated February 13, 2018).
10.48		Form of Securities Purchase Agreement for Series C Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
10.49		Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
10.50		Placement Agency Agreement, by and between the Company and Northland Capital Markets (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
10.51		Form of Exchange Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed September 13, 2018).
10.52		Eleventh Amendment to Employment Agreement, by and between James Miller, Jr. and the Company, dated January 31, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 1, 2019).
10.53		Sixth Amendment to Employment Agreement, by and between David Harding and the Company, dated January 31, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated February 1, 2019).
10.54		Securities Purchase Agreement by and between the Company and Triton, dated February 20, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 27, 2020.
10.55		Employment Agreement between the Company and Kristin Taylor, dated April 10, 2020 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed April 15, 2020).
10.56		Purchase Agreement, by and between ~~ImageWare~~Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated April 28, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated April 30, 2020).
10.57		Registration Rights Agreement, by and between ~~ImageWare~~Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated April 28, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated April 30, 2020).
10.58		Note Payable Agreement by and between ~~ImageWare~~Imageware Systems, Inc. and COMERICA BANK, dated April 30, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 11, 2020).
10.59		Consulting Agreement by and between ~~ImageWare~~Imageware Systems, Inc. and S. James Miller, dated November 13, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
10.60		Debt Exchange Agreement and Satisfaction and Release by and between ~~ImageWare~~Imageware Systems, Inc. and S. James Miller, dated November 12, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
10.61		Debt Exchange Agreement and Satisfaction and Release by and between ~~ImgeWare~~Imageware Systems, Inc. and Neal Goldman, dated November 12, 2020 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated November 18, 2020).
10.62		~~Amendment~~Letter toAgreement, ~~the~~dated ~~ImageWare~~January ~~Systems~~7, ~~Inc~~2021 (incorporated by reference to Exhibit 10.1 ~~2020~~to ~~Omnibus~~the ~~Equity~~Company’s ~~Incentive~~Current ~~Plan~~Report on Form 8-K, dated January 8, 2021).
10.63		Purchase Agreement, by and between Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated May 17, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 21, 2021).
10.64		Registration Rights Agreement, by and between Imageware Systems, Inc. and Lincoln Park Capital Fund, LLC, dated May 17, 2021 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated May 21, 2021).
10.65		Amended and Restated Employment Agreement, by and between Kristin Taylor and the Company, dated June 4, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated June 8, 2021).
10.66		Amendment to the Imageware Systems, Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.62 to the Company’s Annual Report on Form 10-K, filed with the SEC on April 5, 2021).
10.67		Loan and Security Agreement, dated December 29, 2021, among Imageware Systems, Inc., and certain funds and separate accounts managed by Nantahala Capital Management, LLC, and the other lenders set forth on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated January 4, 2022).
21.1		List of Subsidiaries (incorporated by referenced to Exhibit 21.1 to the Company’s Annual Report on Form 10-K filed February 24, 2010).
23.1		Consent of Independent Registered Public Accounting Firm.
23.2		Consent of Independent Registered Public Accounting Firm.
31.1		Certification of CEO as Required by Rule 13a-14(a)/15d-14, filed herewith.
31.2		Certification of CFO as Required by Rule 13a-14(a)/15d-14, filed herewith.
32		Certification of CEO and CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith.
101.INS		Inline XBRL Instance 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 included in Exhibit 101)

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.

Registrant Date: April 2, 2021		ImageWare Systems, Inc. /s/ Kristin Taylor
Registrant Date: April 14, 2022		Imageware Systems, Inc. /s/ Kristin Taylor
		Kristin Taylor
		Chief Executive Officer (Principal Executive Officer) and President

Date: April 214, ~~2021~~2022 /s/ ~~Jay~~Jeffrey ~~Lewis~~Hotze ~~Chief~~Corporate ~~Financial~~Controller ~~Officer~~ (Principal Financial and Accounting Officer)

In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Date: April 2, 2021		/s/ James Demitrieus
Date: April 14, 2022		/s/ James Demitrieus
		James Demitrieus
		Director
Date: April 2, 2021		/s/ Douglas Morgan
Date: April 14, 2022		/s/ Douglas Morgan
		Douglas Morgan
		Director

Date: April 2, 2021		/s/ Lauren C. Anderson
Date: April 14, 2022		/s/ Lauren C. Anderson
		Lauren C. Anderson
		Director

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IMAGEWARE SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page Number
Report of Independent Registered Public Accounting Firm		F-2
Report of Independent Registered Public Accounting Firm (PCAOB ID: 23)		F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019		F-5
Report of Independent Registered Public Accounting Firm (PCAOB ID: 199)		F-3
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019		F-6
Consolidated Balance Sheets as of December 31, 2021 and 2020		F-6
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019		F-7
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020		F-7
Consolidated Statements of Shareholders’ Deficit for the years ended December 31, 2020 and 2019		F-8
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020		F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019		F-9
Consolidated Statements of Shareholders’ Deficit for the years ended December 31, 2021 and 2020		F-9
Notes to Consolidated Financial Statements		F-10
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020		F-11
Notes to Consolidated Financial Statements		F-12

F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Imageware Systems, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Imageware Systems, Inc. (the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, changes in shareholders' deficit and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Other Matter

The consolidated financial statements of the Company, as of and for the year ended December 31, 2020, were audited by other auditors, whose report dated April 2, 2021, expressed an unmodified opinion on those statements.

Substantial Doubt About the Company's Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Convertible Preferred Shares

Critical Audit Matter Description:

As described in Note 13 to the consolidated financial statements, the Company has previously issued Series D Convertible Preferred Stock which required the identification and assessment of the embedded features to be recognized separately and recorded at fair value. The Company determined that the embedded conversion option, redemption option and participating dividend feature contained in the Series D Convertible Preferred Stock were required to be recognized separately as derivative liabilities at fair value. The determination of fair value involved using complex valuation methodologies and significant assumptions including the expected volatility of the Company’s common stock and the probability of certain conditions or events occurring.

We identified auditing the Company’s evaluation of the accounting for the embedded features included in the Series D Convertible Preferred Stock, specifically the methods and assumptions used to estimate the fair value of the derivative liability as a critical audit matter.

