SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

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

For the transition period from _________ to _________

Commission file number 001-15757

Delaware		33-0224167
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

13500 Evening Creek Drive N., Suite 550

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

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

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

Large accelerated filer	[ ]	Accelerated filer	[X] ]
Non-accelerated filer	[ ]X]	Smaller reporting company	[X]
		Emerging growth company	[ ]

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

ITEM 1. FINANCIAL STATEMENTS

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and outstanding at March 31, 2020 (unaudited) and December 31, 2019; liquidation preference $38,404 at March 31, 2020 (unaudited) and $37,467 at December 31, 2019.

Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 shares outstanding at March 31, 2020 (unaudited) and December 31, 2019; liquidation preference $620 and $607 at March 31, 2020 (unaudited) and December 31, 2019, respectively.

Common Stock, $0.01 par value, 175,000,000 shares authorized; 123,753,176 and 113,353,176 shares issued at March 31, 2020 (unaudited) and December 31, 2019, respectively, and 123,746,472 and 113,346,472 shares outstanding at March 31, 2020 (unaudited) and December 31, 2019, respectively.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except share and per share amounts)

Three Months Ended

March 31,

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Three Months Ended

September 30,

Nine months Ended

September 30,

Three Months Ended

March 31,

IMAGEWARE SY~~STEMS,~~SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

(In Thousands, except share amounts)

(Unaudited)

Series A
Convertible,
Series B
Convertible,

Accumulated

Redeemable Redeemable

Additional

Other

Preferred

Preferred

Common Stock

Treasury Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Loss

Deficit

Total

Balance at December 31, 2018
  37,467
$-
  239,400
$2
  98,230,336
$981
  6,704
$(64)
$184,130
$(1,428)
$(186,648)
$(3,027)













Accretion of Preferred Stock discount
  -
  -
  -
  -
  -
  -
  -
  -
  (186)
  -
  -
  (186)
Issuance of Common Stock pursuant to option exercises
  -
  -
  -
  -
  286,834
  3
  -
  -
  103
  -
  -
  106
Stock-based compensation expense
  -
  -
  -
  -
  -
  -
  -
  -
  166
  -
  -
  166
Foreign currency translation adjustment
  -
  -
  -
  -
  -
  -
  -
  -
  -
  15
  -
  15
Dividends on Series A preferred stock, $(23.06)/share
  -
  -
  -
  -
  591,803
  6
  -
  -
  858
  -
  (864)
  -
Divedends on Series C preferred stock, $(230.60)/share
  -
  -
  -
  -
  157,945
  2
  -
  -
  229
  -
  (231)
  -
Net loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (3,612)
  (3,612)
Balance at March 31, 2019
  37,467
$-
  239,400
$2
  99,266,918
$992
  6,704
$(64)
$185,300
$(1,413)
$(191,355)
$(6,538)













Accretion of Preferred Stock discount
  -
  -
  -
  -
  -
  -
  -
  -
  (184)
  -
  -
  (184)
Issuance of common stock net of financing costs
  -
  -
  -
  -
  5,954,545
  60
  -
  -
  6,035
  -
  -
  6,095
Issuance of Common Stock pursuant to option exercises
  -
  -
  -
  -
  64,500
  1
  -
  -
  59
  -
  -
  60
Stock-based compensation expense
  -
  -
  -
  -
  -
  -
  -
  -
  181
  -
  -
  181
Issuance of common stock warrants as compensation
  -
  -
  -
  -
  -
  -
  -
  -
  8
  -
  -
  8
Foreign currency translation adjustment
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (20)
  -
  (20)
Dividends on Series A preferred stock, $(24.81)/share
  -
  -
  -
  -
  999,633
  9
  -
  -
  921
  -
  (930)
  -
Dividends on Series B preferred stock, $(0.11)/share
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (26)
  (26)
Dividends on Series C preferred stock, $(248.12)/share
  -
  -
  -
  -
  266,793
  3
  -
  -
  245
  -
  (248)
  -













Net loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (2,548)
  (2,548)
Balance at June 30, 2019
  37,467
$-
  239,400
$2
  106,552,389
$1,065
  6,704
$(64)
$192,565
$(1,433)
$(195,107)
$(2,972)

Accretion of Preferred Stock discount
  -
  -
  -
  -
  -
  -
  -
  -
  (181)
  -
  -
  (181)
Stock-based compensation expense
  -
  -
  -
  -
  -
  -
  -
  -
  168
  -
  -
  168
Foreign currency translation adjustment
  -
  -
  -
  -
  -
  -
  -
  -
  -
  39
  -
  39
Dividends on Series A preferred stock, $(23.30)/share
  -
  -
  -
  -
  1,857,263
  19
  -
  -
  854
  -
  (873)
  -
Dividends on Series C preferred stock, $(232.97)/share
  -
  -
  -
  -
  495,688
  5
  -
  -
  228

  (233)
  -
Net loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (2,665)
  (2,665)
Balance at September 30, 2019
  37,467
$-
  239,400
$2
  108,905,340
$1,089
  6,704
$(64)
$193,634
$(1,394)
$(198,878)
$(5,611)

	Series A		Series B
	Convertible,		Convertible,							Accumulated
	Redeemable		Redeemable						Additional	Other
	Preferred		Preferred		Common Stock		Treasury Stock		Paid-In	Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Loss	Deficit	Total

Balance at December 31, 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	-	-	-	-	-	-	-	-	(175)	-	-	(175)
Issuance of common stock net of financing costs	-	-	-	-	10,000,000	100	-	-	1,287	-	-	1,387
Stock-based compensation expense	-	-	-	-	-	-	-	-	124	-	-	124
Common stock issued in exchange for unexercised options	-	-	-	-	400,000	4	-	-	58	-	-	62
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	31	-	31
Dividends on Series A preferred stock, $(25.01)/share	-	-	-	-	-	-	-	-	-	-	(937)	(937)
Dividends on Series C preferred stock, $(250.00)/share	-	-	-	-	-	-	-	-	-	-	(250)	(250)
Net loss	-	-	-	-	-	-	-	-	-	-	(3,124)	(3,124)
Balance at March 31, 2020	37,467	$-	239,400	$2	123,753,176	$1,237	(6,704)	$(64)	$196,373	$(1,710)	$(207,482)	$(11,644)

IMAGEWARE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

(In Thousands, except share amounts)

(Unaudited)

Three Months Ended March 31, 2019

	Series A		Series B
	Convertible,		Convertible,							Accumulated
	Redeemable		Redeemable						Additional	Other
	Preferred		Preferred		Common Stock		Treasury Stock		Paid-In	Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Loss	Deficit	Total

Balance at December 31, 2018	37,467	$-	239,400	$2	98,230,336	$981	(6,704)	$(64)	$184,130	$(1,428)	$(186,648)	$(3,027)

Accretion Preferred Stock discount	-	-	-	-	-	-	-	-	(186)	-	-	(186)
Issuance of Common Stock pursuant to option exercises	-	-	-	-	286,834	3	-	-	103	-	-	106
Stock-based compensation expense	-	-	-	-	-	-	-	-	166	-	-	166
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	15	-	15
Dividends on Series A preferred stock, $(23.06)/share	-	-	-	-	591,803	6	-	-	858	-	(864)	-
Dividends on Series C preferred stock, $(231.00)/share	-	-	-	-	157,945	2	-	-	229	-	(231)	-
Net loss	-	-	-	-	-	-	-	-	-	-	(3,612)	(3,612)
Balance at March 31, 2019	37,467	$-	239,400	$ 2	99,266,918	$992	(6,704)	$(64)	$185,300	$(1,413)	$(191,355)	$(6,538)

Series A

Series B

Convertible,

Convertible,

Accumulated



Redeemable

Redeemable

Additional

Other

Preferred

Preferred

Common Stock

Treasury Stock

Paid-In

Comprehensive

  Accumulated

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Loss

Deficit

Total

Balance at December 31, 2017
  31,021
$-
  239,400
$2
  94,174,540
$941
  6,704
$(64)
$172,414
$(1,664)
$(170,481)
$1,148













Issuance of common stock pursuant to Series A Preferred Stock conversions
  (450)
  -
  -
  -
  391,304
  4
  -
  -
  (4)
  -
  -
  -
Cumulative effect of ASC 606 adoption
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  96
  96
Issuance of Common Stock pursuant to option exercises
  -
  -
  -
  -
  83,169
  1
  -
  -
  87
  -
  -
  88
Recognition of beneficial conversion feature on convertible debt
  -
  -
  -
  -
  -
  -
  -
  -
  12
  -
  -
  12
Stock-based compensation expense
  -
  -
  -
  -
  -
  -
  -
  -
  335
  -
  -
  335
Foreign currency translation adjustment
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (27)
  -
  (27)
Dividends on Series A preferred stock, $(24.47)/share
  -
  -
  -
  -
  472,562
  4
  -
  -
  750
  -
  (754)
  -
Net loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (3,583)
  (3,583)
Balance at March 31, 2018
  30,571
$-
  239,400
$2
  95,121,575
$950
  6,704
$(64)
$173,594
$(1,691)
$(174,722)
$(1,931)
Issuance of Common Stock pursuant to option exercises
  -
  -
  -
  -
  65,588
  1
  -
  -
  60
  -
  -
  61
Recognition of beneficial conversion feature on convertible debt
  -
  -
  -
  -
  -
  -
  -
  -
  9
  -
  -
  9
Stock-based compensation expense
  -
  -
  -
  -
  -
  -
  -
  -
  373
  -
  -
  373
Issuance of Common Stock warrants as compensation
  -
  -
  -
  -
  -
  -
  -
  -
  9
  -
  -
  9
Foreign currency translation adjustment
  -
  -
  -
  -
  -
  -
  -
  -
  -
  42
  -
  42
Dividends on Series A preferred stock, $(23.13)/share
  -
  -
  -
  -
  648,696
  6
  -
  -
  704
  -
  (710)
  -
Dividends on Series B preferred stock, $(0.11)/share
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (27)
  (27)
Net loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (2,284)
  (2,284)
Balance at June 30, 2018
  30,571
$-
  239,400
$2
  95,835,859
$957
  6,704
$(64)
$174,749
$(1,649)
$(177,743)
$(3,748)
Recognition of beneficial conversion feature on convertible debt
  -
  -
  -
  -
  -
  -
  -
  -
  9
  -
  -
  9
Accretion of Preferred Stock discount
  -
  -
  -
  -
  -
  -
  -
  -
  (11)
  -
  -
  (11)
Related party debt exchange for Series A Preferred Stock
  6,896
  -
  -
  -
  -
  -
  -
  -
  6,802
  -
  -
  6,802
Stock-based compensation expense
  -
  -
  -
  -
  -
  -
  -
  -
  308
  -
  -
  308
Foreign currency translation adjustment
  -
  -
  -
  -
  -
  -
  -
  -
  -
  4
  -
  4
Modification of preferred stock
  -
  -
  -
  -
  -
  -
  -
  -
  92

