ImageWare Systems (IWSY) Risk Analysis

There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our Common Stock. You may not be able to resell your shares at or above the price you pay for those shares due to fluctuations in the market price of our Common Stock caused by changes in our operating performance or prospects and other factors. Some specific factors that may have a significant effect on our Common Stock market price include: - Actual or anticipated fluctuations in our operating results or future prospects;- Our announcements or our competitors' announcements of new products;- The public's reaction to our press releases, our other public announcements and our filings with the SEC;- Strategic actions by us or our competitors, such as acquisitions or restructurings;- New laws or regulations or new interpretations of existing laws or regulations applicable to our business;- Changes in accounting standards, policies, guidance, interpretations or principles;- Changes in our growth rates or our competitors' growth rates;- Developments regarding our patents or proprietary rights or those of our competitors;- Our inability to raise additional capital as needed;- Substantial sales of Common Stock underlying warrants and preferred stock;- Concern as to the efficacy of our products;- Changes in financial markets or general economic conditions;- Sales of Common Stock by us or members of our management team; and - Changes in stock market analyst recommendations or earnings estimates regarding our Common Stock, other comparable companies or our industry generally.

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

Our Board of Directors has the authority to issue a total of up to 5.0 million shares of preferred stock, par value $0.01 per share ("Preferred Stock") and to fix the rights, preferences, privileges, and restrictions, including voting rights, of the Preferred Stock, which typically are senior to the rights of the Common Stock, without any further vote or action by the holders of our Common Stock. The rights of the holders of our Common Stock will be subject to, and may be adversely affected by, the rights of the holders of the Preferred Stock that have been issued or might be issued in the future. Preferred Stock also could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. This could delay, defer, or prevent a change in control. Furthermore, holders of our Preferred Stock may have other rights, including economic rights, senior to the Common Stock. As a result, their existence and issuance could have a material adverse effect on the market value of the Common Stock. We have in the past issued and may from time to time in the future issue, Preferred Stock for financing or other purposes with rights, preferences, or privileges senior to the Common Stock. As of March 31, 2022, we had two series of Preferred Stock outstanding, the Series B Preferred and the Series D Preferred. The provisions of our Series B Preferred prohibit the payment of dividends on our Common Stock unless the dividends on our preferred shares are first paid. In addition, upon a liquidation, dissolution or sale of our business, the holders of our Series B Preferred will be entitled to receive, in preference to any distribution to the holders of Common Stock, initial distributions of $2.50 per share, plus all accrued but unpaid dividends. As of March 31, 2022 and December 31, 2021, there were 239,400 shares of Series B Preferred outstanding. As of March 31, 2022 and December 31, 2021, we had cumulative undeclared dividends on our Series B Preferred of approximately $21,000 and $8,000, respectively. The provisions of our Series D Preferred prohibit the payment of dividends on our Common Stock unless the dividends on our preferred shares are first paid. In addition, upon a liquidation, dissolution or sale of our business, the holders of our Series D Preferred will be entitled to receive, in preference to any distribution to the holders of Common Stock, initial distributions of $1,000 per share, plus all accrued but unpaid dividends. As of March 31, 2022 and December 31, 2021, there were 23,469.4 and 23,216.4 shares of Series D Preferred outstanding, respectively. As of March 31, 2022 and December 31, 2021, we had no cumulative undeclared dividends on our Series D Preferred.

The holders of our Series B Preferred Stock and Series D Preferred Stock may elect to convert their shares of Preferred Stock into shares of Common Stock. As of March 31, 2022, 239,400 shares of Series B Preferred Stock, which are convertible into 46,980 shares of Common Stock; and 23,469.4 shares of Series D Preferred Stock, which are convertible into 402,562,607 shares of Common Stock, were outstanding. In addition to our outstanding shares of Preferred Stock, as of March 31, 2022, there were outstanding warrants to purchase 3,150,000 shares of our Common Stock, outstanding stock options to purchase 4,818,876 shares of our Common Stock and outstanding Restricted Stock Units that upon vesting will result in the issuance of 81,019,401 shares of our Common Stock. The conversion of our Series B Preferred Stock and Series D Preferred Stock, as well as the exercise of our outstanding warrants, outstanding stock options and the vesting of our Restricted Stock Units could result in significant dilution to existing common shareholders, adversely affect the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity securities.

As a result of the securities issued to Nantahala Capital Management, LLC, and the related entities controlled by Nantahala Capital Management, (i) Blackwell Partners LLC - Series A, (ii) Nantahala Capital Partners Limited Partnership, (iii) Nantahala Capital Partners II Limited Partnership, (iv) Nantahala Capital Partners SI, LP, (v) NCP QR Limited Partnership, and (vi) Silver Creek CS SAV, L.L.C. (collectively, "Nantahala"), Nantahala beneficially owns, in the aggregate, approximately 37.5% of the Company's outstanding voting securities as of May 20, 2022.  As a result, Nantahala has the potential ability to exert influence over the outcome of issues requiring approval by the Company's shareholders. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other shareholders or preventing transactions in which shareholders might otherwise recover a premium for their shares over current market prices.

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