How We Addressed the Matter in Our Audit:

The primary procedures we performed to address this critical audit matter included:

●

Obtaining and reviewing the underlying Series D Convertible Preferred Stock agreements to understand the terms and conditions, economic substance, and identify embedded features requiring evaluation.

●

Obtaining an understanding of management’s process for developing the estimated fair value of the embedded features, including evaluation of the appropriateness of the method selected by the Company, identifying the significant assumptions used to determine the fair value estimate, and the application of those assumptions in the related method.

●

Testing the data and significant assumptions used in developing the fair value estimate, including procedures to determine whether the data was complete and accurate and sufficiently precise and whether management’s estimation of the probability of whether certain conditions or events were reasonable as of each valuation date.

●

Utilizing a valuation specialist assisting in evaluating the reasonableness of the valuation methodology used, and the underlying assumptions including the forecasted volatility of the Company’s common stock price to its historical volatility.

/s/ BAKER TILLY US, LLP

We have served as the Company's auditor since 2021.

Irvine, California
April 14, 2022

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of:

~~ImageWare~~Imageware Systems, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance ~~sheets~~ sheet of ~~ImageWare~~ Imageware Systems, Inc. (“Company”) as of December 31, 2020 ~~and 2019~~, and the related consolidated statements of operations, comprehensive loss, shareholders’ deficit and cash flows for ~~each of~~ the ~~two~~ ~~years~~year ~~in the period~~ ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 ~~and 2019~~, and the results of its operations and its cash flows for ~~each of~~ the year ~~two years in the period~~ ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Going Concern Uncertainty

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not generate sufficient cash flows from operations to maintain operations and, therefore, is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our ~~audits~~audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our ~~audits~~audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our ~~audits~~audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our ~~audits~~ audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our ~~audits~~audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our ~~audits~~audit ~~provide~~provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

F-23

Convertible Preferred Shares

As described further in Note 13 to the financial statements, the Company issued 22,863 shares of Series D Convertible Preferred Stock during the year ended December 31, 2020. The accounting for the transaction was complex, as it required the identification and assessment as to whether embedded features were required to be recognized separately and therefore, also were required to be recorded at fair value. The Company determined that the embedded conversion option, redemption option and participating dividend feature contained in the Series D Convertible Preferred Stock host instrument were required to be recognized separately as derivative liabilities at fair value. The determination of fair value involved using complex valuation methodologies that incorporate significant assumptions which include the expected volatility of the Company’s common stock and the probability of certain conditions or events occurring.

We identified auditing the Company’s evaluation of the accounting for the embedded features included in the Series D Convertible Preferred Stock and the methods and assumptions used to estimate the fair value of the resulting derivative liability as a critical audit matter. The principal consideration for this determination was the degree of judgment involved by management in determining if the host contract was more akin to debt or equity and the development of the assumptions necessary to estimate the fair value of the derivative liability which in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence for the accounting and estimated fair value.

The primary procedures we performed to address this critical audit matter included:

● Reading the underlying Series D Convertible Preferred Stock agreements to understand the terms and conditions, economic substance, and identify embedded features requiring evaluation.

~~Reading the~~● ~~underlying~~Testing ~~Series~~management’s Dapplication ~~Convertible~~of ~~Preferred~~the ~~Stock~~relevant ~~agreements~~accounting guidance to ~~understand~~ assess if the ~~terms~~embedded ~~and~~features ~~conditions,~~require ~~economic~~accounting ~~substance,~~as derivative financial instruments and ~~identify~~ ~~embedded~~applying ~~features~~our ~~requiring~~understanding ~~evaluation~~of each.

● Obtaining an understanding of management’s process for developing the estimated fair value, including understanding the reasons the method was selected by the Company, identifying the significant assumptions used to determine the fair value estimate, and the application of those assumptions in the related method, and evaluating the appropriateness of each.

● Testing ~~management’s~~ ~~application~~the ofdata ~~the~~used ~~relevant~~in ~~accounting~~developing ~~guidance to~~the ~~assess~~fair ifvalue ~~the~~estimate, ~~embedded~~including ~~features~~procedures ~~require~~to ~~accounting~~determine aswhether ~~derivative financial~~the ~~instruments~~data was complete and ~~applying~~accurate ~~our~~and ~~understanding~~sufficiently ~~of each~~precise.

● Evaluating the significant assumptions used in developing the fair value estimate, including:

~~Obtaining an~~o ~~understanding~~Evaluating ofwhether management’s ~~process~~estimation ~~for~~of ~~developing~~ the ~~estimated~~ ~~fair~~probability ~~value, including understanding the reasons the method was selected by the Company, identifying the significant assumptions used to determine the fair value estimate, and the application~~ of ~~those~~whether ~~assumptions~~certain inconditions ~~the~~or ~~related~~events ~~method,~~were ~~and evaluating~~reasonable ~~the~~as ~~appropriateness~~ of each valuation date.

●o Comparing the forecasted volatility of the Company’s common stock price to its historical volatility.

~~Testing~~● Involving the ~~data~~use ~~used~~of ~~in developing~~valuation ~~the~~professionals ~~fair~~with ~~value~~specialized ~~estimate,~~skill ~~including~~and ~~procedures~~knowledge to ~~determine~~ ~~whether~~assist in the ~~data~~evaluation ~~was~~of ~~complete~~management’s process, selected method, and ~~accurate~~inputs and ~~sufficiently~~ ~~precise~~assumptions used in the method.

●

Evaluating the significant assumptions used in developing the fair value estimate, including:

Evaluating whether management’s estimation of the probability of whether certain conditions or events were reasonable as of each valuation date.

Comparing the forecasted volatility of the Company’s common stock price to its historical volatility.

●

Involving the use of valuation professionals with specialized skill and knowledge to assist in the evaluation of management’s process, selected method, and inputs and assumptions used in the method.