  (92)
  -
Dividends on Series A preferred stock, $(24.67)/share
  -
  -
  -
  -
  832,835
  8
  -
  -
  782
  -
  (790)
  -
Dividends on Series C preferred stock, $(246.15)/share
  -
  -
  -
  -
  55,736
  1
  -
  -
  52
  -
  (53)
  -
Net loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
  (3,482)
  (3,482)
Balance at September 30, 2018
  37,467
$-
  239,400
$2
  96,724,430
$966
  6,704
$(64)
$182,783
$(1,645)
$(182,160)
$(118)

-5-

Table of Contents

IMAGEWAG~~EWARE~~RE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,		Three Months Ended March 31,
	2019	2018	2020	2019
Cash flows from operating activities
Net loss	$(8,825)	$(9,351)	$(3,124)	$(3,612)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	53	34	18	19
Amortization of debt issuance costs and beneficial conversion feature	—	168
Stock-based compensation	515	1,014	124	166
Warrants issued in lieu of cash as compensation for services	9	9
Issuance of common stock in exchange for unexercised options			62	—
Change in fair value of derivative liabilities	(445)	186	(197)	424
Change in assets and liabilities:
Accounts receivable	402	(46)	168	(151)
Inventory	(479)	64	(64)	(75)
Other assets	(56)	(343)	30	71
Operating lease right-of-use assets	138	—	(3)	46
Accounts payable	(154)	99	662	(230)
Deferred revenue	775	473	234	275
Accrued expense	44	502	102	201
Contract costs	(29)	—	—	(29)
Pension obligation	45	27	8	13
Total adjustments	818	2,187	1,144	730
Net cash used in operating activities	(8,007)	(7,164)	(1,980)	(2,882)

Cash flows from investing activities
Purchase of property and equipment	(19)	(27)	—	(8)
Net cash used in investing activities	(19)	(27)	—	(8)

Cash flows from financing activities
Proceeds from issuance of Common Stock, net of financing costs	6,520	—
Proceeds from issuance of Series C Preferred stock, net of issuance costs	—	8,789
Dividends paid	(26)	(25)
Proceeds from exercised stock options	167	149
Proceeds from issuance of common stock, net			622	—
Proceeds from exercise of stock options			—	106
Proceeds from issuance of related party notes payable			350	—
Net cash provided by financing activities	6,661	8,913	972	106

Effect of exchange rate changes on cash and cash equivalents	34	19	31	15
Net increase (decrease) in cash and cash equivalents	(1,331)	1,741
Net decrease in cash and cash equivalents			(977)	(2,769)

Cash and cash equivalents at beginning of period	5,694	7,317	1,030	5,694

Cash and cash equivalents at end of period	$4,363	$9,058	$53	$2,925

Supplemental disclosure of cash flow information:
Cash paid for interest	$—		$—
Cash paid for income taxes	$—		$—
Summary of non-cash investing and financing activities:
Beneficial conversion feature on convertible related party lines of credit	$—	$30
Stock dividends on Series A Convertible Preferred Stock	$2,667	$2,346
Stock dividends on Series C Convertible Redeemable Preferred Stock	$712	$53
Exchange of related-party indebtedness for Series A Preferred Stock	—	6,802
Recognition of derivative liabilities on preferred stock issuance	—	833
Accrued stock dividends on Series A Convertible Preferred Stock			$937	$864
Accrued stock dividends on Series C Convertible Redeemable Preferred Stock			$250	$231
Accretion of discount on Series C Convertible Redeemable Preferred Stock	$551	$11	$175	$186
Recognition of operating lease right-of-use assets from adoption of ASC 842	$2,265	$—	$—	$2,265
Recognition of lease liabilities from adoption of ASC 842	$(2,280)	$—	$—	$(2,280)
Conversion of Convertible Preferred Stock into Common Stock	$—	$4
Accrued financing costs	$425	$-
Stock subscription receivable			$765	—

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

-6-

Table of Contents

IMAGEWARE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ~~ORGANIZATION AND~~ DESCRIPTION OF BUSINESS AND OPERATIONS

Overview

As used in this ~~Quarterly~~ Report, ~~“we,” “us,” “our,”~~“we”, “us”, “our”, “ImageWare”, “ImageWare~~” “ImageWare Systems,”~~ Systems” or the “Company” ~~or “our Company”~~ refers to ImageWare Systems, Inc. and all of its subsidiaries. ImageWare Systems, Inc. is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is the patented IWS Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses, and all the products are integrated into the IWS Biometric Engine.

Liquidity, Going Concern and Management’s Plan

Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, product development, and payments relating to purchases of property and equipment. We expect that our principal uses of cash in the future will be for product development, including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital and capital expenditure requirements. Management expects that, as our revenue grows, our sales and marketing and research and development expense will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenue to achieve and sustain ~~income~~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 management has determined that there is substantial doubt about the Company’s ability to continue as a going concern.

Related Party Financings

On February 12, 2020, the Company entered into a factoring agreement with a member of the Company’s Board of Directors for $350,000. Such amount is to be repaid with the proceeds from certain of the Company’s trade accounts receivable approximating $500,000 and were due no later than 21 days after February 12, 2020. As of June 25, 2020, despite collection of the Company’s trade accounts receivable, $315,000 of such amounts have not been repaid and the Company is seeking an extension from the Board member.

In April 2020, the Company received an aggregate amount of $550,000 from two members of the Company’s Board of Directors. Terms of repayment are currently being negotiated between the Company and Board Members, although it is currently anticipated that the Company will issue subordinated promissory notes that will convert into shares of the Company’s common stock, par value $0.01 per share ("Common Stock"), at a conversion price to be agreed to by the lenders and the Company.

2020 Common Stock Financings

Triton Funds LP

On February 20, 2020, the Company entered into a securities purchase agreement (the “Triton Purchase Agreement”) with Triton Funds LP, a Delaware limited partnership ("Triton" or the "Investor"). The Triton Purchase Agreement provides the Company the right to sell to Triton, and Triton is obligated to purchase, up to $2.0 million worth of shares of the Company's Common Stock under the Triton Purchase Agreement (the "Offering”). Pursuant to the terms and conditions set forth in the Triton Purchase Agreement, the purchase price of the Common Stock will be based on the number of shares of Common Stock equal to the amount in U.S. Dollars that the Company intends to sell to the Investor to be set forth in each written notice sent to the Investor by the Company (the "Purchase Notice") and delivered to the Investor (the "Purchase Notice Amount"), divided by the lowest daily volume weighted average price of the Company's Common stock listed on the OTC Markets during the five business days prior to closing (the "Purchased Shares"). The Closing of the purchase of the Purchased Shares as set forth in the Purchase Notice will occur no later than three business days following receipt of the Purchased Shares by the Investor.

In February and March of 2020, the Company sold, and Triton purchased, an aggregate of 10,000,000 shares of the Company’s Common Stock for cash. In February, the Company sold 4,000,000 shares of Common Stock for $0.16 per share resulting in gross proceeds to the Company of $640,000. In March 2020, the Company sold 6,000,000 shares of Common Stock resulting in gross proceeds to the Company of $765,000, or a per share purchase price of $0.13 per share. Proceeds from the March 2020 sale were received on April 29, 2020. Aggregate net proceeds from this financing approximated $1,387,000 after recognition of direct offering costs.

As prescribed by ASC topic 505,Equity, stock subscription receivable represents the purchase of Common Stock for which the Company has not yet received payment from the purchaser. As of March 31, 2020, the Company has recorded a stock subscription receivable in the amount of $765,000 in its condensed consolidated balance sheet. This amount was received by the Company on April 29, 2020.

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Lincoln Park Capital Fund, LLC

On April 28, 2020, we entered into a purchase agreement, as amended on June 11, 2020 (the “Purchase Agreement”), and a registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital fund, LLC (“Lincoln Park”) pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our Common Stock.

Under the terms and subject to the conditions of the Purchase Agreement, including stockholder approval of an amendment to the Company’s Certificate of Incorporation to increase the number of shares of the Company’s capital stock to 350 million shares, obtained from our shareholders effective June 9, 2020, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $10,250,000 of shares of our Common Stock. On April 28, 2020, we sold 1,000,000 shares of Common Stock to Lincoln Park under the Purchase Agreement for an aggregate purchase price of $100,000 (the “Initial Purchase Shares)”. On June 11, 2020, we sold an additional 1,500,000 shares of Common Stock to Lincoln Park under the Purchase Agreement for an aggregate purchase price of $150,000 (the “Commencement Purchase Shares”). Future sales of Common Stock under the Purchase Agreement, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 24-month period commencing on the date that a registration statement of which this prospectus forms a part, which we agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed and the other conditions set forth in the Purchase Agreement are satisfied (such date on which all of such conditions are satisfied, the “Commencement Date”).

After the Commencement Date, on any business day over the term of the Purchase Agreement, the Company has the right, in its sole discretion, to direct Lincoln Park to purchase up to 125,000 shares on such business day (the “Regular Purchase”), subject to increases under certain circumstances as provided in the Purchase Agreement. The purchase price per share for each such Regular Purchase will be based on prevailing market prices of the Company’s Common Stock immediately preceding the time of sale as computed under the 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 presents Lincoln Park with a purchase notice for the full amount allowed for a Regular Purchase, the Company may also direct Lincoln Park to makeaccelerated purchases and additional accelerated purchases as described in the Purchase Agreement.

Pursuant to the terms of the Purchase Agreement, in no event may the Company issue or sell to Lincoln Park under the shares of the Company’s Common Stock under the 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 result in the beneficial ownership by the Investor and its affiliates of more than 4.99% of the then issued and outstanding shares of Common Stock (the “Beneficial Ownership Limitation”).

The Purchase Agreement and the 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 Purchase Agreement.

Due to the terms of the 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.

CARES Act Financing

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). On May 4, 2020, the Company entered into a loan agreement (the “PPP Loan”) with Comerica Bank (“Comerica”) under the Paycheck Protection Program (the “PPP”), which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under the PPP, the Company received proceeds of approximately $1,571,000, from the PPP Loan. In accordance with the requirements of the PPP, the Company intends to use proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, matures on May 4, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, which the Company continues to evaluate.

