SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-40747
Ipsidy Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 46-2069547 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
670 Long Beach Boulevard
Long Beach, New York
11561
(Address of principal executive offices) (zip code)
516-274-8700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock par value $0.0001 per share | AUID | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). files.
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth Company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
| Class | Outstanding at | |
| Common Stock, par value $0.0001 | ||
| Documents incorporated by reference: | None |
TABLE OF CONTENTS
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in this report, in Part I. Item 1A. Risk Factors also appear in our Annual Report on Form 10-K for the year ended December 31, 20202021 and our other filings with the Securities and Exchange Commission. Some examples of risk factors which may affect our business are as follows:
| ● | our lack of significant revenues and history of losses, |
| ● | market acceptance of our products; | |
| ● | our ability to |
| ● | our ability to effectively maintain and update our technology and product and service portfolio; | |
| ● | our ability to hire and retain key personnel and additional talent; | |
| ● | our ability to raise |
| ● | our ability to |
| ● | our ability to |
| ● |
| ● | the impact of the Covid-19 | |
| ● | the impact of the war in Ukraine; | |
| ● | legislation and government regulation; and | |
| ● | general economic conditions, inflation and access to capital. |
Other sections of this report include additional factors which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “Ipsidy,” “authID.ai”,“authID.ai,” the “Company,” “we,” “our,” “us,” and similar terms refer to Ipsidy Inc., a Delaware corporation and its subsidiaries.
Effective June 14, 2021 we completed a 1-for-30 reverse stock split of our common stock. Additionally, the Company changed its ticker symbol to AUID.
The information which appears on our website www.authID.ai is not part of this report.
ii
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | March 31, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
(Unaudited) | (unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets: | ||||||||||||||||
| Cash | $ | 9,233,399 | $ | 3,765,277 | $ | 13,795,772 | $ | 6,037,983 | ||||||||
| Accounts receivable, net | 170,291 | 72,986 | 186,366 | 137,823 | ||||||||||||
| Current portion of net investment in direct financing lease | 78,731 | 72,682 | ||||||||||||||
| Inventory | 214,289 | 254,951 | 397,870 | 153,149 | ||||||||||||
| Other current assets | 929,692 | 237,769 | 624,159 | 597,640 | ||||||||||||
| Total current assets | 10,626,402 | 4,403,665 | 15,004,167 | 6,926,595 | ||||||||||||
| Property and Equipment, net | 127,705 | 97,829 | 97,934 | 118,531 | ||||||||||||
| Other Assets | 73,243 | 240,223 | 468,626 | 69,198 | ||||||||||||
| Intangible Assets, net | 3,657,569 | 4,527,476 | 2,166,119 | 2,532,453 | ||||||||||||
| Goodwill | 4,183,232 | 4,183,232 | 4,183,232 | 4,183,232 | ||||||||||||
| Net investment in direct financing lease, net of current portion | 362,185 | 422,021 | ||||||||||||||
| Total assets | $ | 19,030,336 | $ | 13,874,446 | $ | 21,920,078 | $ | 13,830,009 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current Liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 2,122,257 | $ | 2,665,132 | $ | 1,905,566 | $ | 2,013,460 | ||||||||
| Notes payable obligation, current portion | 3,126 | 5,947 | - | 1,579 | ||||||||||||
| Capital lease obligation, current portion | 20,813 | 39,232 | - | 10,562 | ||||||||||||
| Convertible debt | 662,000 | - | 662,000 | 662,000 | ||||||||||||
| Deferred revenue | 369,708 | 237,690 | 402,495 | 246,830 | ||||||||||||
| Total current liabilities | 3,177,904 | 2,948,001 | 2,970,061 | 2,934,431 | ||||||||||||
| Capital lease obligation, net of current portion | - | 10,562 | ||||||||||||||
| Notes payable, net of discounts and current portion | - | 487,339 | ||||||||||||||
| Convertible debt | - | 5,800,976 | 7,464,267 | - | ||||||||||||
| Other liabilities | - | 47,809 | ||||||||||||||
| Total liabilities | 3,177,904 | 9,294,687 | 10,434,328 | 2,934,431 | ||||||||||||
| Commitments and Contingencies (Note 12) | ||||||||||||||||
| Stockholders’ Equity: | ||||||||||||||||
| Common stock, $0.0001 par value, 1,000,000,000 shares authorized; 23,198,419 and 19,642,401 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 2,319 | 1,964 | ||||||||||||||
| Common stock, $0.0001 par value, 1,000,000,000 shares authorized; 24,672,522 and 23,294,024 shares issued and outstanding as of March 31, 2022, and December 31, 2021, respectively | 2,467 | 2,329 | ||||||||||||||
| Additional paid in capital | 124,609,145 | 102,651,304 | 132,439,724 | 126,581,702 | ||||||||||||
| Accumulated deficit | (108,980,665 | ) | (98,234,151 | ) | (121,200,667 | ) | (115,899,939 | ) | ||||||||
| Accumulated comprehensive income | 221,633 | 160,642 | 244,226 | 211,486 | ||||||||||||
| Total stockholders’ equity | 15,852,432 | 4,579,759 | 11,485,750 | 10,895,578 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 19,030,336 | $ | 13,874,446 | $ | 21,920,078 | $ | 13,830,009 | ||||||||
See notes to condensed consolidated financial statements.
1
IPSIDY INC. AND SUBSIDIARIES
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Products and services | $ | 516,218 | $ | 501,700 | $ | 1,657,296 | $ | 1,587,330 | ||||||||
| Lease income | 12,131 | 13,992 | 37,833 | 43,270 | ||||||||||||
| Total revenues, net | 528,349 | 515,692 | 1,695,129 | 1,630,600 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Cost of Sales | 121,509 | 114,985 | 494,558 | 532,506 | ||||||||||||
| General and administrative | 5,331,159 | 1,527,723 | 10,308,785 | 5,400,639 | ||||||||||||
| Research and development | 419,313 | 308,038 | 1,088,496 | 928,778 | ||||||||||||
| Impairment loss | - | - | - | 1,035,629 | ||||||||||||
| Depreciation and amortization | 319,017 | 276,232 | 943,436 | 923,563 | ||||||||||||
| Total operating expenses | 6,190,998 | 2,226,978 | 12,835,275 | 8,821,115 | ||||||||||||
| Loss from operations | (5,662,649 | ) | (1,711,286 | ) | (11,140,146 | ) | (7,190,515 | ) | ||||||||
| Other Expense: | ||||||||||||||||
| Warrant inducement expense | - | - | - | (366,795 | ) | |||||||||||
| Extinguishment of debt - gain (loss) | 485,762 | - | 971,522 | (985,842 | ) | |||||||||||
| Other income | 6,736 | 16,779 | 14,394 | 51,445 | ||||||||||||
| Interest expense, net | (25,780 | ) | (212,658 | ) | (579,768 | ) | (701,861 | ) | ||||||||
| Other income (expense), net | 466,718 | (195,879 | ) | 406,148 | (2,003,053 | ) | ||||||||||
| Loss before income taxes | (5,195,931 | ) | (1,907,165 | ) | (10,733,998 | ) | (9,193,568 | ) | ||||||||
| Income Tax Expense | (2,974 | ) | (11,074 | ) | (12,516 | ) | (23,540 | ) | ||||||||
| Net loss | $ | (5,198,905 | ) | $ | (1,918,239 | ) | $ | (10,746,514 | ) | $ | (9,217,108 | ) | ||||
| Net Loss Per Share - Basic and Diluted | $ | (0.24 | ) | $ | (0.11 | ) | $ | (0.52 | ) | $ | (0.52 | ) | ||||
| Weighted Average Shares Outstanding - Basic and Diluted | 22,088,865 | 18,237,647 | 20,703,970 | 17,664,446 | ||||||||||||
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Products and services | $ | 607,362 | $ | 575,913 | ||||
| Lease income | - | 13,086 | ||||||
| Total revenues, net | 607,362 | 588,999 | ||||||
| Operating Expenses: | ||||||||
| Cost of Sales | 184,086 | 216,144 | ||||||
| General and administrative | 4,764,349 | 1,927,926 | ||||||
| Research and development | 537,883 | 322,010 | ||||||
| Impairment loss | 143,703 | - | ||||||
| Depreciation and amortization | 243,678 | 309,829 | ||||||
| Total operating expenses | 5,873,699 | 2,775,909 | ||||||
| Loss from operations | (5,266,337 | ) | (2,186,910 | ) | ||||
| Other Expense: | ||||||||
| Other income | 5,151 | 1,537 | ||||||
| Interest expense, net | (33,221 | ) | (297,438 | ) | ||||
| Other income expense, net | (28,070 | ) | (295,901 | ) | ||||
| Income loss before income taxes | (5,294,407 | ) | (2,482,811 | ) | ||||
| Income Tax Expense | (6,321 | ) | (7,188 | ) | ||||
| Net loss | $ | (5,300,728 | ) | $ | (2,489,999 | ) | ||
| Net Loss Per Share - Basic and Diluted | $ | (0.22 | ) | $ | (0.13 | ) | ||
| Weighted Average Shares Outstanding - Basic and Diluted | 23,563,852 | 19,758,957 | ||||||
See notes to condensed consolidated financial statements.