F-3

Modification of Preferred Shares

As described in Note 2 and Note 14 to the financial statements, during the year ended December 31, 2020 the Company amended the terms of its Series A and Series A-1 Preferred Stock. In addition, the Company converted the Series C Preferred Stock into shares of Series D Preferred Stock. The accounting for the transactions was complex due to a lack of authoritative guidance on the accounting for preferred stock modifications and extinguishments within US GAAP. Additionally, the transactions required an estimation of the fair value of Series A, Series A-1, and Series D Preferred Stock.

F-4

We identified auditing the Company’s accounting for the modification of the Series A and A-1 preferred shares, the conversion of the Series C Preferred Stock into Series D Preferred Stock, and the corresponding fair value estimates of the Series A, Series A-1, and Series D Preferred Stock as a critical audit matter. The principal consideration for this determination was a combination of the lack of authoritative guidance on accounting for the modification or extinguishment of preferred shares and the judgment involved by management in developing the model and assumptions necessary to estimate of the fair value of the Series A, Series A-1, and Series D Preferred Stock. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s accounting conclusions and the reasonableness of the significant assumptions used by the Company to estimate each fair value and the application of those assumptions within the valuation methods.

The primary procedures we performed to address this critical audit matter included:

● Reading the underlying preferred share agreements to understand the terms, conditions and economic substance of the transactions.

~~Reading the~~● ~~underlying~~Evaluating ~~preferred~~whether ~~share~~management’s ~~agreements~~selection toand ~~understand~~application of the ~~terms, conditions~~relevant accounting guidance was reasonable and ~~economic~~supportable, ~~substance~~applying our understanding of the ~~transactions~~agreements.

● Obtaining an understanding of management’s process for developing the estimated fair value of the Series A, Series A-1, and Series D Preferred Stock, including understanding the reasons the methods were selected by the Company, identifying the significant assumptions used to determine the fair value estimates and the application of those assumptions in the related models, and evaluating the appropriateness of each.

~~Evaluating whether~~● ~~management’s~~Testing ~~selection~~the ~~and~~data ~~application~~used ofin developing the ~~relevant~~ ~~accounting~~fair ~~guidance~~value ~~was~~estimates, ~~reasonable~~including ~~and~~procedures ~~supportable, applying~~to ~~our~~determine ~~understanding~~whether of the ~~agreements~~data was complete and accurate and sufficiently precise.

● Involving the use of valuation professionals with specialized skill and knowledge to assist in the evaluation of management’s process, selected methods, and inputs and assumptions used in the methods.

Obtaining an understanding of management’s process for developing the estimated fair value of the Series A, Series A-1, and Series D Preferred Stock, including understanding the reasons the methods were selected by the Company, identifying the significant assumptions used to determine the fair value estimates and the application of those assumptions in the related models, and evaluating the appropriateness of each.

●

Testing the data used in developing the fair value estimates, including procedures to determine whether the data was complete and accurate and sufficiently precise.

●

Involving the use of valuation professionals with specialized skill and knowledge to assist in the evaluation of management’s process, selected methods, and inputs and assumptions used in the methods.

/s/ Mayer Hoffman McCann P.C.

We ~~have~~ served as the Company's auditor ~~since~~from 2011 to 2021.

San Diego, California

April 2, 2021

F-45

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IMAGEWARE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	December 31,	~~December 31,~~		December 31,
	2020	2019
	2021			2020
ASSETS
Current Assets:
Cash and cash equivalents	$~~8,345~~	$1,~~030~~202		$	8,345
Accounts receivable, net of allowance for doubtful accounts of $5 and $7 at December 31, 2020 and 2019, respectively.	577	657
Accounts receivable, net of allowance for doubtful accounts of $25 and $5 at December 31, 2021 and 2020, respectively.		383			577
Inventory, net	40	~~615~~25			40
Other current assets	~~196~~	~~243~~215			196
Total Current Assets	~~9,158~~	21,~~545~~825			9,158
Property and equipment, net	~~155~~	~~216~~79			155
Other assets	~~458~~	~~257~~149			458
Operating lease right-of-use assets	~~1,557~~	~~1,906~~847			1,557
Intangible assets, net of accumulated amortization	58	70—			58
Goodwill	~~3,416~~	3,416			3,416
Total Assets	$~~14,802~~	$86,~~410~~316		$	14,802
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$~~1,007~~	~~$515~~837		$	1,007
Deferred revenue	~~903~~	1,~~629~~204			903
Accrued expense	~~1,130~~	1,~~312~~518			1,130
Operating lease liabilities, current portion	~~421~~	~~373~~496			421
Derivative liabilities	~~24,128~~	~~369~~5,292			24,128
Note payable, current portion	~~918~~	—524			918
Total Current Liabilities	~~28,507~~	49,~~198~~871			28,507
Other long-term liabilities	65	~~118~~—			65
Note payable, net of current portion	~~653~~	—			653
Lease liabilities, net of current portion	1,297	1,716
Operating lease liabilities, net of current portion		802			1,297
Pension obligation	~~2,531~~	21,~~256~~976			2,531
Total Liabilities	~~33,053~~	812,~~288~~649			33,053
Mezzanine Equity:
Series C Convertible Redeemable Preferred Stock, $0.01 par value, designated 1,000 shares, 0 and 1,000 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively; liquidation preference $0 and $10,000 at December 31, 2020 and December 31, 2019, respectively.	—	8,884
Series D Convertible Redeemable Preferred Stock, $0.01 par value, designated 26,000 shares, 23,862 shares issued and 23,216 and 22,863 shares outstanding at December 31, 2021 and December 31, 2020, respectively; liquidation preference $23,216 and $22,863 at December 31, 2021 and 2020, respectively.		8,759			1,572
Series D Convertible Redeemable Preferred Stock, $0.01 par value, designated
Shareholders’ Deficit:
26,000 shares, 22,863 and 0 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively; liquidation preference $22,863 and $0 at December 31, 2020 and 2019, respectively.	1,572	—
Preferred stock, authorized 5,000,000 shares:
Shareholders’ Deficit:
Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and 0 and 14,911 shares outstanding at December 31, 2021 and 2020, respectively; liquidation preference $0 and $14,911at December 31, 2021 and 2020, respectively.		—			—
Preferred stock, authorized 5,000,000 shares:
Series A-1 Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and 0 and 14,782 shares outstanding at December 31, 2021 and 2020, respectively; liquidation preference $0 and $14,782 at December 31, 2021 and 2020, respectively.		—			—
Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and 14,911 and 37,467 shares outstanding at December 31, 2020 and 2019, respectively; liquidation preference $14,911 and $37,467 at December 31, 2020 and 2019, respectively.	—	—
Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 shares outstanding at December 31, 2021 and 2020, respectively; liquidation preference $607 at December 31, 2021 and 2020, respectively.		2			2
Series A-1 Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and 14,782 and 0 shares outstanding at December 31, 2020 and 2019, respectively; liquidation preference $14,782 and $0 at December 31, 2020 and 2019, respectively.	—	—
Common Stock, $0.01 par value, 2,000,000,000 shares authorized; 347,240,045 and 180,096,317 shares issued at December 31, 2021 and 2020, respectively, and 347,233,341 shares and 180,089,613 shares outstanding at December 31, 2021 and 2020, respectively.		3,471			1,801
Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 shares outstanding at December 31, 2020 and 2019, respectively; liquidation preference $607 at December 31, 2020 and 2019, respectively.	2	2
Additional paid-in capital		187,148			193,652
Common Stock, $0.01 par value, 1,000,000,000 shares authorized; 180,096,317 and 113,353,176 shares issued at December 31, 2020 and 2019, respectively, and 180,089,613 shares and 113,346,472 shares outstanding at December 31, 2020 and 2019, respectively.	1,801	1,133
Treasury stock, at cost 6,704 shares		(64	)		(64	)
Additional paid-in capital	193,652	195,079
Accumulated other comprehensive loss		(1,396	)		(1,989	)
Treasury stock, at cost 6,704 shares	(64)	(64)
Accumulated deficit		(204,253	)		(213,225	)
Accumulated other comprehensive loss	(1,989)	(1,741)
Total Shareholders’ Deficit		(15,092	)		(19,823	)
Accumulated deficit	(213,225)	(203,171)
Total Liabilities, Mezzanine Equity and Shareholders’ Deficit	$	6,316		$	14,802
Total Shareholders’ Deficit	(19,823)	(8,762)
Total Liabilities, Mezzanine Equity and Shareholders’ Deficit	$14,802	$8,410