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Going Concern

At ~~September 30, 2019,~~March 31, 2020, we had ~~positive~~negative working capital of approximately ~~$1,000,000.~~$4,350,000. Our principal sources of liquidity at ~~September 30, 2019~~March 31, 2020 consisted of approximately ~~$4,363,000~~$53,000 of cash and cash equivalents.

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect the Company's operations and those of third parties on which the Company relies. Additionally, as the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the financial markets may reduce our ability to access capital, which could negatively impact the Company's short-term and long-term liquidity. These effects could have a material impact on the Company's liquidity, capital resources, operations and business and those of the third parties on which the Company relies.

Considering the ~~Common Stock financing completed~~financings consummated in ~~May 2019,~~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~~At June 23, 2020, cash on hand approximated $945,000. Based on the Company’s rate of cash consumption in the first quarter of 2020 and the last quarter of 2019, the Company will need additional capital in the third quarter of 2020 and its prospects for obtaining that capital are uncertain. As a result of the Company’s historical losses and financial condition, there is substantial doubt about ~~our~~the Company’s ability to continue as a going concern.

To address our working capital requirements, management has begun instituting several cost cutting measures and may ~~seek~~utilize cash proceeds available under the Lincoln Park facility at such time as the Company is able to register shares to be issued to Lincoln Park. Additionally, management is currently negotiating a restructuring of certain of our issued and outstanding Preferred Stock to facilitate additional equity and/or debt financing, ~~through the issuance of additional debt and/or equity securities or~~and may seek strategic or other transactions intended to provide necessary working capital and increase shareholder value. There are currently no ~~formal committed~~agreements with the holders of our issued and outstanding Preferred Stock or 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~~such efforts, including our ability to raise 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 condensed 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 regarding the Company’s ability to continue as a going concern.

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

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NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, ~~2018,~~2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, ~~2018,~~2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018 that was~~2019 as filed with the SEC on ~~March 28, 2019.~~May 15, 2020.

Operating results for the three ~~and nine~~ months ~~ended September 30, 2019~~ending March 31, 2020 are not necessarily indicative of the results that may be expected for the year ~~ended~~ending December 31, ~~2019,~~2020, or any other future periods.

~~Certain prior period amounts have been reclassified to conform with current period presentation. Pursuant to the Company’s adoption~~

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Table of ~~Accounting Standards Update 2017-07 -Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~(“~~ASU 2017-07~~”), the Company is presenting certain elements of periodic pension expense as a separate line item “Other components of net periodic pension expense” outside the loss from operations, in the Company’s condensed Consolidated Statements of Operations. These reclassifications have no impact on net loss.Contents

Significant Accounting Policies

Principles of Consolidation

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

Operating Cycle

Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying condensed 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 condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, deferred tax asset valuation allowances, recoverability of goodwill, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of ~~derivatives~~financial instruments issued with and affected by the Series C Preferred Financing, assumptions used in the application of revenue recognition policies, assumptions used in the derivation of the Company’s incremental borrowing rate used in the computation of the Company’s operating lease liabilities and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.

Accounts Receivable

In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the ~~account~~accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.

Inventories

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

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Property, Equipment and Leasehold Improvements

Property and equipment, consisting of furniture and equipment, are stated at cost and are being depreciated on a straight-line basis over the estimated useful lives of the assets, which generally range from three to five years. Maintenance and repairs are charged to expense as incurred. Major renewals or improvements are capitalized. When assets are sold or abandoned, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Expenditures for leasehold improvements are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

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Fair Value of Financial Instruments

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

Lease Liabilities and Operating Lease Right-of-Use Assets

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

A package of practical ~~expedient~~expedients to not reassess:

●

Whether a contract is or contains a lease

●

Lease classification, and

●

Initial direct costs

Revenue Recognition

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

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

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

Identify the contract with the customer;

Identify the performance obligation in the contract;

Determine the transaction price;

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

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

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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;

●

Sales of computer hardware and identification media;

●

Services; and

●

Post-contract customer support.

Software Licensing and Royalties

Software licenses consist of revenue from the sale of software for identity management applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer. We recognize revenue from software licensing at a point in time upon delivery, provided all other revenue recognition criteria are met.

Royalties consist of revenue from usage-based arrangements and guaranteed minimum-based arrangements. We recognize revenue for royalty arrangements at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied.

Computer Hardware and Identification Media

We generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer, provided all other revenue recognition criteria are met.

Services

Services revenue is comprised primarily of software customization services, software integration services, system installation services and customer training. Revenue is generally recognized upon completion of services and customer acceptance provided all other revenue recognition criteria are met.

Post-Contract Customer Support (“PCS”)

Post contract customer support consists of maintenance on software and hardware for our identity management solutions. We recognize PCS revenue from periodic maintenance agreements. Revenue is generally recognized ratably over the respective maintenance periods provided no significant obligations remain. Costs related to such contracts are expensed as incurred.

Arrangements with Multiple Performance Obligations

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

Contract Costs

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. At March 31, 2020 and December 31, 2019, we had capitalized incremental costs of obtaining a contract with a customer of approximately $118,000. We recorded no additional contract costs during the three months ended March 31, 2020. Additionally, we recognized no revenue during the three months ended March 31, 2020 that was related to contract costs at the beginning of the period.

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Other Items

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

Sales tax collected from customers is excluded from revenue.

The ~~adoption of ASC 606 as of January 1, 2018 resulted in a cumulative positive adjustment to beginning accumulated deficit and accounts receivable of approximately $96,000. The~~ following table sets forth our disaggregated revenue for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:

	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
Net Revenue	2019	2018	2019	2018	2020	2019
(dollars in thousands)

Software and royalties	$73	$61	$306	$1,015	$125	$111
Hardware and consumables	15	7	53	130	14	11
Services	67	10	233	212	11	156
Maintenance	630	658	1,935	1,980	646	653
Total revenue	$785	$736	$2,527	$3,337	$796	$931

Customer Concentration

For the three months ended ~~September 30, 2019,~~March 31, 2020, one customer accounted for approximately ~~28%~~27% or $216,000 of our total revenue and had trade receivables at ~~September 30, 2019~~March 31, 2020 of $0.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2019, two customers accounted for approximately ~~40%~~46% or ~~$1,009,000~~$424,000 of our total revenue and had trade receivables at ~~September 30,~~March 31, 2019 of ~~$161,000.~~

For the three months ended September 30, 2018, two customers accounted for approximately 41% or $302,000 of our total revenue and had trade receivables at September 30, 2018 of $51,000. For the nine months ended September 30, 2018, one customer accounted for approximately 40% or $1,348,000 of our total revenue and had trade receivables at September 30, 2018 of $0.$651,000.

Recently Issued Accounting Standards

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

~~FASB ASU No. 2016-13. In June 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-13,Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.~~ ASU No. 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This guidance is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.

FASB ~~ASU No. 2018-13. In August 2018, the FASB issued ASU 2018-13,~~ ~~“Fair Value Measurement (Topic 820) —Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement”~~ (“~~ASU 2018-13~~”Accounting Standards Update (‘ASU”). The amendments in this update improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for fiscal years ending after December 15, 2019. Early adoption is permitted. The adoption of this standard should be applied to all periods presented. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

~~FASB ASU~~ No. 2018-14. In August 2018, the FASB issued ASU 2018-14, “Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). The amendments in this update remove defined benefit plan disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The adoption of this standard should be applied to all periods presented. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2019-12. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Early adoption of the amendments is permitted. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2020-01. In January 2020, the FASB issued ASU 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”, to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

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~~FASB ASU No. 2018-15. In August 2018, the FASB issued ASU 2018-15,~~ “Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“~~ASU 2018-15~~”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for fiscal years ending after December 15, 2019. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3. NET LOSS PER COMMON SHARE

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

The table below presents the computation of basic and diluted loss per share:

(Amounts in thousands except share and per share amounts)	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2019	2018	2019	2018	2020	2019
Numerator for basic and diluted loss per share:
Net loss	$(2,665)	$(3,482)	$(8,825)	$(9,351)	$(3,124)	$(3,612)
Preferred dividends and preferred stock discount accretion	(1,300)	(949)	(3,968)	(2,437)

Preferred dividends, deemed dividends and accretion					(1,374)	(1,294)
Net loss available to common shareholders	$(3,965)	$(4,431)	$(12,793)	$(11,788)	$(4,498)	$(4,906)

Denominator for basic and dilutive loss per share – weighted-average shares outstanding	106,571,261	95,838,813	102,830,312	95,116,862
Denominator for basic and dilutive loss per share — weighted-average shares outstanding					116,196,197	98,398,239

Basic and diluted loss per share available to common shareholders	$(0.04)	$(0.05)	$(0.13)	$(0.12)	$(0.04)	$(0.05)

The following potential dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding, as their effect would have been antidilutive:

Three and Nine Months Ended

September 30,

Three Months Ended

March 31,

NOTE 4. SELECT BALANCE SHEET DETAILS

Inventories of ~~$509,000~~$679,000 as of ~~September 30, 2019~~March 31, 2020 were comprised of work in process of ~~$503,000~~$666,000 representing direct labor costs on in-process projects and finished goods of ~~$6,000~~$13,000 net of reserves for obsolete and slow-moving items of $3,000.

Inventories of ~~$29,000~~ $615,000as of December 31, ~~2018~~2019 were comprised of work in process of ~~$21,000~~ $608,000,representing direct labor costs on in-process projects and finished goods of ~~$8,000~~ $7,000net of reserves for obsolete and slow-moving items of ~~$3,000.~~

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$3,000.

The carrying amounts of the Company’s patent intangible assets were ~~$73,000~~$67,000 and ~~$82,000~~$70,000 as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, which includes accumulated amortization of ~~$586,000~~$592,000 and ~~$577,000~~$589,000 as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Amortization expense for patent intangible assets was $3,000 ~~and $9,000~~ for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately ~~6.75~~6.25 years. There was no impairment of the Company’s intangible assets during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

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

Estimated

Amortization

Expense

($ in thousands)

Estimated

Amortization

Expense

($ in thousands)

The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. The Company performs its annual impairment test in the fourth quarter of each year. In December 2018, the Company adopted the provisions of ASU 2017-04, ~~“Intangibles~~"Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ~~Impairment.”~~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~~unit's carrying amount over its fair value. Entities that have reporting units with zero or negative carrying amounts, will no longer be required to perform a qualitative assessment assuming they pass the simplified impairment test. The Company continues to have only one reporting unit, Identity Management which, at ~~September 30, 2019,~~March 31, 2020, had a negative carrying amount of approximately ~~$5,611,000.~~$11,841,000. Based on the results of the ~~Company’s~~Company's impairment testing, the Company determined that its goodwill was not impaired ~~as of September 30, 2019~~during the three months ended March 31, 2020 and the year ended December 31, ~~2018.~~2019.