2
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Loss | $ | (5,300,728 | ) | $ | (2,489,999 | ) | ||
| Foreign currency translation gain | 32,740 | 40,356 | ||||||
| Comprehensive loss | $ | (5,267,988 | ) | $ | (2,449,643 | ) | ||
See notes to condensed consolidated financial statements.
3
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Loss | $ | (5,198,905 | ) | $ | (1,918,239 | ) | $ | (10,746,514 | ) | $ | (9,217,108 | ) | ||||
| Foreign currency translation gain (loss) | 18,966 | 29,057 | 60,991 | (6,972 | ) | |||||||||||
| Comprehensive loss | $ | (5,179,939 | ) | $ | (1,889,182 | ) | $ | (10,685,523 | ) | $ | (9,224,080 | ) | ||||
See notes to condensed consolidated financial statements.
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Nine Months Ended September 30, 2021 | Shares | Amount | Capital | Deficit | Income | Total | ||||||||||||||||||
| Balances, December 31, 2020 | 19,642,401 | $ | 1,964 | $ | 102,651,304 | $ | (98,234,151 | ) | $ | 160,642 | $ | 4,579,759 | ||||||||||||
| Sale of common stock for cash | 1,642,856 | 164 | 10,282,834 | - | - | 10,282,998 | ||||||||||||||||||
| Stock-based compensation | - | - | 4,795,069 | - | - | 4,795,069 | ||||||||||||||||||
| Settlement of accrued expense with stock options | - | - | 349,376 | - | - | 349,376 | ||||||||||||||||||
| Convertible notes converted to common stock | 1,171,296 | 117 | 6,232,223 | - | - | 6,232,340 | ||||||||||||||||||
| Stock option exercise for cash | 4,802 | 1 | 24,659 | 24,660 | ||||||||||||||||||||
| Warrant exercise for cash | 60,834 | 6 | 273,747 | 273,753 | ||||||||||||||||||||
| Cashless stock option exercise | 412,569 | 40 | (40 | ) | - | - | - | |||||||||||||||||
| Cashless warrant exercise | 263,661 | 27 | (27 | ) | - | - | - | |||||||||||||||||
| Net loss | - | - | - | (10,746,514 | ) | - | (10,746,514 | ) | ||||||||||||||||
| Foreign currency translation | - | - | - | - | 60,991 | 60,991 | ||||||||||||||||||
| Balances, September 30, 2021 | 23,198,419 | $ | 2,319 | $ | 124,609,145 | $ | (108,980,665 | ) | $ | 221,633 | $ | 15,852,432 | ||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||
| Balances, June 30, 2021 | 21,363,027 | $ | 2,137 | $ | 111,493,973 | $ | (103,781,760 | ) | $ | 202,667 | $ | 7,917,017 | ||||||||||||
| Sale of common stock for cash | 1,642,856 | 164 | 10,282,834 | - | - | 10,282,998 | ||||||||||||||||||
| Stock-based compensation | - | - | 2,533,943 | - | - | 2,533,943 | ||||||||||||||||||
| Stock option exercise for cash | 4,802 | 1 | 24,659 | - | - | 24,660 | ||||||||||||||||||
| Warrant exercise for cash | 60,834 | 6 | 273,747 | - | - | 273,753 | ||||||||||||||||||
| Cashless stock option exercise | 125,998 | 11 | (11 | ) | - | - | - | |||||||||||||||||
| Cashless warrant exercise | 902 | - | - | - | - | - | ||||||||||||||||||
| Net loss | - | - | - | (5,198,905 | ) | - | (5,198,905 | ) | ||||||||||||||||
| Foreign currency translation | - | - | - | - | 18,966 | 18,966 | ||||||||||||||||||
| Balances, September 30, 2021 | 23,198,419 | $ | 2,319 | $ | 124,609,145 | $ | (108,980,665 | ) | $ | 221,633 | $ | 15,852,432 | ||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Balances, December 31, 2019 | 17,270,848 | $ | 1,727 | $ | 95,032,252 | $ | (86,935,593 | ) | $ | 177,385 | $ | 8,275,771 | ||||||||||||
| Modification of warrants issued with debt | - | - | 95,223 | - | - | 95,223 | ||||||||||||||||||
| Sale of common stock for cash | 114,719 | 12 | 199,988 | - | - | 200,000 | ||||||||||||||||||
| Warrant exercise | 727,107 | 73 | 1,248,910 | - | - | 1,248,983 | ||||||||||||||||||
| Warrant exercise inducement | - | - | 366,795 | - | - | 366,795 | ||||||||||||||||||
| Stock-based compensation | 150,000 | 15 | 741,653 | - | - | 741,668 | ||||||||||||||||||
| Issuance of common stock to settle accounts payable | 3,540 | - | 8,270 | - | - | 8,270 | ||||||||||||||||||
| Net loss | - | - | - | (9,217,108 | ) | - | (9,217,108 | ) | ||||||||||||||||
| Foreign currency translation | - | - | - | - | (6,972 | ) | (6,972 | ) | ||||||||||||||||
| Balances, September 30, 2020 | 18,266,214 | $ | 1,827 | $ | 97,693,091 | $ | (96,152,701 | ) | $ | 170,413 | $ | 1,712,630 | ||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Balances, June 30, 2020 | 18,221,807 | $ | 1,822 | $ | 97,581,421 | $ | (94,234,462 | ) | $ | 141,356 | $ | 3,490,137 | ||||||||||||
| Warrant and stock cashless exercises | 44,407 | 5 | (5 | ) | - | - | - | |||||||||||||||||
| Stock-based compensation | - | - | 111,675 | - | - | 111,675 | ||||||||||||||||||
| Net loss | - | - | - | (1,918,239 | ) | - | (1,918,239 | ) | ||||||||||||||||
| Foreign currency translation | - | - | - | - | 29,057 | 29,057 | ||||||||||||||||||
| Balances, September 30, 2020 | 18,266,214 | $ | 1,827 | $ | 97,693,091 | $ | (96,152,701 | ) | $ | 170,413 | $ | 1,712,630 | ||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||
| Balances, December 31, 2021 | 23,294,024 | $ | 2,329 | $ | 126,581,702 | $ | (115,899,939 | ) | $ | 211,486 | $ | 10,895,578 | ||||||||||||
| Stock-based compensation | - | - | 1,866,989 | - | - | 1,866,989 | ||||||||||||||||||
| Sale of common stock for cash, net of offering costs | 1,063,514 | 106 | 3,146,834 | - | - | 3,146,940 | ||||||||||||||||||
| Common stock issued with convertible debt | 28,496 | 3 | 91,754 | - | - | 91,757 | ||||||||||||||||||
| Common stock issued for working capital facility | 100,000 | 10 | 302,990 | - | - | 303,000 | ||||||||||||||||||
| Warrants for services with the issuance of convertible debt | - | 449,474 | - | - | 449,474 | |||||||||||||||||||
| Cashless stock option exercise | 185,111 | 19 | (19 | ) | - | - | - | |||||||||||||||||
| Cashless warrant exercise | 1,377 | - | - | - | - | - | ||||||||||||||||||
| Net loss | - | - | - | (5,300,728 | ) | - | (5,300,728 | ) | ||||||||||||||||
| Foreign currency translation | - | - | - | - | 32,740 | 32,740 | ||||||||||||||||||
| Balances, March 31, 2022 | 24,672,522 | $ | 2,467 | $ | 132,439,724 | $ | (121,200,667 | ) | $ | 244,226 | $ | 11,485,750 | ||||||||||||
| Balances, December 31, 2020 | 19,642,401 | $ | 1,964 | $ | 102,651,304 | $ | (98,234,151 | ) | $ | 160,642 | $ | 4,579,759 | ||||||||||||
| Stock-based compensation | - | - | 626,579 | - | - | 626,579 | ||||||||||||||||||
| Convertible note converted to common stock | 32,950 | 3 | 124,077 | - | - | 124,080 | ||||||||||||||||||
| Cashless stock option exercise | 178,120 | 18 | (18 | ) | - | - | - | |||||||||||||||||
| Cashless warrant exercise | 262,759 | 26 | (26 | ) | - | - | - | |||||||||||||||||
| Net loss | - | - | - | (2,489,999 | ) | - | (2,489,999 | ) | ||||||||||||||||
| Foreign currency translation | - | - | - | - | 40,356 | 40,356 | ||||||||||||||||||
| Balances, March 31, 2021 | 20,116,230 | $ | 2,011 | $ | 103,401,916 | $ | (100,724,150 | ) | $ | 200,998 | $ | 2,880,775 | ||||||||||||
See notes to condensed consolidated financial statements.