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

F-56

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IMAGEWARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

	~~Year Ended December 31,~~	Year Ended December 31,
	2020	2019
		2021			2020
Revenue:
Product	~~$2,231~~	$~~923~~	854		$	2,231
Maintenance	~~2,554~~	~~2,583~~	2,618			2,554
	4,785	3,506
			3,472			4,785
Cost of revenue:
Product	~~800~~	~~218~~	322			800
Maintenance	~~448~~	~~425~~	346			448
Gross profit	~~3,537~~	~~2,863~~	2,804			3,537
Operating expense:
General and administrative	~~4,102~~	~~3,614~~	6,151			4,102
Sales and marketing	~~2,936~~	~~3,937~~	2,892			2,936
Research and development	~~5,706~~	~~7,488~~	4,461			5,706
Depreciation and amortization	72	71	56			72
	12,816	15,110
			13,560			12,816
Loss from operations	~~(9,279)~~	~~(12,247)~~	(10,756	)		(9,279	)
Interest (income) expense, net	102	(90)
Interest expense, net			2			102
Gain on change in fair value of derivative liabilities	(2,252)	(696)
(Gain) on change in fair value of derivative liabilities			(18,809	)		(2,252	)
Other components of net periodic pension expense	115	109
(Gain) on extinguishment of debt			(1,581	)		—
Other expense	2	1
Loss on extinguishment of derivative liabilities, net			311			—
Loss before income taxes	(7,246)	(11,571)
Other components of net periodic pension expense			103			115
Income tax expense	7	10
Other (income) expense, net			(74	)		2
Net loss	$(7,253)	$(11,581)
Income (loss) before income taxes			9,292			(7,246	)
Preferred dividends, deemed dividends and accretion	(3,695)	(5,670)
Income tax expense			10			7
Net loss available to common shareholders	$(10,948)	$(17,251)
Net income (loss)		$	9,282		$	(7,253	)
Basic and diluted loss per common share — see Note 2:
Preferred dividends, deemed dividends and accretion			(8,116	)		(3,695	)
Basic and diluted loss per share available to common shareholders	$(0.08)	$(0.17)
Net income (loss) available to common shareholders		$	1,166		$	(10,948	)
Basic and diluted weighted-average shares outstanding	133,346,309	104,372,048
Basic income (loss) per common share — see Note 2:
Basic income (loss) per share available to common shareholders		$	0.00		$	(0.08	)
Basic weighted-average shares outstanding			312,119,417			133,346,309
Diluted income (loss) per common share — see Note 2:
Diluted income (loss) per share available to common shareholders		$	0.00		$	(0.08	)
Diluted weighted-average shares outstanding			320,656,728			133,346,309

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

F-67

Table of Contents

IMAGEWARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	~~Year Ended December 31,~~	Year Ended December 31,
	2020	2019
		2021		2020
Net loss	$(7,253)	$(11,581)
Net income (loss)		$	9,282	$	(7,253	)
Other comprehensive income (loss):
Increase in additional minimum pension liability	(97)	(312)
Decrease (increase) in additional minimum pension liability			518		(97	)
Foreign currency translation adjustment	~~(151)~~	~~(1)~~	75		(151	)
Comprehensive loss	$(7,501)	$(11,894)
Comprehensive income (loss)		$	9,875	$	(7,501	)

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

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IMAGEWARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(In thousands, except share amounts)