The Company is a party to certain contractual arrangements for office space which meet the definition of leases under ASC 842 – Leases. In accordance with ASC 842, the Company has determined that such arrangements are operating leases and accordingly the Company has, as of January 1, 2019, recorded operating lease right-of-use assets and related lease liability for the present value of the lease payments over the lease terms using the Company’s estimated weighted-average incremental borrowing rate of approximately 14.5%. as the discount rates implicit in the Company’s leases cannot be readily determined. Such assets and liabilities aggregated approximately $2,265,000 and $2,280,000 as of January 1, 2019, respectively and $1,906,000 and $2,089,000 as of December 31, 2019, respectively. At March 31, 2020, such assets and liabilities aggregated approximately $1,822,000 and $2,002,000, respectively. The Company determined that it had no arrangements representing finance leases.

The Company’s operating leasing arrangements are summarized below:

●

The Company’s corporate headquarters is located in San Diego, California, where it occupies 8,511 square feet of office space at an average cost of approximately $28,000 per month. This facility’s lease was entered into by the Company in July 2018. This lease commenced on November 1, 2018 and terminates on April 30, ~~2025.~~2025;

●

1,508 square feet in Ottawa, Province of Ontario, Canada, at a cost of approximately $3,000 per month until the expiration of the lease on March 31, 2021;

●

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

●

183 square feet of office space in Mexico City, Mexico, at a cost of approximately $2,000 per month until September 30, 2020.

The above leases contain no residual value guarantees provided by the Company and there are no options to either extend or terminate the leases. The Company is not a party to any subleasing arrangements.

~~-13-~~-15-

Table of Contents

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company recorded approximately $154,000, ~~and $503,000, respectively,~~ in lease expense using the straight-line method. ~~For the three and nine months ended September 30, 2018, prior to the adoption of ASC 842, the Company recorded approximately $174,000 and $522,000, respectively, in lease expense.~~ Under the provisions of ASC 842, lease expense is comprised of the total lease payments under the lease plus any initial direct costs incurred less any lease incentives received by the lessor amortized ratably using the straight-line method over the lease term. The weighted-average remaining lease term of the Company’s operating leases as of ~~September 30, 2019~~March 31, 2020 is ~~4.73~~4.29 years. Cash payments under operating leases aggregated approximately ~~$122,000~~$161,000 and ~~$366,000~~$117,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, respectively, and are included in operating cash flows.

The Company’s lease liability was computed using the present value of future lease payments. The Company has utilized the practical expedient regarding lease and non-lease components and combined such components into a single combined component in the determination of the lease liability. The Company has excluded the lease of its office space in Mexico City, Mexico in the determination of the lease liability as of January 1, 2019 as its term is less than 12 months.

At ~~September 30, 2019,~~March 31, 2020, future minimum undiscounted lease payments are as follows:

NOTE 6. MEZZANINE EQUITY

Series C Convertible Redeemable Preferred Stock

On September 10, 2018, the Company filed the Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred ~~Stock~~stock (the “Series C COD”) with the ~~Delaware~~ Secretary of State for the State of Delaware – Division of Corporations, designating 1,000 shares of the Company’s preferred stock, par value $0.01 per share, as Series C Preferred, each share with a stated value of $10,000 per share (the “Stated Value”). Shares of Series C Preferred accrue dividends cumulatively and are payable quarterly at a rate of 8% per annum if paid in cash, or 10% per annum if paid by the issuance of shares of Common Stock. Each share of Series C Preferred has a liquidation preference equal to the greater of (i) the Stated Value plus all accrued and unpaid dividends, and (ii) such amount per share as would have been payable had each share been converted into Common Stock immediately prior to the occurrence of a Liquidation Event or Deemed Liquidation Event. Each share of Series C Preferred is convertible into that number of shares of the Company’s Common Stock (“Conversion Shares”) equal to the Stated Value, divided by $1.00, which conversion rate is subject to adjustment in accordance with the terms of the Series C COD. Holders of Series C Preferred may elect to convert shares of Series C Preferred into Conversion Shares at any time. Holders of the Series C Preferred may also require the Company to redeem all or any portion of such holder’s shares of Series C Preferred at any time from and after the third anniversary of the issuance date or in the event of the consummation of a Change of Control (as such term is defined in the Series C COD). Subject to the terms and conditions set forth in the Series C COD, in the event the volume-weighted average price of the Company’s Common Stock is at least $3.00 per share (subject to adjustment in accordance with the terms of the Series C COD) for at least 20 consecutive trading days, the Company may convert all, but not less than all, issued and outstanding shares of Series C Preferred into Conversion Shares. In addition, in the event of a Change of Control, the Company will have the option to redeem all, but not less than all, issued and outstanding shares of Series C Preferred for 115% of the Liquidation Preference Amount per share. Holders of Series C Preferred will have the right to vote, on an as-converted basis, with the holders of the Company’s Common Stock on any matter presented to the Company’s stockholders for their action or consideration. Shares of Series C Preferred rank senior to the Company’s Common Stock and Series A Preferred, and junior to the Company’s Series B Preferred.

~~-14-~~-16-

Table of Contents

On September 10, 2018, the Company offered and sold a total of 890 shares of Series C Preferred at a purchase price of $10,000 per share, and on September 21, 2018, the Company offered and sold an additional 110 shares of Series C Preferred at a purchase price of $10,000 per ~~share (the “Series C Financing”).~~share. The total gross proceeds to the Company from the Series C Financing were $10,000,000. Issuance costs incurred in conjunction with the Series C Financing were approximately $1,211,000. Such costs have been recorded as a discount on the Series C Preferred ~~stock~~Stock and will be accreted to the point of earliest redemption which is the third anniversary of the Series C Financing or September 10, 2021 using the effective interest rate method. The accretion of these costs is recorded as a deemed dividend.

~~The Company had 1,000 shares~~There were no issuances or conversions of Series C Preferred ~~outstanding as of September 30, 2019 and December~~during the three months ended March 31, ~~2018.~~2020 or March 31, 2019. The Company issued the holders of Series C Preferred an aggregate of 157,945 ~~266,793 and 495,688~~ shares of Common Stock on March 31, 2019 ~~June 30,~~as dividends.

At March 31, 2020 and December 31, 2019, the Company had cumulative dividends of approximately $250,000 and ~~September 30, 2019, respectively,~~$0, respectively. At March 31, 2020, the unpaid Series C dividend of $250,000 is included as ~~payment of dividends due on these dates.~~a current liability under the caption “Accrued expense” in the Company’s condensed consolidated balance sheet.

Guidance for accounting for freestanding financial instruments that contain characteristics of both liabilities and equity are contained in ASC 480, Distinguishing Liabilities From Equity and Accounting Series Release 268 (“ASR 268”) Redeemable Preferred Stocks. The Company evaluated the provisions of the Series C Preferred and determined that the provisions of the Series C Preferred grant the holders of the Series C Preferred a redemption right whereby the holders of the Series C Preferred may, at any time after the third anniversary of the Series C Preferred issuance, require the Company to redeem in cash any or all of the holder’s outstanding Series C Preferred at an amount equal to the Liquidation Preference Amount (“Liquidation Preference Amount”). The Liquidation Preference Amount is defined as the greater of the stated value of the Series C Preferred plus any accrued unpaid interest or such amount per share as would have been payable had each such share been converted into Common Stock. In the event of a Change of Control, the holders of Series C Preferred shall have the right to require the Company to redeem in cash all or any portion of such holder’s shares at the Liquidation Preference Amount. The Company has concluded that because the redemption features of the Series C Preferred are outside of the control of the Company, the instrument is to be recorded as temporary or mezzanine equity in accordance with the provisions of ASR 268.

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

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

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

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

Using the whole instrument approach, the Company concluded that the host instrument is more akin to debt than equity as the majority of identified features contain more characteristics of debt.

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

Accordingly, the Company has bifurcated from the Series C Preferred host instrument the conversion options, redemption option and participating dividend feature in accordance with the guidance in ASC 815. These bifurcated features aggregated approximately $833,000 at issuance and have been recorded as a discount to the Series C Preferred. Such amount will be accreted to the point of earliest redemption which is the third anniversary of the Series C Financing or September 10, 2021 using the effective interest rate method. The accretion of these features is recorded as a deemed dividend.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $175,000 using the effective interest rate method. For the three months ended March 31, 2019, the Company recorded the accretion of debt issuance costs and derivative liabilities aggregating approximately $181,000 and $551,000, respectively, using the effective interest rate method. For the three and nine months ended September 30, 2018, the Company recorded the accretion of debt issuance costs and derivative liabilities of approximately $11,000$186,000 using the effective interest rate method.

~~-15-~~

~~Table~~There were no conversions of ~~Contents~~

Series C Preferred into Common Stock during the three months ended March 31, 2020 and 2019.

The Company reflected the following in Mezzanine Equity for the Series C Preferred Stock as of December 31, ~~2018~~2019 and ~~September 30, 2019:~~March 31, 2020:

Series C

Convertible,

Redeemable

Preferred

(amounts in thousands, except share amounts)

Shares

Amount

Total

Total Series C Preferred Stock as of December 31, 2018
  1,000
$8,156
$8,156




Accretion of discount – deemed dividend for the three months ended March 31, 2019
  —
  186
  186




Total Series C Preferred Stock as of March 31, 2019
  1,000
  8,342
  8,342




Accretion of discount – deemed dividend for the three months ended June 30, 2019
  —
  184
  184




Total Series C Preferred Stock as of June 30, 2019
  1,000
  8,526
  8,526




Accretion of discount – deemed dividend for the three months ended September 30, 2019
  —
  181
  181




Total Series C Preferred Stock as of September 30, 2019
  1,000
$8,707
$8,707

	Series C
	Convertible,
	Redeemable
	Preferred
(amounts in thousands, except share amounts)	Shares	Amount

Total Series C Preferred Stock as of December 31, 2019	1,000	$8,884

Accretion of discount – deemed dividend for the three months ended March 31, 2020	—	175

Total Series C Preferred Stock as of March 31, 2020	1,000	$9,059

NOTE 7. DERIVATIVE LIABILITIES

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

The Company determined that the conversion option, redemption option and participating dividend feature contained in the Series C Preferred host instrument required bifurcation. The Company valued the bifurcatable features at fair value. Such liabilities aggregated approximately $833,000 at inception and are classified as current liabilities on the Company’s condensed consolidated balance ~~sheet~~sheets under the caption “Derivative ~~liabilities.”~~liabilities”. The Company ~~revalued~~will revalue these features at each balance sheet date and ~~has recorded~~record any change in fair value in the determination of period net income or loss. Such amounts are recorded in the caption ~~“Change~~“(Gain) loss on change in fair value of derivative liabilities” in the Company’s condensed consolidated statements of operations. During the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, the Company recorded a decrease to these derivative liabilities using fair value methodologies of approximately ~~$388,000 and $445,000, respectively.~~$197,000. As a result of this decrease, such liabilities aggregated approximately $172,000 at March 31, 2020. During the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, the Company recorded an increase to these derivative liabilities using fair value methodologies of approximately $186,000. See Note 9 to these condensed consolidated financial statements for a reconciliation of amounts recorded at September 30, 2019 and 2018 and for the three and nine months ended September 30, 2019 and 2018.$424,000.