4
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (10,746,514 | ) | $ | (9,217,108 | ) | $ | (5,300,728 | ) | $ | (2,489,999 | ) | ||||
| Adjustments to reconcile net loss with cash flows from operations: | ||||||||||||||||
| Depreciation and amortization expense | 943,436 | 923,563 | 243,678 | 309,829 | ||||||||||||
| Stock-based compensation | 4,795,069 | 741,668 | 1,866,989 | 626,579 | ||||||||||||
| (Gain)/loss on extinguishment of note payable | (971,522 | ) | 985,842 | |||||||||||||
| Impairment charge | 143,703 | - | ||||||||||||||
| Amortization of debt discounts and issuance costs | 554,020 | 333,388 | 12,657 | 131,674 | ||||||||||||
| Impairment losses | - | 1,035,629 | ||||||||||||||
| Warrant exercise inducement | - | 366,795 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (92,993 | ) | 73,442 | (54,540 | ) | (543,955 | ) | |||||||||
| Net investment in direct financing lease | 53,787 | 48,341 | - | 17,450 | ||||||||||||
| Other current assets | (524,943 | ) | 450,755 | 180,048 | (63,582 | ) | ||||||||||
| Inventory | 47,480 | (70,040 | ) | (261,773 | ) | 129,863 | ||||||||||
| Accounts payable and accrued expenses | 336,099 | 1,232,898 | (87,423 | ) | (124,665 | ) | ||||||||||
| Deferred revenue | 132,018 | (36,902 | ) | 155,665 | 319,192 | |||||||||||
| Other liabilities | (47,809 | ) | - | - | 11,697 | |||||||||||
| Net cash flows from operating activities | (5,521,872 | ) | (3,131,729 | ) | (3,101,724 | ) | (1,675,917 | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of property and equipment | (79,703 | ) | (8,643 | ) | ||||||||||||
| Purchase of intangible assets | (23,702 | ) | - | (450 | ) | (4,424 | ) | |||||||||
| Investment in other assets | - | (172,880 | ) | - | 18,845 | |||||||||||
| Net cash flows from investing activities | (103,405 | ) | (181,523 | ) | (450 | ) | 14,421 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from sale of common stock, net of offering costs | 10,282,998 | - | 3,146,940 | - | ||||||||||||
| Proceeds from exercise of warrants | 273,753 | 1,248,983 | ||||||||||||||
| Proceeds from exercise of stock options | 24,660 | 1,510,000 | ||||||||||||||
| Proceeds from paycheck protection program | 485,762 | 485,760 | ||||||||||||||
| Payment of debt issuance costs | - | (104,800 | ) | |||||||||||||
| Proceeds from issuance of convertible debt, net of issuance costs | 7,992,841 | - | ||||||||||||||
| Proceeds from Paycheck Protection Program loan | - | 485,760 | ||||||||||||||
| Payment of fees for working capital facility | (300,000 | ) | - | |||||||||||||
| Payments on notes payable | (4,400 | ) | - | (1,579 | ) | - | ||||||||||
| Principal payments on capital lease obligation | (28,981 | ) | (29,669 | ) | (10,562 | ) | (10,801 | ) | ||||||||
| Net cash flows from financing activities | 11,033,792 | 3,110,274 | 10,827,640 | 474,959 | ||||||||||||
| Effect of Foreign Currencies | 59,607 | (96,653 | ) | 32,323 | 39,338 | |||||||||||
| Net Change in Cash | 5,468,122 | (299,631 | ) | 7,757,789 | (1,147,199 | ) | ||||||||||
| Cash, Beginning of the Period | 3,765,277 | 567,081 | 6,037,983 | 3,765,277 | ||||||||||||
| Cash, End of the Period | $ | 9,233,399 | $ | 267,450 | $ | 13,795,772 | $ | 2,618,078 | ||||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||||||||||
| Cash paid for interest | $ | 10,984 | $ | 7,505 | $ | 240 | $ | 8,779 | ||||||||
| Cash paid for income taxes | $ | 12,516 | $ | 23,540 | $ | 148,793 | $ | 7,188 | ||||||||
| Non-cash Investing and Financing Activities: | ||||||||||||||||
| Reclass from other assets to intangible assets | $ | 8,270 | $ | - | $ | - | $ | 8,270 | ||||||||
| Modification of warrants issued with convertible debt | $ | - | $ | 95,223 | ||||||||||||
| Exchange of notes payable and accrued interest for convertible notes payable | $ | - | $ | 2,662,000 | ||||||||||||
| Settlement of accounts payable with issuance of common stock | $ | 349,376 | $ | 8,270 | $ | - | $ | 349,376 | ||||||||
| Conversion of convertible note payable and accrued interest to common stock | $ | 6,232,340 | $ | - | $ | - | $ | 6,232,340 | ||||||||
| Cashless option and warrant exercises | $ | 19 | $ | 76 | ||||||||||||
| Common stock issued with convertible notes | $ | 91,757 | $ | - | ||||||||||||
| Common stock for working capital facility | $ | 303,000 | $ | - | ||||||||||||
| Warrants for services with the issuance of convertible debt | $ | 449,474 | $ | - | ||||||||||||
See notes to condensed consolidated financial statements.
5
IPSIDY INC. AND SUBSIDIARIES
IPSIDY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, and include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2021. The results of operations for the ninethree months ended September 30, 2021March 31, 2022 are not necessarily indicative of the results to be expected for future periods or the full year.