	~~Series A~~	Series A	~~Series A-1~~		~~Series B~~					Series A-1							Series B
	~~Convertible,~~	Convertible,	~~Convertible,~~		~~Convertible,~~					Convertible,		~~Accumulated~~					Convertible,																			Accumulated
	~~Redeemable~~	Redeemable	~~Redeemable~~		~~Redeemable~~					Redeemable	~~Additional~~	~~Other~~					Redeemable																Additional			Other
	~~Preferred~~	Preferred	~~Preferred~~		~~Preferred~~		~~Common Stock~~		~~Treasury Stock~~	Preferred	~~Paid-In~~	~~Comprehensive~~	~~Accumulated~~				Preferred				Common Stock						Treasury Stock						Paid-In			Comprehensive			Accumulated
	~~Shares~~	~~Amount~~Shares	~~Shares~~	~~Amount~~	~~Shares~~	Amount	~~Shares~~	~~Amount~~	~~Shares~~	~~Amount~~Shares	~~Capital~~	~~Loss~~	~~Deficit~~	~~Total~~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	-	-	-	-	-	-	-	-	-	-	~~(2,688)~~-	-	-	~~(2,688)~~	-			-		-		-			-			-			-			(6,806	)		-			-			(6,806	)
Issuance of common stock net of financing costs	-	-	-	-	-	-	15,700,000	157	-	-	2,103	-	-	2,260
Stock-based compensation expense - options			-				-				-				-			-		-		-			-			-			-			1,494			-			-			1,494
Stock-based compensation expense and issuance of Restricted Stock Units	-	-	-	-	-	-	1,883,248	19	-	-	843	-	-	862
Stock-based compensation expense - RSUs			-				-				-				-			-		-		902,630			9			-			-			(1	)		-			-			8
Issuance of common stock for financing facility	-	-	-	-	-	-	2,500,000	25	-	-	375	-	-	400
Stock-based compensation expense - warrants			-				-				-				-			-		-		-			-			-			-			26			-			-			26
Modification of Series A Preferred Stock from issuance of Series A-1 Preferred Stock	(18,828)	-	18,828	-	-	-	-	-	-	-	1,849	-	-	1,849
Issuance of Common Stock for cash			-				-				-				-			-		-		1,000,000			10			-			-			90			-			-			100
Conversion of Series A Preferred to Common Stock	(3,728)	-	-	-	-	-	18,640,000	186	-	-	(186)	-	-	-
Issuance of Common Stock as issuance costs for equity line of credit			-				-				-				-			-		-		1,000,000			10			-			-			60			-			-			70
Conversion of Series A-1 Preferred to Common Stock	-	-	(4,046)	-	-	-	19,016,452	190	-	-	(190)	-	-	-
Issuance of common stock in lieu of cash			-				-				-				-			-		-		921,218			9			-			-			49			-			-			58
Dividends on Series B preferred stock, $(0.21)/share	-	-	-	-	-	-	-	-	-	-	-	-	(51)	(51)
Issuance of common stock pursuant to warrant exercise			-				-				-				-			-		-		400			0			-			-			-			-			-			0
Additional minimum pension liability	-	-	-	-	-	-	-	-	-	-	-	(97)	-	(97)
Conversion of Series A Preferred to Common Stock			(14,911	)			(0	)			-				-			-		-		74,562,000			746			-			-			(745	)		-			-			(0	)
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	-	-	(151)	-	(151)
Conversion of Series A-1 Preferred to Common Stock			-				-				(14,782	)			(0	)		-		-		73,910,000			739			-			-			(739	)		-			-			0
Dividends on Series A preferred stock, $256.89/share	-	-	-	-	-	-	1,388,876	14	-	-	104	-	(1,967)	(1,849)
Conversion of Series D Preferred to Common Stock			-				-				-				-			-		-		11,149,123			110			-			-			851			-			(5	)		956
Dividends on Series A-1 preferred stock, $867.20/share	-	-	-	-	-	-	1,159,416	12	-	-	81	-	(93)	-
Recission of common shares			-				-				-				-			-		-		(2,817	)		(0	)		-			-			0			-			-			-
Dividends on Series C preferred stock, $(1,422.31)/share	-	-	-	-	-	-	6,455,149	65	-	-	625	-	(690)	-
Dividends on Series A preferred stock, $(249.92)/share			-				-				-				-			-		-		1,911,587			19			-			-			113			-			(132	)		(0	)
Dividends on Series D preferred stock, $(45.70)/share	-	-	-	-	-	-	-	-	-	-	(142)	-	-	(142)
Dividends on Series A-1 preferred stock, $(228.18)/share			-				-				-				-			-		-		1,789,587			18			-			-			104			-			(122	)		0
Deemed dividend from issuance of Series D preferred stock $(1859.80)/share	-	-	-	-	-	-	-	-	-	-	(4,201)	-	-	(4,201)
Dividends on Series B preferred stock			-				-				-				-			-		-		-			-			-			-			-			-			(51	)		(51	)
Net loss	-	-	-	-	-	-	-	-	-	-	-	-	(7,253)	(7,253)
Dividends on Series D Preferred stock, $(342.16)/share			-				-				-				-			-		-		-			-			-			-			(999	)		-			-			(999	)
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)
Foreign currency translation adjustment			-				-				-				-			-		-		-			-			-			-			-			75			-			75
Additional minimum pension liability			-				-				-				-			-		-		-			-			-			-			-			518			-			518
Net income			-				-				-				-			-		-		-			-			-			-			-			-			9,282			9,282
Balance at December 31, 2021			-			$	-				-			$	-			239,400	$	2		347,240,045		$	3,471			(6,704	)	$	(64	)	$	187,148		$	(1,396	)	$	(204,253	)	$	(15,092	)

	Series A 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	Capital	Loss	Deficit	Total
Balance at December 31, 2018	37,467	$-	239,400	$2	98,230,336	$981	(6,704)	$(64)	$184,130	$(1,428)	$(186,648)	$(3,027)
Accretion of Preferred Stock discount	-	-	-	-	-	-	-	-	(728)	-	-	(728)
Issuance of common stock net of financing costs	-	-	-	-	5,954,545	60	-	-	6,060	-	-	6,120
Issuance of common stock pursuant to option exercises	-	-	-	-	351,334	4	-	-	162	-	-	166
Stock-based compensation expense	-	-	-	-	-	-	-	-	643	-	-	643
Warrants issued in lieu of cash as compensation for services	-	-	-	-	-	-	-	-	9	-	-	9
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	(1)	-	(1)
Additional minimum pension liability	-	-	-	-	-	-	-	-	-	(312)	-	(312)
Dividends on Series A preferred stock, $(103.03)/share	-	-	-	-	6,959,523	70	-	-	3,791	-	(3,861)	-
Dividends on Series B preferred stock, $(0.21)/share	-	-	-	-	-	-	-	-	-	-	(51)	(51)
Dividends on Series C preferred stock, $(1,030.28)/share	-	-	-	-	1,857,438	18	-	-	1,012	-	(1,030)	-
Net loss	-	-	-	-	-	-	-	-	-	-	(11,581)	(11,581)
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)