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

Series A Convertible Preferred Stock

The Company had 37,467 shares of Series A Preferred outstanding as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had cumulative ~~undeclared~~ dividends of ~~$0.The Company issued the holders~~approximately $937,000 and $0, respectively. There were no conversions of Series A Preferred ~~591,803, 999,633 and 1,857,263~~ ~~shares of~~ into Common Stock onduring the three months ended March 31, ~~2019, June 30, 2019~~2020 and ~~September 30,~~ 2019 ~~respectively,~~. At March 31, 2020, the unpaid Series A dividend of approximately $937,000 is included as ~~payment~~a current liability under the caption “Accrued expense” in the Company’s condensed consolidated balance sheet.

Series B Convertible Preferred Stock

The Company had 239,400 shares of Series B Convertible Preferred stock, par value $0.01 per share (“Series B Preferred”), outstanding as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had cumulative undeclared dividends of approximately $21,000 and ~~$8,000, respectively.~~$8,000. There were no conversions of Series B Preferred into Common Stock during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018.~~.

The following table summarizes Common Stock activity for the ~~nine~~three months ended ~~September 30, 2019:~~March 31, 2020:

	Common Stock
Shares outstanding at December 31, ~~2018~~2019	~~98,223,632~~
~~Shares issued as payment of stock dividend on Series A Preferred~~	~~3,448,699~~
~~Shares issued as payment of stock dividend on Series C Preferred~~	~~920,426~~113,346,472
Shares issued pursuant to option ~~exercises~~exchange	~~351,334~~400,000
Shares issued for cash and stock subscription receivable	~~5,954,545~~10,000,000
Shares outstanding at ~~September 30, 2019~~March 31, 2020	~~108,898,636~~123,746,472

In ~~May 2019,~~February and March of 2020, the Company ~~completed a registered direct offering~~sold, and Triton purchased, an aggregate of ~~5,954,545~~10,000,000 shares of ~~its~~the Company’s Common Stock ~~at a price~~for cash. In February, the Company sold 4,000,000 shares of ~~$1.10~~Common Stock for $0.16 per share resulting in gross proceeds to the Company of ~~approximately $6,550,000. Net~~$640,000. In March 2020, the Company sold 6,000,000 shares of Common Stock resulting in gross proceeds to the Company of $765,000, or a per share purchase price of $0.13 per share. Proceeds from the March 2020 sale were ~~approximately $6,095,000~~received on April 29, 2020. Aggregate net proceeds from this financing approximated $1,387,000 after recognition of direct offering ~~expenses. The Company intends to use~~costs.

As prescribed by ASC topic 505,Equity, stock subscription receivable represents the ~~net proceeds received from the sale~~purchase of ~~the~~ Common Stock for ~~general corporate purposes.~~

~~The shares~~which the Company has not yet received payment from the purchaser. As of ~~Common Stock described above were offered~~March 31, 2020, the Company has recorded a stock subscription receivable in the amount of $765,000. This amount was received by the Company ~~pursuant to a shelf registration statement filed with the SEC~~ on ~~June 28, 2018 and declared effective on July 10, 2018.~~April 29, 2020.

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company issued ~~351,334~~400,000 shares of its Common Stock pursuant to an exchange agreement with certain terminated employees whereby such employees exchanged 800,000 Common Stock purchase options for 400,000 shares of Common Stock as a component of their severance agreement. The Company recorded the ~~exercise~~grant date fair value of ~~stock options, resulting~~this Common Stock issuance as severance expense in ~~proceeds to~~ the ~~Company~~amount of approximately ~~$167,000.~~$62,000.

The following table summarizes warrant activity for the following periods:

Weighted- Average

Exercise Price

Weighted- Average

Exercise Price

Balance at March 31, 2020

As of ~~September 30, 2019,~~March 31, 2020, warrants to purchase 1,733,856shares of Common Stock at ~~exercise~~ prices ranging from $0.01 to $1.46 were outstanding. All warrants are exercisable as of ~~September 30, 2019~~March 31, 2020 and expire as of July 29, 2020, except for an aggregate of 1,643,856 warrants, which become exercisable only upon the attainment of specified events. Such warrants expire at various dates through September 2028. The intrinsic value of warrants outstanding at ~~September 30, 2019~~March 31, 2020 was ~~approximately~~ $0. The Company has excluded from this computation any intrinsic value of the 1,493,856 warrants issued to the Series A Preferred stockholders due to ~~such warrants becoming exercisable only upon~~the conversion exercise contingency more fully described above.

Stock-Based Compensation

The Company’s 1999 Stock Award Plan (the “1999 Plan”) was adopted by the Company’s Board of Directors on December 17, 1999. Under the terms of the 1999 Plan, the Company could, originally, issue up to 350,000 non-qualified or incentive stock options to purchase Common Stock of the Company. During the year ended December 31, 2014, the Company subsequently amended and restated the 1999 Plan, whereby it increased the share reserve for issuance to approximately 7.0 million shares of the Company’s Common Stock. Subsequently, in February 2018, the Company amended and restated the 1999 Plan, whereby it increased the share reserve for issuance by an additional 2.0 million shares. The 1999 Plan prohibits the grant of stock option or stock appreciation right awards with an exercise price less than fair market value of ~~the Company’s~~ Common Stock on the date of grant. The 1999 Plan also generally prohibits the “re-pricing” of stock options or stock appreciation rights, although awards may be bought-out for a payment in cash or the Company’s stock. The 1999 Plan permits the grant of stock-based awards other than stock options, including the grant of “full value” awards such as restricted stock, stock units and performance shares. The 1999 Plan permits the qualification of awards under the plan (payable in either stock or cash) as “performance-based compensation” within the meaning of Section 162(m) of the ~~Internal~~ Revenue Code. The number of options issued and outstanding and the number of options remaining available for future issuance are shown in the table below. The number of authorized shares available for issuance under the plan at ~~September 30, 2019~~March 31, 2020 was ~~406,923 shares.~~1,679,259.

~~-17-~~

~~Table~~On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Omnibus Stock Incentive Plan (the ”2020 Plan”). Such plan had been previously unanimously approved by the Company’s Board of ~~Contents~~

Directors. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Internal Revenue Code of 1986 (the “Code”).

Pursuant to the adoption of the 2020 Plan, such plan will supersede and replace the Company’s 1999 Stock Option Plan (the “1999 Plan”) and no new awards will be granted under the 1999 Plan thereafter. Any awards outstanding under the 1999 Plan on the date of approval of the 2020 Plan will remain subject to the 1999 Plan. Upon approval of our 2020 Plan, all shares of Common Stock remaining authorized and available for issuance under the 1999 Plan and any shares subject to outstanding awards under the 1999 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2020 Plan.

A more detailed description of the 2020 Plan is set forth in Note 12.

The Company estimates the fair value of its stock options using a Black-Scholes ~~option-valuation~~option-pricing model, consistent with the provisions of ASC ~~No.~~ 718, “, Compensation – Stock Compensation”. The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense 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~~operating expense based upon the departments to which substantially all of the associated employees report and credited to additional ~~paid-in capital.~~paid-in-capital. Stock-based compensation expense related to equity options was approximately ~~$168,000~~$124,000 and ~~$515,000~~$166,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~respectively. Stock-based compensation expense related to equity options was approximately $308,000 and $1,014,000 for the three and nine months ended September 30, 2018,~~ respectively.

ASC ~~No.~~ 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes ~~option-valuation~~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-valuation~~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. There were no options granted during the three months ended March 31, 2020. Historical volatility factors utilized in the Company’s Black-Scholes computations for options granted during the ~~nine~~three months ~~ended September 30,~~March 31, 2019 ~~and 2018~~ ranged from ~~51%~~57% to ~~84%~~59%. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin Topic 14. The expected term used by the Company during the ~~nine~~three months ended ~~September 30,~~March 31, 2019 ~~and 2018~~ was 5.17 years. The difference between the actual historical expected life and the simplified method was immaterial. The interest rate used is the risk-free interest rate and is based upon U.S. Treasury rates appropriate for the expected term.~~The interest rate~~ Interest rates used in the Company’s Black-Scholes calculations for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 ~~and 2018 was2.6~~%averaged 2.58%. Dividend yield is zero as the Company does not expect to declare any dividends on the Company’s ~~Common Stock~~common shares in the foreseeable future.

In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has adopted the provisions of ASU 2016-09 and will continue to use an estimated an annualized forfeiture rate of approximately 0% for corporate officers, 4.1% for members of the Board of Directors and 6.0% for all other employees. The Company ~~reviews~~is currently in the process of reviewing the expected forfeiture rate ~~annually~~ to determine if that percent is still reasonable based on recent historical experience.

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

Weighted-Average

Exercise Price

Weighted-Average

Exercise Price

During the three months ended March 31, 2020, the Company issued 400,000 shares of its Common Stock pursuant to an exchange agreement with certain terminated employees whereby such employees exchanged 800,000 Common Stock purchase options for 400,000 shares of Common Stock as a component of their severance agreement. The Company recorded the grant date fair value of this Common Stock issuance as severance expense in the amount of approximately $62,000. In addition to these 800,000 options, an additional 477,340 options expired unexercised during the three months ended March 31, 2020.