The condensed consolidated financial statements include the accounts of Ipsidy Inc. and its wholly-owned subsidiaries MultiPay S.A.S., ID Global LATAM, IDGS S.A.S., ID Solutions, Inc., FIN Holdings Inc., Ipsidy Enterprises Limited, Cards Plus Pty Ltd. and Ipsidy Peru S.A.C. (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Reverse Stock Split
At the Annual Meeting of stockholders of the Company held on March 22, 2021, the stockholders approved an amendment to our certificate of incorporation to effect a reverse stock split at a ratio not less than 1-for-2 and not greater than 1-for-50, with the exact ratio to be set within that range at the discretion of our board of directors before December 31, 2021
On June 14, 2021 (the “Effective Time”), the Company completed a 1-for-30 reverse stock split of its Common Stock, as previously authorized at the Annual Meeting. Pursuant to the reverse stock split, at the Effective Time, every 30 issued shares of Common Stock were automatically combined into one share of Common Stock without any change in the par value per share.
The par value of the Company’s Common Stock was unchanged at $0.0001 per share after the reverse stock split. As a result, on the effective date of the reverse stock split, the stated capital on the Company’s balance sheet attributable to Common Stock was reduced proportionately based on the reverse stock split ratio of 1-for-30 and the additional paid-in capital account was credited with the amount by which the stated capital was reduced.
After the reverse stock split, net income or loss per share, and other per share amounts were adjusted because there are fewer shares of the Company’s Common Stock outstanding.
The financial statements, net income or loss per share and other per share amounts for periods ending before the reverse stock split were recast to give retroactive effect to the reverse stock split.
Going Concern
As of September 30, 2021,March 31, 2022, the Company had an accumulated deficit of approximately $109.0$121.2 million. For the ninethree months ended September 30, 2021March 31, 2022 the Company earned revenue of approximately $1.7$0.6 million and incurred a loss from operations of approximately $11.1$5.3 million.
The reports of our independent registered public accounting firm on our consolidated financial statements for the years ended December 31, 20202021 and 20192020 contained an explanatoryemphasis of matter paragraph regarding our ability to continue as a going concern based upon our net losses.the Company’s liquidity situation and management’s plan thereto.
These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, the Company has secured additional financing which management believes will provide adequate funding for its operations as a going concern is dependent upon financial support fromit continues to invest in its product, people, and technology. The Company may need additional capital in the Company’s current shareholders,future but currently it believes it has sufficient funds to operate its business through December 31, 2023. See Notes 6, 8 and 10.
6
Subsequent Event
The Board of Directors of Ipsidy considers it in the abilitybest interests of the Company to obtain additional financingfocus its business activities on providing biometric identity verification products and services by means of our proprietary IDaaS platform. Accordingly, on May 4, 2022, the Board approved a plan to continue operations,start to exit from certain non-core activities comprising the Company’s ability to generate sufficient cash flows from operations, successfully locatingMultiPay correspondent bank, payments services in Colombia and negotiating with otherthe Card Plus cards manufacturing and printing business entities for potential acquisition and /or acquiring new clients to generate revenues and cash flows.in South Africa.
On August 26, 2021,Colombia
The Company plans to exit the Company’s completedMultiPay business in Colombia in an orderly fashion through the end of the 2022, honoring our obligations to employees, customers and under applicable laws and regulations. We plan to maintain our customer support and operations team in Bogota, which performs essential functions to support the global operations of our Verified family of products.
The Company will incur certain costs associated with its public offering (the “Offering”) of 1,642,856 sharesemployees and other contractual obligations. MultiPay will continue to service its customer base in the interim as it will look to minimize all such costs and in addition to realize proceeds from the potential disposition of its common stockassets. The Company cannot estimate the net costs to be incurred as a result of this decision at this time, but believes that the overall additional cash costs will not exceed $250,000. The Company has not recorded the potential costs or write-down in the three months ended March 31, 2022.
South Africa
The Company plans to exit the Cards Plus business and will seek a public offering pricebuy out of $7.00 per share, including 214,285 shares sold upon full exerciseour interests. We have had preliminary discussions with one group but no definitive terms for the sale have been agreed at this point.
If we are successful in achieving a sale of our interest it is expected that there will be a net cash inflow resulting from the planned exit of our business in South Africa. There is no guarantee that we will be successful in finding a buyer for our interest, that such sale will be on acceptable terms or that this will result in a net cash inflow. As a result of these preliminary discussions, the Company has decided to write-down the value of the underwriter’s option to purchase additional shares, for gross proceedsCards Plus intangible assets and has recorded an impairment charge of approximately $11.5 million, before deducting underwriting discounts and offering expenses.$144,000 in the three months ended March 31, 2022.
In November 2021, the Company filed an S-3three months ended March 31, 2022, MultiPay and Cards Plus revenue was approximately $69,000 and $373,000, respectively, and MultiPay had a loss of approximately $68,000 with Cards Plus contributing approximately $11,000 of net income. These amounts do not include any corporate overhead allocation nor any amounts relating to register an indeterminate number of securities of each identified class of securities up to athe proposed aggregate offering price of $200,000,000, which may from time to time be offered in unspecified numbers and at indeterminate prices.exits.
There is no assurance that the Company will ever be profitable or be able to secure funding or generate sufficient revenues to sustain operations. As such, there is substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidatedThe financial statements doof Cards Plus and the Colombian operations have not include any adjustments to reflect the possible future effects on the recoverability andbeen classified as discontinued operations as of March 31, 2022 as all required classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.criteria under Accounting Standards Codification 205 were not met until May 2022.
Covid-19
Covid-19 emerged globally in December 2019, and it has been declared a pandemic. Covid-19 is still impacting customers, business, results and financial condition throughout the world. The Company’s day-to-day operations have been impacted differently depending on geographic location and services that are being performed. The Cards Plus business located in South Africa operations has had limitations on its operations as they are following the guidance and requirements of the South African government. Our operations in the United States and Colombia have suffered less immediate impact as most staff can work remotely and can continue to develop our product offerings. 7
That said we have seen our business opportunities develop more slowly as business partners and potential customers include Covid-19 considerations. Furthermore, working remotely can cause a delay in decision making and finalization of negotiations and agreements.
Net Loss per Common Share
The Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. The following potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and nine months ended September 30,March 31, 2022 and 2021 and 2020 because their effect was antidilutive:
| Security | 2021 | 2020 | ||||||
| Convertible notes payable | 117,529 | 1,182,557 | ||||||
| Warrants | 1,413,611 | 1,581,774 | ||||||
| Stock options | 9,322,153 | 3,660,778 | ||||||
| 10,853,293 | 6,425,109 | |||||||
| Security | ||||||||
| 2022 | 2021 | |||||||
| Convertible notes payable | 2,598,741 | 1,146,917 | ||||||
| Warrants | 1,544,633 | 1,411,308 | ||||||
| Stock options | 9,151,167 | 5,411,180 | ||||||
| 13,294,541 | 7,969,405 | |||||||
Inventories
Inventory of plastic/ID cards, digital printing material, which are held by Cards Plus Pty Ltd., are at the lower of cost (using the average method) or market. The Plastic/ID cards and digital printing material are used to provide plastic loyalloyalty ID and other types of cards. Inventories of kiosks held by IDGS S.A.S are stated at the lower of cost (using the first-in, first-out method) or net realizable value.
Inventories at September 30, 2021March 31, 2022 and December 31, 20202021 consist of cards inventory. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, the Company recorded an inventory valuation allowance of approximately $26,000$23,000 and $18,000$20,000, respectively to reflect net realizable value of the cards inventory.
Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Revenue Recognition
Cards Plus – The Company recognizes revenue for the design and production of cards at the point in time when products are shipped, or services have been performed due to the short termshort-term nature of the contracts. Additionally, the cards produced by the Company have no alternative use and the Company has an enforceable right to payment for work performed should the contract be cancelled. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, Cards Plus had approximately $40,000$332,000 and $88,000,$48,000, respectively, of contract liability from payments received in advance that will be earned in future periods.
8
Payment Processing – The Company recognizes revenue for variable fees generated for payment processing solutions that are earned on a usage fee over time based on monthly transaction volumes or on a monthly flat fee rate. Additionally, the Company also sells certain equipment from time to time for which revenue is recognized upon delivery to the customer.