F-9

Table of Contents

	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, 2019		37,467		$	-		-		$	-		239,400	$	2		113,353,176	$	1,133		(6,704	)	$	(64	)	$	195,079		$	(1,741	)	$	(203,171	)	$	(8,762	)

Accretion of Preferred Stock discount		-			-		-			-		-		-		-		-		-			-			(2,688	)		-			-			(2,688	)
Issuance of common stock net of financing costs		-			-		-			-		-		-		15,700,000		157		-			-			2,103			-			-			2,260
Stock-based compensation expense		-			-		-			-		-		-		1,883,248		19		-			-			843			-			-			862
Issuance of common stock for financing facility		-			-					-		-		-		2,500,000		25		-			-			375			-			-			400
Modification of Series A Preferred Stock from issuance of Series A-1 Preferred Stock		(18,828	)		-		18,828			-		-		-		-		-		-			-			1,849			-			-			1,849
Conversion of Series A Preferred to Common Stock		(3,728	)		-											18,640,000		186								(186	)								-
Conversion of Series A-1 Preferred to Common Stock		-			-		(4,046	)		-						19,016,452		190								(190	)								-
Dividends on Series B preferred stock, $(0.11)/share		-			-					-		-		-		-		-		-			-			-			-			(51	)		(51	)
Additional minimum pension liability		-			-		-			-		-		-		-		-		-			-			-			(97	)		-			(97	)
Foreign currency translation adjustment		-			-		-			-		-		-		-		-		-			-			-			(151	)		-			(151	)
Dividends on Series A preferred stock, $(25.01)/share		-			-		-			-		-		-		1,388,876		14		-			-			104			-			(1,967	)		(1,849	)
Dividends on Series A-1 preferred stock, $(25.01)/share		-			-		-			-		-		-		1,159,416		12		-			-			81			-			(93	)		-
Dividends on Series C preferred stock, $(250.00)/share		-			-		-			-		-		-		6,455,149		65		-			-			625			-			(690	)		-
Dividends on Series D preferred stock, $(45.70)/share		-			-		-			-		-		-		-		-		-			-			(142	)		-			-			(142	)
Deemed dividend from issuance of Series D preferred stock		-			-		-			-		-		-		-		-		-			-			(4,201	)		-			-			(4,201	)
Net loss		-			-		-			-		-		-		-		-		-			-			-			-			(7,253	)		(7,253	)
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	)