The intrinsic value of options exercisable and outstanding at ~~September 30, 2019~~March 31, 2020 was $0. ~~The~~ The aggregate intrinsic value for all options outstanding as of ~~September 30, 2019~~March 31, 2020 was $0.The weighted-average grant-date per share fair value of options granted during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$0.48. The weighted-average grant-date per share fair value of options granted~~$0 as there were no option grants during ~~the nine months ended September 30, 2018 was $0.95.~~this period. At ~~September 30, 2019,~~March 31, 2020, the total remaining unrecognized compensation cost related to unvested stock options amounted to approximately ~~$801,000,~~$558,000, which will be recognized over a weighted-average period of ~~1.9~~1.5 years.

Stock-based compensation related to equity options, including options granted to certain members of the Company’s Board of Directors, has been classified as follows in the accompanying condensed consolidated statements of operations (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended

March 31,

NOTE 9. FAIR VALUE ACCOUNTING

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

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

Level 1

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


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


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

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

Fair Value at September 30, 2019

Fair Value at March 31, 2020

Fair Value at December 31, 2018

Fair Value at December 31, 2019

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

~~The~~As of March 31, 2020, the Company had embedded features contained in the Series C Preferred host instrument (issued in September 2018) ~~had embedded features contained in the host instrument~~ that qualified for derivative liability treatment. The recorded fair market value of these features was approximately $172,000 and $369,000 at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018 was approximately $620,000~~2019, respectively, and ~~$1,065,000, respectively which is reflected~~are classified as a current liability in the condensed consolidated balance sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The fair value of the Company’s derivative liabilities is classified within Level 3 of the fair value hierarchy because they are valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The Company uses the lattice framework, Monte-Carlo simulations and other fair value methodologies in the determination of the fair value of derivative liabilities.

Some of the aforementioned fair value methodologies are affected by the Company’s stock price as well as assumptions regarding the expected stock price volatility over the term of the derivative liabilities in addition to the probability of future events.

~~-19-~~

~~Table~~ Significant assumptions used in the fair value methodologies during the three months ended March 31, 2020 and 2019 are a risk-free rate of ~~Contents~~

0.20% to 2.45% equity volatility of 63% to 109%, effective life of 1.44 years to 4.45 years, and a preferred stock dividend rate of 10.0%. Additionally, management has made certain estimates regarding the timing of potential change of control events.

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

~~($ in thousands)~~	~~Pension~~ ~~Assets~~

~~Balance at June 30, 2019~~	$~~1,721~~
~~Return on plan assets~~	14
~~Company contributions and benefits paid, net~~	(4)
~~Effect of exchange rate changes~~	~~(82~~)
~~Balance at September 30, 2019~~	$~~1,649~~

A reconciliation of the Company’s pension assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the nine months ended September 30, 2019:

~~($ in thousands)~~	~~Pension~~ ~~Assets~~

~~Balance at December 31, 2018~~	$~~1,733~~
~~Return on plan assets~~	44
~~Company contributions and benefits paid, net~~	~~(34~~)
~~Effect of exchange rate changes~~	~~(94~~)
~~Balance at September 30, 2019~~	$~~1,649~~

A reconciliation of the Company’s pension assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three months ended September 30, 2018:

~~($ in thousands)~~	~~Pension~~ ~~Assets~~

~~Balance at June 30, 2018~~	$~~1,754~~
~~Return on plan assets~~	15
~~Company contributions and benefits paid, net~~	41
~~Effect of exchange rate changes~~	~~(67~~)
~~Balance at September 30, 2018~~	$~~1,743~~

~~($ in thousands)~~	~~Pension~~ ~~Assets~~

~~Balance at December 31, 2017~~	$~~1,806~~
~~Return on plan assets~~	47
~~Company contributions and benefits paid, net~~	17
~~Effect of exchange rate changes~~	~~(127~~)
~~Balance at September 30, 2018~~	$~~1,743~~

~~A reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three months ended September 30, 2019:~~

~~($ in thousands)~~	~~Derivative~~ ~~Liabilities~~

~~Balance at June 30, 2019~~	$~~1,008~~
~~Change in fair value included in earnings~~	~~(388~~)
~~Balance at September 30, 2019~~	$~~620~~

~~-20-~~-22-

Table of Contents

~~A reconciliation~~

The reconciliations of Level 3 pension assets measured at fair value during the ~~Company’s~~three months ended March 31, 2020 and 2019 are presented below:

($ in thousands)	Three months ended March 31, 2020	Three months ended March 31, 2019

Pension assets:
Fair value at beginning of period	$1,713	$1,733
Return on plan assets	14	15
Company contributions and benefits paid, net	(10)	(11)
Effect of rate changes	(42)	(38)
Fair value at end of period	$1,675	$1,699

The reconciliations of Level 3 derivative liabilities measured at fair value ~~on a recurring basis using significant unobservable inputs (Level 3) is as follows for~~during the ~~nine~~three months ended ~~September 30, 2019:~~March 31, 2020 and 2019 are presented below:

~~($ in thousands)~~	~~Derivative~~ ~~Liabilities~~

~~Balance at December 31, 2018~~	$~~1,065~~
~~Change in fair value included in earnings~~	~~(445~~)
~~Balance at September 30, 2019~~	$~~620~~

($ in thousands)	Three months ended March 31, 2020	Three months ended March 31, 2019

Derivative liabilities
Fair value at beginning of period	$369	$1,065
Change in fair value included in earnings	(197)	424
Fair value at end of period	$172	$1,489

A reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three and nine months ended September 30, 2018:

~~($ in thousands)~~	~~Derivative~~ ~~Liabilities~~

~~Balance at December 31, 2017~~	$—
~~Issued in conjunction with Series C financing~~	~~833~~
~~Change in fair value included in earnings~~	~~186~~
~~Balance at September 30, 2018~~	$~~1,019~~

There were no derivative liabilities at either December 31, 2017 or at any time during the 2018 year prior to the consummation of the Series C financing in September 2018. The Company is not a party to any hedge arrangements, commodity swap agreement or any other derivative financial instruments.

NOTE 10. RELATED PARTY TRANSACTIONS

~~During the year ended December 31, 2018,~~Notes Payable

On February 12, 2020, the Company entered into a ~~professional services~~factoring agreement with ~~a firm whose managing director is also~~ a member of the Company’s Board of ~~Directors. During~~Directors for $350,000. Such amount is to be repaid with the proceeds from certain of the Company’s trade accounts receivable approximating $500,000 and are due no later than 21 days after February 12, 2020. As of June 25, 2020, despite collection of the Company’s trade accounts receivable, $315,000 of such amounts have not been repaid and the Company is seeking an extension from the Board member. Under the terms of the factoring agreement, factored money will bear interest at the rate of 1% of the factoring money for the first ~~quarter of~~seven days, and 1% for each additional seven days until the ~~fiscal year ended December 31, 2019,~~factoring money is paid in full.

In April 2020, the Company ~~recorded and paid the remaining one-half~~received an aggregate amount of ~~the aggregate fee of $50,000 related to this professional services agreement.~~

~~During the nine months ended September 30, 2018, the Company had Convertible Lines of Credit outstanding with~~$550,000 from two members of the Company’s Board of Directors. ~~At September 30, 2018, aggregate borrowing under~~Terms of repayment are currently being negotiated between the ~~Lines of Credit were $0. Such Lines of Credit~~Company and ~~all accrued unpaid interest were converted~~Board Members, although it is currently anticipated that the Company will issue subordinated promissory notes that will convert into shares of the Company’s ~~Series A Preferred~~Common Stock, ~~in September 2018,~~par value $0.01 per share ("Common Stock"), at ~~which time~~a conversion price to be agreed to by the ~~Lines of Credit were deemed satisfied in full~~lenders and ~~terminated.~~the Company.

NOTE 11. CONTINGENT LIABILITIES

Employment Agreements

The Company has employment agreements with its Chief Executive Officer and its Chief Technical Officer. The Company may terminate the agreements with or without cause. Subject to the conditions and other limitations set forth in each respective employment agreement, each executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the employment agreements) by the Company or by the executive:

Under the terms of the employment agreement with our Chief Executive Officer, executed April 10, 2020, the Chief Executive Officer will be entitled to the following severance benefits if we terminate ~~his~~her employment without cause or in the event of an involuntary termination: (i) ~~a lump sum cash payment~~severance payments equal to ~~twenty-four months’ base salary;~~the lesser of twelve (12) months of salary or the remaining period prior to the expiration of the employment period; (ii) continuation of ~~fringe benefits and~~ medical insurance for a period of three years; and (iii) immediate vesting of 50% of outstanding stock options and restricted stock awards. In the event that the Chief Executive Officer’s employment is terminated within six months prior to or thirteen months following a change of control (as defined in the employment agreements), the Chief Executive Officer is entitled to the severance benefits described above, except that 100% of the Chief Executive Officer’s outstanding stock options and restricted stock awards will immediately vest. twelve months.

Under the terms of the employment agreement with our Chief Technical Officer, this executive will be entitled to the following severance benefits if we terminate his employment without cause or in the event of an involuntary termination: (i) a lump sum cash payment equal to six months of base salary; and (ii) continuation of their fringe benefits and medical insurance for a period of six months. In the event that his employment is terminated within six months prior to or thirteen months following a change of control (as defined in the employment agreements), he is entitled to the severance benefits described above, except that 100% of his outstanding stock options and restricted stock awards will immediately vest.

~~Effective September 15, 2017,~~On February 28, 2020, the employment ~~agreements~~agreement for the Company’s Chief ~~Executive Officer and Chief~~ Technical Officer ~~were~~was amended to extend the term of ~~each executive officer’s~~the employment agreement until December 31, ~~2018, and on January 30, 2019, both agreements were amended again to further extend the term of each executive officer’s employment until December 31, 2019.~~2020.

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

12. SUBSEQUENT EVENTS

In April 2020, the Company received an aggregate amount of $550,000 from two members of the Company’s Board of Directors. Terms of repayment are currently being negotiated between the Company and Board Members, although it is currently anticipated that the Company will issue subordinated promissory notes that will convert into shares of the Company’s Common Stock, at a conversion price to be agreed to by the lenders and the Company.

On April 28, 2020, we entered into a purchase agreement, as amended on June 11, 2020 (the “Purchase Agreement”), and a registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our Common Stock.