Identity Solutions Software – The Company recognizes revenue based on the identified performance obligations over the performance period for fixed consideration andand/or for variable fees generated that are earned on a usage fee basedearned over time based on monthly transaction or user volumes and/or on a monthly flat fee rate. The Company had a contract liability of approximately $330,000$71,000 and $150,000 as of September 30, 2021March 31, 2022, and December 31, 2020 relating to2021, respectively, for certain revenue that will be earned in future periods. Of the $71,000 of deferred revenue contract liability as of March 31, 2022, the majority will be earned during the balance of 2022. The majority of the $150,000 of deferred revenue contract liability as of December 31, 2020, was earned in the first quarter of fiscal year 2021. As of September 30, 2021, the majority of the deferred revenue contract liability of $330,000 will be recognized in the ensuing two quarters.
quarter ended March 31, 2021. All contracts are reviewed for their respective performance obligations and related revenue and expense recognition implications. Certain of the revenues are derived from identity services that could include multiple performance obligations. A performance obligation is defined as a promise to provide a “distinct” good or service to a customer. The Company has determined that one possible treatment under U.S. GAAP is that these services will represent a stand-ready series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. Further, the Company has determined that the performance obligation to provide account access and facilitate transactions should meet the criteria for the “as invoiced” practical expedient, in that the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company anticipates it may recognize revenue in the amount to which the Company has a right to invoice, based on completed performance at the relevant date. Additionally, the contracts could include implementation services, or support on an “as needed” basis and we will review each contract and determine whether such performance obligations are separate and distinct and apply the new standard accordingly to the revenue and expense derived from or related to each such service. During the three months ended March 31, 2022 and 2021, the Company provided annual software maintenance support services relating to previously licensed software on a stand ready basis. These fees were billed in advance and recognized ratably over the requisite service period as revenue.
During the three months ended March 31, 2022, the Company had revenues from operations in North America, South America and Africa of $0.2 million, $0.1 million and $0.3 million, respectively, compared to $0.1 million, $0.1 million and $0.4 million, respectively, in the three months ended March 31, 2021.
Furthermore, the Company will capitalize the incremental costs of acquiring and fulfilling a contract with a customer if the Company expects to recover those costs. These incremental costs were immaterial in both three-month periods and the Company recognizes these costs as incurred as it typically relates to a period of less than 1 year as allowed by the practical expedient and the amounts in the period were immaterial.
Contract cost assets will be amortized using the straight-line method over the expected period of benefit beginning at the time revenue begins to be realized. The amortization of contract fulfillment cost assets associated with facilitating transactions will be recorded as cost of services in the Company’s Consolidated Statements of Operations. The amortization of contract acquisition cost assets associated with sales commissions that qualify for capitalization will be recorded as selling, general and administrative expense in the Company’s Consolidated Statements of Operations.
As of March 31, 2022 and December 31, 2021, the Company did not have any deferred contract costs or fees payable.
Revenue related to direct financing leases is outside the scope of Topic 606 and is recognized over the term of the lease using the effective interest method.
NOTE 2 – OTHER CURRENT ASSETS
Other current assets consisted of the following as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Prepaid insurance | $ | 163,361 | $ | 39,117 | ||||
| Prepaid licensing fees | 103,521 | 30,841 | ||||||
| Operating lease right of use | 99,667 | 131,568 | ||||||
| Prepaid marketing expense | 263,929 | - | ||||||
| Payroll tax receivable | 85,735 | - | ||||||
| Prepaid services | 175,000 | - | ||||||
| Other | 38,479 | 36,243 | ||||||
| $ | 929,692 | $ | 237,769 | |||||
NOTE 32 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Property and equipment | $ | 377,622 | $ | 297,839 | $ | 387,875 | $ | 387,875 | ||||||||
| Equipment under finance lease | 163,407 | 163,407 | ||||||||||||||
| Equipment under finance lease (see Note 10) | 163,407 | 163,407 | ||||||||||||||
| 541,029 | 461,246 | 551,282 | 551,282 | |||||||||||||
| Less Accumulated depreciation | (413,324 | ) | (363,417 | ) | (453,348 | ) | (432,751 | ) | ||||||||
| Property and equipment, net | $ | 127,705 | $ | 97,829 | $ | 97,934 | $ | 118,531 | ||||||||
Depreciation expense totaled $49,827$20,597 and $40,231$14,525 for the ninethree months ended September 30,March 31, 2022, and 2021, and 2020, respectively.
9
NOTE 43 – OTHER ASSETS
Other assets consisted of the following at September 30, 2021March 31, 2022 and December 31, 2020:2021:
| September 30, 2021 | December 31, 2020 | |||||||
| Operating lease right of use assets | $ | - | $ | 49,856 | ||||
| Other | 73,243 | 190,367 | ||||||
| $ | 73,243 | $ | 240,223 | |||||
| March 31, 2021 | December 31, 2021 | |||||||
| Unamortized working capital facility fees | $ | 398,261 | - | |||||
| Other | 70,365 | 69,168 | ||||||
| $ | 468,626 | $ | 69,198 | |||||
NOTE 54 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)
The Company’s intangible assets consist primarily of acquired and developed software as well as intellectual property acquired from previous acquisitionsMultiPay and FIN and are amortized over their estimated useful lives as indicated below. The following is a summary of activity related to intangible assets for the ninethree months ended September 30, 2021:March 31, 2022:
| Customer Relationships | Acquired and Developed Software | Intellectual Property | Patents | Total | Customer Relationships | Acquired and Developed Software | Patents | Total | ||||||||||||||||||||||||||||
| Useful Lives | 10 Years | 5 Years | 10 Years | - | 10 Years | 5 Years | 10 years | |||||||||||||||||||||||||||||
| Carrying Value at December 31, 2020 | $ | 811,303 | $ | 3,171,394 | $ | 416,471 | $ | 128,308 | $ | 4,527,476 | ||||||||||||||||||||||||||
| Carrying Value at December 31, 2021 | $ | 153,001 | $ | 2,238,882 | $ | 140,570 | $ | 2,532,453 | ||||||||||||||||||||||||||||
| Additions | - | - | - | 23,702 | 23,702 | - | - | 450 | 450 | |||||||||||||||||||||||||||
Impairment of assets | (143,703 | ) | - | - | (143,703 | ) | ||||||||||||||||||||||||||||||
| Amortization | (122,645 | ) | (699,442 | ) | (61,018 | ) | (10,504 | ) | (893,609 | ) | (9,298 | ) | (209,814 | ) | (3,969 | ) | (223,081 | ) | ||||||||||||||||||
| Carrying Value at September 30, 2021 | $ | 688,658 | $ | 2,471,952 | $ | 355,453 | $ | 141,506 | $ | 3,657,569 | ||||||||||||||||||||||||||
| Carrying Value at March 31, 2022 | $ | - | $ | 2,029,068 | $ | 137,051 | $ | 2,166,119 | ||||||||||||||||||||||||||||
The following is a summary of intangible assets as of September 30, 2021March 31, 2022:
| Customer Relationships | Acquired and Developed Software | Intellectual Property | Patents | Total | Customer Relationships | Acquired and Developed Software | Patents | Total | ||||||||||||||||||||||||||||
| Cost | $ | 1,587,159 | $ | 4,476,273 | $ | 828,577 | $ | 155,297 | $ | 7,047,306 | $ | 372,130 | $ | 4,476,271 | $ | 158,753 | $ | 5,007,154 | ||||||||||||||||||
| Accumulated amortization | (898,501 | ) | (2,004,321 | ) | (473,124 | ) | (13,791 | ) | (3,389,737 | ) | (372,130 | ) | (2,447,203 | ) | (21,702 | ) | (2,841,035 | ) | ||||||||||||||||||
| Carrying Value at September 30, 2021 | $ | 688,658 | $ | 2,471,952 | $ | 355,453 | $ | 141,506 | $ | 3,657,569 | ||||||||||||||||||||||||||
| Carrying Value at March 31, 2022 | $ | - | $ | 2,029,068 | $ | 137,051 | $ | 2,166,119 | ||||||||||||||||||||||||||||
Amortization expense totaled approximately $894,000$223,081 and $883,000$298,095 for the ninethree months ended September 30,March 31, 2022, and 2021, and 2020, respectively.