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

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IMAGEWARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	~~Year Ended December 31,~~	Year Ended December 31,
Cash flows from operating activities	~~2020~~	~~2019~~2021			2020
Net loss	$(7,253)	$(11,581)
Net income (loss)		$	9,282		$	(7,253	)
Adjustments to reconcile net loss to net cash used by operating activities:
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization	72	71	56			72
Stock-based compensation	862	643
Loss on disposal of fixed assets			82			—
Warrants issued in lieu of cash as compensation for services	—	9
Loss on abandonment of patents			50			—
Application of rent deposit in lieu of cash payments	124	—
Loss on extinguishment of derivative liabilities			311			—
Gain from change in fair value of derivative liabilities	(2,252)	(696)
Deferred stock issuance costs			364
Change in assets and liabilities
Stock-based compensation			1,528			862
Accounts receivable	81	311
Stock issued in lieu of cash as compensation for services			58			—
Inventory	576	(586)
Application of rent deposit in lieu of cash payments			—			124
Other assets	33	66
Gain on extinguishment of debt			(1,581	)
Operating lease right-of-use assets	(20)	168
Gain from change in fair value of derivative liabilities			(18,809	)		(2,252	)
Accounts payable	491	(162)
Impairment loss on lease abandonment			333			—
Accrued expense	(175)	37
Change in assets and liabilities
Deferred revenue	(726)	415
Accounts receivable			194			81
Contract costs	—	(29)
Inventory			14			576
Pension obligation	178	67
Other assets			(69	)		33
Total adjustments	(756)	314
Operating lease right-of-use assets			(44	)		(20	)
Net cash used by operating activities	(8,009)	(11,267)
Accounts payable			(170	)		491
Cash flows from investing activities
Accrued expense			401			(175	)
Purchase of property and equipment	—	(31)
Deferred revenue			300			(726	)
Net cash used by investing activities	—	(31)
Pension obligation			(37	)		178
Cash flows from financing activities
Total adjustments			(17,019	)		(756	)
Proceeds from issuance of common stock, net	2,296	6,520
Net cash used by operating activities			(7,737	)		(8,009	)
Proceeds from issuance of notes payable	4,658	—
Cash flows from investing activities
Repayment of notes payable	(575)	—
Purchase of property and equipment			(53	)		—
Proceeds from exercise of stock options	—	166
Net cash used by investing activities			(53	)		—
Proceeds from issuance of preferred stock, net of issuance costs	9,147	—
Cash flows from financing activities
Dividends paid to preferred stockholders	(51)	(51)
Proceeds from issuance of common stock, net			100			2,296
Net cash provided by financing activities	15,475	6,635
Proceeds from issuance of notes payable, net			523			4,658
Effect of exchange rate changes on cash and cash equivalents	(151)	(1)
Repayment of notes payable			—			(575	)
Net increase (decrease) in cash and cash equivalents	7,315	(4,664)
Proceeds from issuance of preferred stock, net of issuance costs			—			9,147
Cash and cash equivalents at beginning of year	1,030	5,694
Dividends paid to preferred stockholders			(51	)		(51	)
Cash and cash equivalents at end of year	$8,345	$1,030
Net cash provided by financing activities			572			15,475
Supplemental disclosure of cash flow information:
Effect of exchange rate changes on cash and cash equivalents			75			(151	)
Cash paid for interest	$52	$—
Net (decrease) increase in cash and cash equivalents			(7,143	)		7,315
Cash paid for income taxes	$—	$—
Cash and cash equivalents at beginning of year			8,345			1,030
Summary of non-cash investing and financing activities:
Cash and cash equivalents at end of year		$	1,202		$	8,345
Issuance of common stock for financing facility	$400	$—
Supplemental disclosure of cash flow information:
Stock dividends on Series A Convertible Redeemable Preferred Stock	$1,849	$3,861
Cash paid for interest		$	—		$	52
Stock dividends on Series A-1 Convertible Redeemable Preferred Stock	$93	$—
Cash paid for income taxes		$	—		$	—
Stock dividends on Series C Convertible Redeemable Preferred Stock	$690	$1,030
Summary of non-cash investing and financing activities:
Stock dividends on Series D Convertible Redeemable Preferred Stock	$142	$—
Issuance of common stock for financing facility		$	70		$	400
Recognition of operating lease right-of-use assets from adoption of ASC 842	$—	$2,265
Stock dividends on Series A Convertible Redeemable Preferred Stock		$	132		$	1,849
Recognition of lease liabilities of ASC 842	$—	$(2,280)
Stock dividends on Series A-1 Convertible Redeemable Preferred Stock		$	122		$	93
Conversion of Series A Convertible Redeemable Preferred Stock into Common Stock	$190	$—
Stock dividends on Series C Convertible Redeemable Preferred Stock		$	—		$	690
Conversion of Series A-1 Convertible Redeemable Preferred Stock into Common Stock	$186	$—
Stock dividends on Series D Convertible Redeemable Preferred Stock		$	999		$	142
Conversion of bridge loan into Series D Convertible Redeemable Preferred Stock	$2,187	$—
Conversion of Series A Convertible Redeemable Preferred Stock into Common Stock		$	745		$	190
Conversion of related party notes payable and accrued interest into Series D Convertible Redeemable Preferred Stock	$334	$—
Conversion of Series A-1 Convertible Redeemable Preferred Stock into Common Stock		$	739		$	186
Recognition of derivative liabilities on preferred stock issuance	$26,011	$—
Conversion of bridge loan into Series D Convertible Redeemable Preferred Stock		$	—		$	2,187
Deemed dividend from holder on preferred stock extinguishment and modification	$6,136	$—
Conversion of related party notes payable and accrued interest into Series D Convertible Redeemable Preferred Stock		$	—		$	334
Exchange of Series C Convertible Redeemable Preferred Stock for Series D Convertible Redeemable Preferred Stock	$10,000	$—
Recognition of derivative liabilities on preferred stock issuance		$	557		$	26,011
Accretion of discount on Series C Convertible Redeemable Preferred Stock	$1,116	$728
Deemed dividend from holder on preferred stock extinguishment and modification		$	—		$	6,136
Accretion of discount on Series D Convertible Redeemable Preferred Stock	$1,572	$—
Exchange of Series C Convertible Redeemable Preferred Stock for Series D Convertible Redeemable Preferred Stock		$	—		$	10,000
Reduction in additional minimum pension liability	$97	$312
Accretion of discount on Series C Convertible Redeemable Preferred Stock		$	—		$	1,116
Accrued financing costs	$—	$400
Accretion of discount on Series D Convertible Redeemable Preferred Stock		$	6,806		$	1,572
Reduction in additional minimum pension liability		$	518		$	97

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

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Table of Contents

IMAGEWARE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, ~~2020~~2021 AND ~~2019~~2020

1. DESCRIPTION OF BUSINESS AND OPERATIONS

Overview

As used in this 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.

Liquidity, Going Concern and Management’s ~~Plan~~Plans

~~Historically~~At December 31, ~~our~~2021 ~~principal~~and ~~sources~~2020, ofwe ~~cash~~had ~~have included~~negative ~~customer~~working ~~payments~~capital ~~from the sale~~ of ~~our products~~$8,046,000 ~~proceeds from the issuance of common~~ and ~~preferred~~$19,349,000, ~~stock~~respectively. ~~and~~Included ~~proceeds~~in ~~from the~~our ~~issuance~~negative ofworking ~~debt.~~capital ~~Our~~as ~~principal uses~~ of December ~~cash~~31, ~~have~~2021 ~~included~~are ~~cash used in operations~~$5, ~~product development~~292,000 ~~and payments relating to purchases~~ of ~~property~~derivative ~~and~~liabilities ~~equipment.~~which Weare ~~expect~~not ~~that~~required ~~our~~to ~~principal uses~~be ofsettled in cash except in the ~~future~~event ~~will be for product development, including customization~~ of ~~identity~~the ~~management~~consummation ~~products for enterprise and consumer applications, further development~~ of ~~intellectual~~ ~~property,~~a ~~development~~change of ~~Software-as-a-Service (“SaaS”)~~control ~~capabilities~~or ~~for~~at ~~existing~~any ~~products~~time ~~as well~~after asthe ~~general~~fourth ~~working~~anniversary ~~capital~~of ~~requirements.~~the ~~Management~~Series ~~expects that,~~D asPreferred ~~our revenue grows~~issuance, ~~our sales and marketing and research and development expense will continue to grow, albeit~~ at awhich ~~slower rate~~time ~~and,~~the asholders aof ~~result,~~the weSeries ~~will~~D ~~need~~Preferred may torequire ~~generate~~the ~~significant~~Company ~~net revenue~~ to ~~achieve~~redeem ~~and~~in ~~sustain positive~~ cash ~~flows~~any ~~from~~or ~~operations. Historically~~all of the ~~Company~~holder’s ~~has~~outstanding ~~not~~Series ~~been~~D ~~able~~Preferred toat ~~generate~~an ~~sufficient net~~amount ~~revenue~~equal to ~~achieve~~the ~~and~~liquidation ~~sustain~~preference ~~positive~~of ~~cash~~the ~~flows~~Series ~~from operations~~D. ~~and~~At December ~~management~~31, ~~has~~2021 ~~determined that there is substantial doubt about~~ the ~~Company’s~~liquidation ~~ability~~preference tototaled ~~continue as a going concern~~$23,216,000.