Under the terms and subject to the conditions of the Purchase Agreement, including stockholder approval of an amendment to the Company’s Certificate of Incorporation to increase the number of shares of the Company’s capital stock to 350 million shares, obtained from our shareholders effective June 9, 2020, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $10,250,000 of shares of our Common Stock. On April 28, 2020, we sold 1,000,000 shares of Common Stock to Lincoln Park under the Purchase Agreement for an aggregate purchase price of $100,000 (the “Initial Purchase Shares)”. On June 11, 2020, we sold an additional 1,500,000 shares of Common Stock to Lincoln Park under the Purchase Agreement for an aggregate purchase price of $150,000 (the “Commencement Purchase Shares”). Future sales of Common Stock under the Purchase Agreement, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 24-month period commencing on the date that a registration statement, which was filed with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement on June 9, 2020, is declared effective by the SEC and a final prospectus in connection therewith is filed and the other conditions set forth in the Purchase Agreement are satisfied (such date on which all of such conditions are satisfied, the “Commencement Date”).

Under the Purchase Agreement, on any business day over the term of the Purchase Agreement, the Company has the right, in its sole discretion, to present Lincoln Park with a purchase notice (each, a "Purchase Notice") directing Lincoln Park to purchase up to 125,000 shares of Common Stock per business day, which increases to up to 425,000 shares in the event the price of the Company’s Common Stock is not below $0.55 per share (the "Regular Purchase") (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement). In each case, Lincoln Park's maximum commitment in any single Regular Purchase may not exceed $500,000. The Purchase Agreement provides for a purchase price per Purchase Share (the "Purchase Price") equal to the lesser of:

●

the lowest sale price of the Company's Common Stock on the purchase date; and

●

the average of the three lowest closing sale prices for the Company's Common Stock during the fifteen consecutive business days ending on the business day immediately preceding the purchase date of such shares.

~~-21-~~-24-

Table of Contents

~~ITEM~~In addition, on any date on which the Company submits a Purchase Notice to Lincoln Park, the Company also has the right, in its 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 "Accelerated Purchase") equal to up to the lesser of (i) three times the number of shares of Common Stock purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate shares of the Company's Common Stock traded during all or, if certain trading volume or market price thresholds specified in the Purchase Agreement are crossed on the applicable Accelerated Purchase Date, the portion of the normal trading hours on the applicable Accelerated Purchase Date prior to such time that any one of such thresholds is crossed (such period of time on the applicable Accelerated Purchase Date, the "Accelerated Purchase Measurement Period"), provided 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 Common Stock on the OTC Markets (or alternative national exchange in accordance with the Purchase Agreement) is below $0.25 per share. The purchase price per share of Common Stock for each such Accelerated Purchase will be equal to the lesser of:

●

95% of the volume weighted average price of the Company's Common Stock during the applicable Accelerated Purchase Measurement Period on the applicable Accelerated Purchase Date; and

●

the closing sale price of the Company's Common Stock on the applicable Accelerated Purchase Date.

The Company may also direct Lincoln Park on any 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 Purchase Agreement, to purchase an amount of stock (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 (ii) 30% of the aggregate number of 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 Purchase Agreement (such period of time on the applicable Additional Accelerated Purchase date, the "Additional Accelerated Purchase Measurement Period"), provided that the closing price of the Company's Common Stock on the business day immediately preceding such business day is not below $0.25 (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement). Additional Accelerated Purchases will be equal to the lower of:

●

95% of 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

●

the closing sale price of the Company's Common Stock on the applicable Additional Accelerated Purchase date.

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.

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

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 Purchase Agreement.

The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions and indemnification obligations of the parties. We have the right to terminate the Purchase Agreement at any time, at no cost or penalty. We issued to Lincoln Park 2,500,000 shares of Common Stock in consideration for entering into the Purchase Agreement.

Actual sales of shares of Common Stock to Lincoln Park under the 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.

On May 4, 2020, the Company entered into a loan agreement (“PPP Loan”) with Comerica Bank (“Comerica”) under the Paycheck Protection Program (the “PPP”), which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under this program, the Company received proceeds of approximately $1,571,000, from the PPP Loan. In accordance with the requirements of the PPP, the Company intends to use proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, matures on May 4, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, which the Company continues to evaluate.

Organizational Developments

The Company and Ms. Kristin Taylor entered into an employment agreement effective April 10, 2020 resulting from her appointment as President and Chief Executive Office effective March 2, 2020. A copy of the employment contract that sets forth Ms. Taylor’s base compensation, equity compensation and termination provisions was filed with the SEC on April 15, 2020 on the Company’s Current Report on Form 8-K. On May 27, 2020, the Company announced the appointment Ms. Taylor to serve as a director on the Board of Directors (the "Board") of the Company for a period of one year or until her successor is duly elected. In connection with her service on the Board and as an employee director, Ms. Taylor is not entitled to receive any additional compensation.

On April 1, 2020, John Cronin resigned from his position as a member of the Board of Directors of the Company. Mr. Cronin will continue his work with the Company on intellectual property matters, including intellectual property monetization.

The Company announced the appointment of Jonathan D. Morris as Senior Vice President and Chief Financial Officer effective May 1, 2020.

Subsequent to March 31, 2020, the Company issued 200,000 shares of its Common Stock to certain terminated employees as part of such employees’ severance in exchange for 400,000 outstanding options held by such employees. Such shares of stock vested immediately. Additionally, on May 8, 2020 the Company granted 708,916 restricted stock units to certain active employees in exchange for 1,417,832 outstanding options held by such employees. On May 8, 2020, 88,695 shares of these restricted stock units vested with the remainder of such shares of stock vesting quarterly over a period of two years.

On June 9, 2020, the Company amended its Certificate of Incorporation, as amended (the “Charter’) to increase the number of shares of the Company’s Common Stock and the number of shares of the Company’s Preferred Stock authorized thereunder from an aggregate of 179 million to 350 million, consisting of 345 million shares of Common Stock and 5.0 million shares of Preferred Stock. Such amendment was made pursuant to authorization obtained from the Company’s stockholders.

On June 9, 2020, pursuant to authorization obtained from the Company’s stockholders, the Company adopted the 2020 Omnibus Stock Incentive Plan (the “2020 Plan”). Such plan had been previously unanimously approved by the Company’s Board of Directors. The purposes of our 2020 Plan are to enhance our ability to attract and retain highly qualified officers, non-employee directors, key employees and consultants, and to motivate those service providers to serve the Company and to expend maximum effort to improve our business results by providing to those service providers an opportunity to acquire or increase a direct proprietary interest in our operations and future success. The 2020 Plan also will allow us to promote greater ownership in our Company by the service providers in order to align the service providers’ interests more closely with the interests of our stockholders. Awards granted under the 2020 Plan are designed to qualify for special tax treatment under Section 422 of the Internal Revenue Code of 1986 (the “Code”).

			Page
PART I. FINANCIAL INFORMATION

	ITEM 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019	1
		Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	2
		Condensed Consolidated Statements of Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	3
		Condensed Consolidated Statements of Shareholders’ Deficit for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	6
		Notes to unaudited Condensed Consolidated Financial Statements	7
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2227
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	3437
	ITEM 4.	Controls and Procedures	3437

PART II. OTHER INFORMATION

	ITEM 1.	Legal Proceedings	3538
	ITEM1A.	Risk Factors	3538
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3538
	ITEM 3.	Defaults Upon Senior Securities	3538
	ITEM 4.	Mine Safety Disclosures	3538
	ITEM 5.	Other Information	3538
	ITEM 6.	Exhibits	3538

SIGNATURES			3639

Potential Dilutive Securities	Three and Nine Months Ended September 30,
Potential Dilutive securities			Three Months Ended March 31,
	2019	2018	2020	2019

Convertible redeemable preferred stock	42,627,000		43,685,695	42,626,980
Stock options	7,199,668	7,318,179	5,927,332	7,225,421
Warrants	1,733,856	1,763,856	1,733,856	1,813,856
Total potential dilutive securities	51,560,524	51,709,035	51,346,883	51,666,257

($ in thousands)
2019 (three months)	$139
2020	671
2020 (nine months)		$502
2021	642	642
2022	652	652
2023	425	425
2024		387
Thereafter	519	130
Total	3,048	2,738
Short-term leases not included in lease liability	(29)	(14)
Present Value effect on future minimum undiscounted lease payments at September 30, 2019	(876)
Lease liability at September 30, 2019	$2,143
Present Value effect on future minimum undiscounted lease payments at March 31, 2020		(722)
Lease liability at March 31, 2020		$2,002
Less current portion	(294)	(391)
Non-current lease liability at September 30, 2019	$1,849
Non-current lease liability at March 31, 2020		$1,611

	Options	Weighted-Average Exercise Price	Options	Weighted-Average Exercise Price
Balance at December 31, 2018	7,227,248	$1.34
Balance at December 31, 2019			7,204,672	$1.32
Granted	712,500	$0.92	—	$—
Expired/Cancelled	(388,746)	$1.53	(1,277,340)	$1.31
Exercised	(351,334)	$0.47	—	$—
Balance at September 30, 2019	7,199,668	$1.34
Balance at March 31, 2020			5,927,332	$1.32

	Three Months Ended September 30,
Maintenance Revenue	2019	2018	$ Change	% Change
(dollars in thousands)

Total maintenance revenue	$630	$658	$(28)	(4)%

	September 30, 2019	December 31, 2018
	(Unaudited)		March 31, 2020	December 31, 2019
ASSETS			(Unaudited)
Current Assets:
Cash and cash equivalents	$4,363	$5,694	$53	$1,030
Accounts receivable, net of allowance for doubtful accounts of $7 at September 30, 2019 and $0 at December 31, 2018.	566	968
Accounts receivable, net of allowance for doubtful accounts of $7 at March 31, 2020 and December 31, 2019.			489	657
Inventory, net	509	29	679	615
Stock subscription receivable			765	—
Other current assets	337	233	214	243
Total Current Assets	5,775	6,924	2,200	2,545

Property and equipment, net	218	244	198	216
Other assets	286	332	256	257
Operating lease right-of-use assets	1,991	—	1,822	1,906
Intangible assets, net of accumulated amortization	73	82	67	70
Goodwill	3,416	3,416	3,416
Total Assets	$11,759	$10,998	$7,959	$8,410

LIABILITIES AND SHAREHOLDERS’ DEFICIT
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT

Current Liabilities:
Accounts payable	$525	$678	$1,178	$515
Deferred revenue	1,989	1,215	1,865	1,629
Accrued expense	1,347	888	2,594	1,312
Notes payable to related parties			350	—
Operating lease liabilities, current portion	294	—	391	373
Derivative liabilities	620	1,065	172	369
Total Current Liabilities	4,775	3,846	6,550	4,198

Other long-term liabilities	118	147	118
Lease liabilities, net of current portion	1,849	—	1,611	1,716
Pension obligation	1,921	1,876	2,265	2,256
Total Liabilities	8,663	5,869	10,544	8,288