Future expected amortization of intangible assets is as follows:
| Fiscal Year Ending December 31, | |||||||||
| Remainder of 2021 | $ | 297,060 | |||||||
| 2022 | 1,094,905 | ||||||||
| Remainder of 2022 | $ | 712,608 | |||||||
| 2023 | 1,043,916 | 792,810 | |||||||
| 2024 | 819,604 | 527,965 | |||||||
| 2025 | 302,986 | 56,468 | |||||||
| 2026 | 15,875 | ||||||||
| 2027 | 15,875 | ||||||||
| Thereafter | 99,098 | 44,518 | |||||||
| $ | 3,657,569 | $ | 2,166,119 | ||||||
10
NOTE 65 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Trade payables | $ | 769,602 | $ | 311,024 | $ | 693,246 | $ | 593,563 | ||||||||
| Accrued interest* | 17,469 | 554,755 | ||||||||||||||
| Accrued interest | 50,103 | 33,533 | ||||||||||||||
| Accrued payroll and related obligations | 656,938 | 891,790 | 717,581 | 836,793 | ||||||||||||
| Current portion of operating lease liabilities | 100,290 | 117,414 | 41,666 | 69,812 | ||||||||||||
| Other** | 577,958 | 790,149 | ||||||||||||||
| Other | 402,970 | 479,759 | ||||||||||||||
| Total | $ | 2,122,257 | $ | 2,665,132 | $ | 1,905,566 | $ | 2,013,460 | ||||||||
NOTE 6 – WORKING CAPITAL FACILTIY
On March 21, 2022, the Company entered into a Facility Agreement with a current shareholder and noteholder of the Company, pursuant to which the shareholder agreed to provide to the Company a $10.0 million unsecured standby line of credit facility that will rank behind the Convertible Notes (see Note 8) and may be drawn down in several tranches, subject to certain conditions described in the Facility Agreement (the “Credit Facility”). Pursuant to the Credit Facility, the Company agreed to pay a facility commitment fee of 100,000 shares of our common stock upon the effective date of the Credit Facility.
Outstanding borrowings under the Credit Facility will accrue interest at 15% per annum. Drawdowns of the Credit Facility will be in tranches of not less than $500,000 up to the maximum amount of the Credit Facility, subject to the satisfaction of customary certifications and a certification from the Company that it has no more than $5 million of cash available to it as of the date of the drawdown request. The Credit Facility contemplates that the terms of the borrowings will be further set out in promissory notes that will contain representations and warranties and customary covenants and events of default. The Company will be permitted to prepay borrowings under the Credit Facility at any time, without penalty, in part or in full. Upon conversion or redemption of all amounts outstanding under the Convertible Notes and release of all security over the Company’s assets, the Company will provide a lien on the Company’s intellectual property assets to secure the Credit Facility.
There were no borrowings under the Credit Facility as of March 31, 2022. The unamortized deferred debt expense is approximately $597,000 of which $199,000 is included in other current assets and the balance in other assets.
NOTE 7 -– NOTES PAYABLE, NET
The following isCompany had an installment loan payable at a summaryrate of notes payable10.8% that was repaid as of September 30, 2021 andMarch 31, 2022. The outstanding loan balance was $1,579 as of December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Paycheck Protection Program Loan #1 | $ | - | $ | 485,760 | ||||
| Paycheck Protection Program Loan #2 | - | - | ||||||
| Installment loan payable related to a vehicle acquisition payable in monthly payments of $539 per month at an interest rate of 10.8% per annum payable for 36 months | 3,126 | 7,526 | ||||||
| Notes Payable, Net | $ | 3,126 | $ | 493,286 | ||||
| Notes Payable, current portion, | $ | 3,126 | $ | 5,947 | ||||
| Notes Payable, net of current portion | - | 487,339 | ||||||
| $ | 3,126 | $ | 493,286 | |||||
2021.
Paycheck Protection Program Loans
In May 2020, the Company received a loan of approximately $486,000 under the Paycheck Protection Program (“PPP”) as part of the Coronavirus Aid, Relief and Economic Security Act which is administered by the U.S. Small Business Association (“USSBA”) related to its U.S. Operations. The Company received notice from the USSBA in May 2021, that the May 2020 PPP loan was forgiven as we met the applicable requirements.
In January 2021, the Company received a second loan of approximately $486,000 under the PPP related to its U.S. Operations. The Company received notice from the USSBA in August 2021, that the January 2021 PPP loan was forgiven as the Company met the applicable requirements.
In accordance with ASC 470, extinguishment accounting, the amount forgiven by the USSBA is recorded as other income – gain on extinguishment of notes payable.
NOTE 8 – CONVERTIBLE NOTES PAYABLE
On December 13, 2019,March 21, 2022, the Company entered into a Securities Purchase AgreementsAgreement (“SPA”) with severalcertain accredited investors, (the “8% Note Investors”) providing for the sale byincluding certain directors of the Company or their affiliates (the “Note Investors”), and, pursuant to the 8%SPA, sold to the Note Investors of 8% Convertible Notes in the aggregate amount of $428,000 (the “8% Notes”). The 8% Notes were to mature on November 30, 2021 and were a general unsecured obligation of the Company.
In February 2020, the Company and the holders of the 8% Notes entered into an amendment agreement pursuant to which the principal and interest due under the 8% Notes will remain due and payable on the same terms as exist in the 8% Notes prior to modification, that the maturity shall be extended to the same maturity date as the 2020 Notes, namely February 28, 2022, and the 8% Notes became a secured obligation of the Company.
On February 14, 2020 the Company, entered into Securities Purchase Agreements with several accredited investors (the “2020 Note Investors”) providing for the sale by the Company to the 2020 Note Investors of 15% Senior Secured Convertible Notes in the(the “Convertible Notes”) with an aggregate amount of $1,510,000 (the “2020 Notes”). Philip D. Beck, Chief Executive Officer and Chairman of the Board, invested $50,000 in consideration of a 2020 Note in theinitial principal amount of $50,000 paid byapproximately $9.2 million and a deduction from his salary. Theodore Stern, a former director of the Company, invested $50,000 in consideration of a 2020 Note in the principal amount of $50,000. Herbert Selzer, a former director of the Company invested $100,000 in consideration of a 2020 Note in the principal amount of $100,000. Mr. Selzer provided $50,000 on the closing date and provided the balance of the funding in April 2020.
The 2020 Notes mature February 28, 2022 and are a secured obligation of the Company. At the option of the 2020 Note Investors, they may at any time convert the 2020 Notes. The number of shares delivered shall be equal to 150% of the amount of the principal converted divided by the conversion price of $6.00 per share.$3.70. The Company may require that the 2020 Note Investors convert all or a portion of the 2020Convertible Notes if the Company’s volume weighted average price for any preceding 20-day period is equal to or greater than $9.00.
In connectionwere sold with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, aan aggregate cash origination fee of approximately $104,800.
During$200,000, and we issued a total of approximately 28,500 shares of our common stock to the first quarter of 2021, convertible notes totaling $120,000 and a portion of their accruedNote Investors as an additional origination fee. The Convertible Notes will accrue interest at the optionrate of 9.75% per annum, which will be payable in cash or, for some or all of the noteholders were converted into approximately 33,000first five interest payments, in shares of our common stock at the Company’s option, on the last day of each calendar quarter before the maturity date and on the maturity date. The maturity date of the Company.Convertible Notes is March 31, 2025.