AtHistorically, ~~December~~our ~~31,~~principal ~~2020~~sources of cash have included proceeds from the issuance of common and ~~2019,~~preferred ~~we had~~stock ~~negative~~and ~~working~~proceeds ~~capital~~from the issuance of ~~$19~~debt,~~349,000~~ and, $1to a lesser extent,~~653,000, respectively.~~ ~~Included~~customer inpayments from the sale of our ~~negative~~ ~~working~~products. ~~capital~~Our asprincipal uses of ~~December~~cash ~~31,~~have ~~2020~~included ~~are~~cash ~~$24~~used in operations,~~128~~ product development,~~000~~ and payments relating to purchases of ~~derivative~~ ~~liabilities~~property ~~which~~and ~~are~~equipment. ~~not~~We ~~required~~expect tothat beour ~~settled~~principal inuses of cash ~~except~~ in the ~~event~~future will be for product development, including customization of ~~the~~identity ~~consummation~~management products for enterprise and consumer applications, further development of aintellectual ~~Change~~property, development of ~~Control~~Software-as-a-Service ~~or at~~(“SaaS”) ~~any~~capabilities ~~time~~for ~~after~~existing ~~the~~products ~~fourth~~as ~~anniversary~~well ofas ~~the~~general ~~Series~~working Dcapital ~~Preferred issuance~~requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at ~~which~~a ~~time~~slower ~~the~~rate ~~holders~~and, ofas ~~the~~a ~~Series~~result, Dwe ~~Preferred~~will ~~may require~~need ~~the~~to ~~Company~~generate significant net revenue to ~~redeem~~achieve inand sustain positive cash ~~any~~flows orfrom ~~all~~operations. ofHistorically the ~~holder’s~~ ~~outstanding~~Company ~~Series~~has Dnot ~~Preferred~~been atable anto ~~amount~~generate ~~equal~~sufficient net revenue to ~~the~~ ~~Series~~achieve Dand ~~Liquidation~~sustain ~~Preference~~positive ~~Amount~~cash flows from operations. AtAs ~~December~~a 31result, ~~2020~~ the ~~Liquidation~~Company ~~Preference~~has ~~Amount~~been ~~totaled $22,863,000~~dependent on equity and debt financings to satisfy its working capital requirements and continue as a going concern.

~~F-10~~To address our working capital requirements, management has instituted several cost cutting measures and has utilized cash proceeds available under the credit facility with certain funds and separate accounts managed by Nantahala Capital Management, LLC and other lenders (collectively, the “Lenders”), and under the purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to satisfy its working capital requirements (“LPC Purchase Agreement”).

~~Table~~During 2021, the Company retained an investment bank to initiate a review of ~~Contents~~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 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 “LOC”). As of April 14, 2022 approximately $763,000 remains available under the LOC in such shareholder’s discretion.

~~Considering~~To date the ~~financings~~Board ~~consummated~~of inDirectors ~~2020,~~(“Board”) ashas ~~well~~not asentered ~~our projected~~into ~~cash~~any ~~requirements,~~financing ~~and~~or ~~assuming~~other wearrangements, ~~are~~other ~~unable~~than tothe ~~generate incremental revenue~~LOC, ~~our~~and ~~available~~no ~~cash~~assurances ~~will~~can be ~~insufficient~~given ~~to satisfy~~that ~~our~~we ~~cash~~will ~~requirements~~be ~~for~~successful ~~the~~in ~~next~~raising ~~twelve~~additional ~~months~~capital ~~from~~through the ~~date~~ issuance of ~~this~~debt ~~filing.~~and/or Atequity ~~March~~securities ~~26,~~or ~~2021,~~entering ~~cash~~into onany ~~hand~~other ~~approximated $5,178,000.~~transaction ~~Based~~that onaddresses ~~the~~our ~~Company’s~~ability ~~rate~~to ofcontinue ~~cash~~as ~~consumption in~~a ~~the~~going ~~first~~concern. The ~~quarter~~consummation of ~~2021~~a ~~and~~transaction ~~the last quarter of 2020, the Company estimates it~~ will ~~need~~likely ~~additional~~involve ~~capital~~substantial indilution ~~the~~to ~~third quarter of 2021 and its prospects for obtaining that capital are uncertain. As a result of~~ the Company’s ~~historical~~stockholders ~~losses~~ and ~~financial~~ may ~~condition,~~result ~~there~~in ~~is substantial doubt about~~ the ~~Company’s~~ ~~ability~~loss toof ~~continue~~your asentire ~~a going concern~~investment.

To address our working capital requirements, management has begun instituting several cost cutting measures and may seek additional equity and/or debt financing through the issuance of additional debt and/or equity securities. Other than the Lincoln Purchase Agreement, there are currently no financing arrangements to support our projected cash shortfall, including commitments to purchase additional debt and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional debt and/or equity securities, or entering into any other transaction that addresses our ability to continue as a going concern.

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

F- 12

Table of Contents

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

F-11

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements are prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 105-10, Generally Accepted Accounting Principles, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s wholly-owned subsidiaries are: XImage Corporation, a California Corporation; ~~ImageWare~~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.

F- 13

Table of Contents

Operating Cycle

Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying consolidated balance sheets, although they will be liquidated in the normal course of contract completion which may take more than one operating cycle.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, assumptions used in the Black-Scholes model to calculate the fair value of share-based payments, fair value of Series D Preferred and financial instruments issued with and affected by the Series D Preferred Financing (defined below), fair value of financial instruments with and affected by the Series C Preferred (defined below), fair value of Series A Preferred (defined below), fair value of Series A-1 Preferred (defined below), assumptions used in the application of revenue recognition policies, assumptions used in the derivation of the Company’s incremental borrowing rate used in the computation of the Company’s operating lease liabilities, the determination of impairment of long-lived assets 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.

Filing Compare · IMAGEWARE SYSTEMS INC