Mezzanine Equity:
Series C Convertible Redeemable Preferred Stock, $0.01 par value, designated 1,000 shares, 1,000 shares issued and outstanding at September 30, 2019 (unaudited) and December 31, 2018; liquidation preference $10,000 at September 30, 2019 (unaudited) and December 31, 2018.	8,707	8,156
Series C Convertible Redeemable Preferred Stock, $0.01 par value, designated 1,000 shares, 1,000 shares issued and outstanding at March 31, 2020 (unaudited) and December 31, 2019, respectively; liquidation preference $10,250 at March 31, 2020 (unaudited) and $10,000 at December 31, 2019.			9,059	8,884

Shareholders’ Equity (Deficit):
Shareholders’ Deficit:
Preferred stock, authorized 4,000,000 shares:
Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and outstanding at September 30, 2019 (unaudited) and December 31, 2018, respectively; liquidation preference $37,467 at September 30, 2019 (unaudited) and December 31, 2018, respectively.	—
Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 outstanding at September 30, 2019 (unaudited) and December 31, 2018, respectively; liquidation preference $620 and $607 at September 30, 2019 (unaudited) and December 31, 2018, respectively.	2	2
Common Stock, $0.01 par value, 175,000,000 shares authorized; 108,905,340 and 98,230,336 shares issued at September 30, 2019 (unaudited) and December 31, 2018, respectively, and 108,898,636 and 98,223,632 shares outstanding at September 30, 2019 (unaudited) and December 31, 2018, respectively.	1,089	981
Series A Convertible Redeemable Preferred Stock, $0.01 par value; designated 38,000 shares, 37,467 shares issued and outstanding at March 31, 2020 (unaudited) and December 31, 2019; liquidation preference $38,404 at March 31, 2020 (unaudited) and $37,467 at December 31, 2019.			—
Series B Convertible Redeemable Preferred Stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued and 239,400 shares outstanding at March 31, 2020 (unaudited) and December 31, 2019; liquidation preference $620 and $607 at March 31, 2020 (unaudited) and December 31, 2019, respectively.			2
Common Stock, $0.01 par value, 175,000,000 shares authorized; 123,753,176 and 113,353,176 shares issued at March 31, 2020 (unaudited) and December 31, 2019, respectively, and 123,746,472 and 113,346,472 shares outstanding at March 31, 2020 (unaudited) and December 31, 2019, respectively.			1,237	1,133
Additional paid-in capital	193,634	184,130	196,373	195,079
Treasury stock, at cost 6,704 shares	(64)	(64)	(64)
Accumulated other comprehensive loss	(1,394)	(1,428)	(1,710)	(1,741)
Accumulated deficit	(198,878)	(186,648)	(207,482)	(203,171)
Total Shareholders’ Deficit	(5,611)	(3,027)	(11,644)	(8,762)
Total Liabilities, Mezzanine Equity and Shareholders’ Deficit	$11,759	$10,998	$7,959	$8,410

	Series A Convertible,		Series B Convertible,							Accumulated
	Redeemable		Redeemable						Additional	Other
	Preferred		Preferred		Common Stock		Treasury Stock		Paid-In	Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Loss	Deficit	Total
Balance at December 31, 2018	37,467	$-	239,400	$2	98,230,336	$981	6,704	$(64)	$184,130	$(1,428)	$(186,648)	$(3,027)

Accretion of Preferred Stock discount	-	-	-	-	-	-	-	-	(186)	-	-	(186)
Issuance of Common Stock pursuant to option exercises	-	-	-	-	286,834	3	-	-	103	-	-	106
Stock-based compensation expense	-	-	-	-	-	-	-	-	166	-	-	166
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	15	-	15
Dividends on Series A preferred stock, $(23.06)/share	-	-	-	-	591,803	6	-	-	858	-	(864)	-
Divedends on Series C preferred stock, $(230.60)/share	-	-	-	-	157,945	2	-	-	229	-	(231)	-
Net loss	-	-	-	-	-	-	-	-	-	-	(3,612)	(3,612)
Balance at March 31, 2019	37,467	$-	239,400	$2	99,266,918	$992	6,704	$(64)	$185,300	$(1,413)	$(191,355)	$(6,538)

Accretion of Preferred Stock discount	-	-	-	-	-	-	-	-	(184)	-	-	(184)
Issuance of common stock net of financing costs	-	-	-	-	5,954,545	60	-	-	6,035	-	-	6,095
Issuance of Common Stock pursuant to option exercises	-	-	-	-	64,500	1	-	-	59	-	-	60
Stock-based compensation expense	-	-	-	-	-	-	-	-	181	-	-	181
Issuance of common stock warrants as compensation	-	-	-	-	-	-	-	-	8	-	-	8
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	(20)	-	(20)
Dividends on Series A preferred stock, $(24.81)/share	-	-	-	-	999,633	9	-	-	921	-	(930)	-
Dividends on Series B preferred stock, $(0.11)/share	-	-	-	-	-	-	-	-	-	-	(26)	(26)
Dividends on Series C preferred stock, $(248.12)/share	-	-	-	-	266,793	3	-	-	245	-	(248)	-

Net loss	-	-	-	-	-	-	-	-	-	-	(2,548)	(2,548)
Balance at June 30, 2019	37,467	$-	239,400	$2	106,552,389	$1,065	6,704	$(64)	$192,565	$(1,433)	$(195,107)	$(2,972)

Accretion of Preferred Stock discount	-	-	-	-	-	-	-	-	(181)	-	-	(181)
Stock-based compensation expense	-	-	-	-	-	-	-	-	168	-	-	168
Foreign currency translation adjustment	-	-	-	-	-	-	-	-	-	39	-	39
Dividends on Series A preferred stock, $(23.30)/share	-	-	-	-	1,857,263	19	-	-	854	-	(873)	-
Dividends on Series C preferred stock, $(232.97)/share	-	-	-	-	495,688	5	-	-	228		(233)	-
Net loss	-	-	-	-	-	-	-	-	-	-	(2,665)	(2,665)
Balance at September 30, 2019	37,467	$-	239,400	$2	108,905,340	$1,089	6,704	$(64)	$193,634	$(1,394)	$(198,878)	$(5,611)

Fiscal Year Ended December 31,	Estimated Amortization Expense ($ in thousands)	Estimated Amortization Expense ($ in thousands)
2019 (three months)	$3
2020	12
2020 (nine months)		$9
2021	12	12
2022	12	12
2023	12	12
2024		12
Thereafter	22	10
Totals	$73	$67

	Warrants	Weighted- Average Exercise Price	Warrants	Weighted- Average Exercise Price
Balance at December 31, 2018	1,813,856	$0.19
Balance at December 31, 2019			1,733,856	$0.14
Granted	—		—
Expired/Canceled	(80,000)	1.13	—
Exercised	—	—	—
Balance at September 30, 2019	1,733,856	$0.14
Balance at March 31, 2020			1,733,856	$0.14

	Three Months Ended September 30,
Net Product Revenue	2019	2018	$ Change	% Change
(dollars in thousands)

Software and royalties	$73	$61	$12	20%
Percentage of total net product revenue	47%	78%
Hardware and consumables	$15	$7	$8	114%
Percentage of total net product revenue	10%	9%
Services	$67	$10	$57	570%
Percentage of total net product revenue	43%	13%
Total net product revenue	$155	$78	$77	99%

	Three Months Ended September 30,
Cost of Product Revenue	2019	2018	$ Change	% Change
(dollars in thousands)

Software and royalties	$11	$2	$9	450%
Percentage of software and royalty product revenue	15%	3%
Hardware and consumables	$12	$5	$7	140%
Percentage of hardware and consumables product revenue	80%	71%
Services	$18	$2	$16	800%
Percentage of services product revenue	27%	20%
Total product cost of revenue	$41	$9	$32	356%
Percentage of total product revenue	27%	12%

	Three Months Ended March 31,
Cost of Product Revenue:	2020	2019	$ Change	% Change
(dollars in thousands)

Software and royalties	$14	$—	$14	100%
Percentage of software and royalty product revenue	11%	0%
Hardware and consumables	$6	$8	$(2)	(25)%
Percentage of hardware and consumables product revenue	43%	73%
Services	$1	$76	$(75)	(99)%
Percentage of services product revenue	9%	49%
Total product cost of revenue	$21	$84	$(63)	75%
Percentage of total product revenue	14%	30%

Maintenance Cost of Revenue	Three Months Ended September 30,
(dollars in thousands)	2019	2018	$ Change	% Change
Total maintenance cost of revenue	$97	$151	$(54)	(36)%
Percentage of total maintenance revenue	15%	23%

	Three Months Ended September 30,
Product Gross Profit	2019	2018	$ Change	% Change
(dollars in thousands)
Software and royalties	$62	$59	$3	5%
Percentage of software and royalty product revenue	85%	97%
Hardware and consumables	$3	$2	$1	50%
Percentage of hardware and consumables product revenue	20%	29%
Services	$49	$8	$41	513%
Percentage of services product revenue	73%	80%
Total product gross profit	$114	$69	$45	65%
Percentage of total product revenue	74%	88%

Maintenance Gross Profit	Three Months Ended September 30,
(dollars in thousands)	2019	2018	$ Change	% Change

Total maintenance gross profit	$533	$507	$26	5%
Percentage of total maintenance revenue	85%	77%

	Three Months Ended September 30,
Operating Expense	2019	2018	$ Change	% Change
(dollars in thousands)

General and administrative	$791	$958	$(167)	(17)%
Percentage of total net revenue	101%	130%
Sales and marketing	$985	$920	$65	7%
Percentage of total net revenue	125%	125%
Research and development	$1,898	$1,820	$78	4%
Percentage of total net revenue	242%	247%
Depreciation and amortization	$17	$10	$7	70%
Percentage of total net revenue	2%	1%

(a)		EXHIBITS

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
31.2		Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) and 15d-14(a)
32.1		Certification by the Principal Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

Date: ~~November 12, 2019~~June 25, 2020		IMAGEWARE SYTEMS, INC

		By:/s/ ~~S. James Miller, Jr.~~Kristin Taylor
		~~S. James Miller, Jr.~~Kristin Taylor Chief Executive Officer ~~Chairman and Director~~ (Principal Executive Officer) and President

Date: ~~November 12, 2019~~June 25, 2020		By:/s/ ~~Wayne Wetherell~~Jonathan D. Morris
		~~Wayne Wetherell~~Jonathan D. Morris Chief Financial Officer (Principal Financial ~~and Accounting~~ Officer)