11
Additionally, duringIn connection with the nine months ended September 30, 2021,issuance of the Convertible Notes, the Company received conversion notices from (i)issued 142,690 common stock warrants to the broker and its representatives with an estimated grant date fair value of approximately $449,000 which has been recorded as a reduction in the carrying value of the Convertible Notes.
The Company also has a note outstanding to the Stern Trust converting the principal amount, repayment premium and interest in the amount of approximately $3.5 million payable under$662,000 that earns interest at 10% per annum, which at the Restatedelection of the Stern Note into approximately 561,000Trust can be paid in shares of common stock (ii)at a conversion price of $6.00 (the “Stern Note”). Theodore Stern, the 8%Trustee of the Stern Trust was formerly a director of the Company. The maturity date of the Stern Note Investors converting principalwas previously February 29, 2022 and interest in the amount of approximately $0.4 million into approximately 180,000 shares of common stockStern Trust and (iii) the 2020 Note Investors converting principal, repayment premium and interest inCompany have mutually agreed to extend the amount of approximately $2.5 million into approximately 398,000 shares of common stock.due date to December 31, 2022. The Stern Trust shall have the right at is owed approximately $0.7 million in interest undersole option to extend the Restated Stern Note, which has not been converted and remains outstanding. Asmaturity date for a result, a totalfurther six months after December 31, 2022, by service of approximately $6.1 million of Company net indebtedness was converted andwritten notice upon the Company issued approximately 1,138,000 shares of common stock in the aggregate.Borrower at any time on or before December 31, 2022.
The following is a summary of the convertible notes payable outstanding at September 30, 2021:as of March 31, 2022:
| 8% convertible notes payable issued December 2019 | $ | - | ||
| 15% convertible notes payable issued February 2020 | - | |||
| 10% convertible notes payable issued February 2020 | 662,000 | |||
| $ | 662,000 |
| 10.0% convertible note due December 31, 2022 | $ | 662,000 | ||
| 9.75% convertible notes due March 31, 2025 | 9,176,224 | |||
| less: | ||||
| Unamortized debt discount expense | (271,797 | ) | ||
| Unamortized debt issuance expense | (1,440,160 | ) | ||
| $ | 8,126,267 |
Future maturities of convertible notes payable are as follows:of March 31, 2022:
| 2021 | $ | - | |||||||
| 2022 | 662,000 | $ | 662,000 | ||||||
| 2025 | 9,176,224 | ||||||||
| $ | 9,838,224 | ||||||||
| $ | 662,000 | ||||||||
NOTE 9 – RELATED PARTY TRANSACTIONS
Convertible Notes Payable
The maturity date of the Stern Trust was previously February 29, 2022 and the Stern Trust and the Company mutually agreed to extend the due date to December 31, 2022. Mr. Stern, the trustee of the Stern Trust, is a former Director of the Company.
In 2021,During the Company received conversion notices from Stern Trustquarter ended March 31, 2022, two Directors, an affiliate of which Theodore Stern, (a former memberone of such Directors and one Executive Officer invested in $1.2 million of the Board of Directors until June 9, 2021) is the Trustee, converting the principal amount, repayment premium and interest in the amount of approximately $3.5 million payable under the Restated SternConvertible Notes issued. See Note into approximately 561,000 shares of common stock. Additionally, Theodore Stern and Herbert Selzer (also a former member of the Board of Directors until June 9, 2021) provided conversion notices for their respective 2020 Notes converting the principal, repayment premium and interest in the amount of approximately $256,000 into approximately 41,000 shares of common stock. The Stern Trust is owed approximately $0.7 million in interest under the Restated Stern Note, which has not been converted and remains outstanding.8.
Executive OfficersIssuance of Common Stock
On June 14, 2021, Phillip L. Kumnick resigned as ChiefTwo Directors and one Executive Officer of Ipsidy Inc., and Thomas L. Thimot was appointed Chief Executive Officerinvested $0.2 million in his place. Further, Philip R. Broenniman resigned as President and Chief Operating Officer and Cecil N. Smith III (Tripp) was appointed President and Chief Technology Officer. In May 2021 the Company granted to each of Mr. Kumnick and Mr. Broenniman options (the “May 2021 Options”) to acquire a total of 1,166,667 shares of common stock at an exercise price of $7.20 per share for a term of ten years that vest uponoffering in the achievement of certain market capitalization thresholds, or performance conditions. In November 2021 Mr. Kumnick and Mr. Broenniman agreed to cancel 300,000 and 200,000, respectively, of these stock options in consideration of removing certain service conditions.quarter ended March 31, 2022. See Note 10.
Mr. Thomas Thimot and Mr. Cecil Smith, became employed by the Company as Chief Executive Officer and President and Chief Technology Officer effective June 14, 2021. Mr. Thimot and the Company entered into an Offer Letter pursuant to which Mr. Thimot will earn an annual salary of $325,000 with a bonus target at 50% of the base salary (pro-rated for 2021) upon terms to be agreed with the Compensation Committee for 2021 and on the understanding that the 2022 target will include a requirement of the Company achieving three times the annual revenue of 2021. Additionally, Mr. Thimot was granted an option to acquire 1,200,000 shares of common stock at an exercise price of $7.80 per share for a term of ten years of which half of the options vest monthly over four years and the balance is subject to certain performance vesting requirements.
On June 14, 2021, Mr. Smith and the Company entered an into an Offer Letter pursuant to which Mr. Smith will earn an annual salary of $275,000 with a bonus target at 50% of the base salary (pro-rated for 2021) upon terms to be agreed with the Compensation Committee for 2021. In addition, Mr. Smith will receive a bonus of $50,000 after 90 days of service. Additionally. Mr. Smith was granted an option to acquire 600,000 shares of common stock at an exercise price of $7.80 per share for a term of ten years of which half of the options vest monthly over four years and the balance is subject to certain performance vesting requirements.12
Appointment of Board of Directors
On June 9, 2021 Theodore Stern, Herbert Selzer and Thomas Szoke resigned as directors of the Company. The size of the Board of directors was increased to seven and Dr. Michael A. Gorriz, Michael L. Koehneman, Sanjay Puri, Mr. Thimot and Jacqueline L. White were appointed as additional directors of the Company. Messrs. Stern, Selzer and Szoke did not advise the Company of any disagreement with the Company on any matter relating to its operations, policies or practices. Mr. Szoke will continue with the Company as Chief Solutions Architect.
The Company granted each of the four new Board of Directors as of June 2021 stock options to acquire 62,500 shares of common stock or a total of 250,000 at an exercise price of $7.80 per share for a term of ten years that vest one third per year after each Annual Meeting. The Company granted the previously serving Board of Directors stock options to acquire 93,470 common shares that are vested as the services were previously rendered. The stock options were granted in lieu of other forms of Board of Director Compensation. The Company also granted Mr. Selzer and Mr. Stern 22,388 stock options to acquire common shares for service in 2021 prior to their resignation as Board Members. Upon their resignation as directors in June 2021, 13,992 stock options were vested and the balance was cancelled.
Other
In the third quarter of 2021, the Company and Progress Partners Inc. (“Progress”) modified their Business Advisory Agreement dated May 6, 2020 (“Progress Agreement”). The amended Progress Agreement provides for Progress to undertake continuing business development activities for the Company, for which the Company agreed to pay Progress $350,000 which was paid, October 15, 2021. Additionally, the Company agreed to pay Progress, another $115,000 for additional consulting services. Mr. Puri, a Director of the Company beginning June 9, 2021 is an employee and Managing Director of Progress but is not a principal shareholder nor an executive officer of Progress.
NOTE 10 – STOCKHOLDER’S EQUITY
Common Stock
On August 26, 2021, the Company completed the Offering of 1,642,856 shares of its common stock at a public offering price of $7.00 per share, including 214,285 shares sold upon full exercise of the underwriter’s option to purchase additional shares, for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and offering expenses.
During the nine monthsquarter ended September 30,March 31, 2022, shares of common stock were issued as a result of the following transactions:
| ● | On March 18 and March 21, 2022, the Company entered into Subscription Agreements (the “Subscription Agreements”) with an accredited investor and certain members of authID.ai’s management team (the “PIPE Investors”), and, pursuant to the Subscription Agreements, sold to the PIPE Investors a total of 1,063,514 shares of our common stock at prices of $3.03 per share for an outside investor and $3.70 per share for the management investors (the “PIPE”). The aggregate gross proceeds from the PIPE are approximately $3.3 million. | |
| ● | The Company issued total of approximately 28,500 shares of our common stock to the Note Investors as an additional origination fee. | |
| ● | Certain warrant and stock option holders exercised their respective warrants and stock options by means of the cashless exercise feature and were issued approximately 186,488 common shares of the Company. |
During the quarter ended March 31, 2021, shares of common stock were issued as a result of the following non-cash transactions:
| ● |
| ● | Certain warrant and stock option holders exercised their respective warrants and stock options by means of the cashless exercise feature and were issued approximately |
Warrants
The following is a summary of the Company’s warrant activity for the ninethree months ended September 30, 2021:March 31, 2022:
| Weighted Average | Weighted Average | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||||||||||
| Number of | Exercise | Remaining | ||||||||||||||||||||
| Shares | Price | Life | ||||||||||||||||||||
| Outstanding at December 31, 2020 | 1,823,267 | $ | 4.20 | 3.4 Years | ||||||||||||||||||
| Outstanding at December 31, 2021 | 1,403,610 | $ | 4.61 | 3.0 years | ||||||||||||||||||
| Granted | 64,286 | $ | 8.75 | 4.3 Years | 142,690 | $ | 3.70 | 5.0 Years | ||||||||||||||
| Exercised/cancelled | (473,942 | ) | $ | 3.20 | 4.2 years | (1,667 | ) | $ | 2.64 | 4.2 years | ||||||||||||
| Outstanding at September 30, 2021 | 1,413,611 | $ | 4.61 | 3.2 Years | ||||||||||||||||||
| Outstanding at March 31, 2022 | 1,544,633 | $ | 4.18 | 2.91 years | ||||||||||||||||||
Under the terms of the Underwriting Agreement in connection with the Offering, the Company issued underwriters warrants (the “Representative’s Warrants”) to purchase an aggregate of 64,286 shares of common stock (4.5% of the total shares issued in the Offering). The Representative’s Warrants are exercisable at a per share price of $8.75 (equal to 125% of the Offering price of the Company’s common stock). The Representative’s Warrants are exercisable for a term of four and one half years beginning on February 23, 2022.13
Stock Options
During the nine months ended September 30, 2021, theThe Company determined the grant date fair value of the options granted for the quarter ended March 31, 2022, using the Black Scholes Method and use the following assumptions:
| Expected volatility | 127 | % | ||
| Expected term | 5 years | |||
| Risk free rate | 2.14 | % | ||
| Dividend rate | 0.00 | % |
Expected Volatility – 68-75%
Expected Term – 5.0 Years
Risk Free Rate – 0.70- 0.78%
Dividend Rate – 0.00%
Activity related to stock options for the ninethree months ended September 30, 2021March 31, 2022, is summarized as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Term (Yrs.) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2021 | 8,910,994 | $ | 4.50 | 7.5 | $ | 8,283,639 | ||||||||||
| Granted | 546,204 | 2.83 | 10.0 | $ | - | |||||||||||
| Exercised | (281,031 | ) | 3.28 | 8.8 | 3,485,482 | |||||||||||
| Forfeited/cancelled | (25,000 | ) | 12.93 | - | ||||||||||||
| Outstanding as of March 31, 2022 | 9,151,167 | $ | 6.34 | 6.7 | $ | 6,233,571 | ||||||||||
| Exercisable as of March 31, 2022 | 4,676,151 | $ | 5.34 | 4.3 | $ | 5,271,207 | ||||||||||
The options have a term of ten years and all options were granted at market value.
Activity related to stock options for the nine months ended September 30, 2021, is summarized as follows:
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Shares | Price | Term (Yrs.) | Value | |||||||||||||
| Outstanding as of December 31, 2020 | 5,645,802 | $ | 4.50 | 7.5 | $ | 8,823,639 | ||||||||||
| Granted | 4,358,246 | $ | 7.95 | 10.0 | - | |||||||||||
| Exercised | (504,804 | ) | $ | 1.54 | 5.0 | $ | 3,485,482 | |||||||||
| Forfeited/cancelled | (177,091 | ) | $ | 4.30 | 8.8 | - | ||||||||||
| Outstanding as of September 30, 2021 | 9,322,153 | $ | 6.28 | 7.1 | $ | 48,380,894 | ||||||||||
| Exercisable as of September 30, 2021 | 4,708,113 | $ | 5.15 | 4.5 | $ | 30,866,033 | ||||||||||
The following table summarizes stock option information as of
| Exercise Price | Outstanding | Weighted Average Contractual Life (Yrs.) | Exercisable | Outstanding | Weighted Average Contractual Life (Yrs.) | Exercisable | ||||||||||||||||||
| $.03 - $4.00 | 3,664,901 | 4.9 | 3,208,347 | 3,875,463 | 5.1 | 3,041,687 | ||||||||||||||||||
| $4.01 - $7.00 | 162,784 | 4.7 | 162,784 | 151,667 | 4.5 | 151,667 | ||||||||||||||||||
| $7.01 - $10.00 | 4,007,801 | 9.6 | 270,315 | 3,432,802 | 9.1 | 416,131 | ||||||||||||||||||
| $10.01 - $13.50 | 1,486,667 | 4.3 | 1,066,667 | |||||||||||||||||||||
| $10.01 - $15.97 | 1,691,235 | 5.6 | 1,066,666 | |||||||||||||||||||||
| 9,322,153 | 7.1 | 4,708,113 | 9,151,167 | 6.7 | 4,676,151 | |||||||||||||||||||
During the ninethree months ended September 30, 2021,March 31, 2022, the Company recognized approximately $3,567,000$1,867,000 of stock option based compensation expense of which approximately $2,388,000$798,000 relates to performance-basedmarket condition-based awards of directors and officers. As of September 30, 2021,March 31, 2022, there was approximately $15,443,000$14,528,000 of unrecognized compensation costs related to stock options outstanding that are expected towill be expensed through 2025.
Additionally, the Company recorded approximately $1,228,000 for restricted stock expense as the Company met certain performance thresholds.
Total stock-based compensation expense consisting of stock options and restricted stock in the nine months ended September 30, 2021 was approximately $4,795,000.
At the Annual Meeting of Stockholders held on March 22, 2021, the stockholders approved and ratified an increase of 2,500,000 shares of common stock allocated to the Company’s 2017 Incentive Stock Plan.
See Note 6 for additional information regarding accrued Directors’ compensation.
NOTE 11 – DIRECT FINANCING LEASE
The Company and an entity in Colombia entered into a rental contract for the rental of 78 kiosks to provide cash collection and fare services at transportation stations. The lease term began in May 2016 when the kiosk was installed and operational and when the lease commenced. The term of the rental contract is ten years at an approximate monthly rental of $11,900. The lease has the option at the end of the lease term to purchase each unit for approximately $40. The term of the lease approximates the expected economic life of the kiosks. The lease was accounted for as a direct financing lease.
The Company has recorded the transaction as its net investment in the lease and will receive monthly payments of $11,856 before estimated executory costs, or $142,272, annually, to reduce investment in the lease and record income associated with the related amount due. Executory costs are estimated to be $1,677 per month and initial direct costs are not considered significant. The transaction resulted in incremental revenue in the quarter ended September 30, 2021 of approximately $38,000.
The equipment is subject to a direct lease valued at approximately $748,000. At the inception of the lease term, the aggregate minimum future lease payments to be received is approximately $1,422,000 before executory cost. Unearned income recorded at the inception of this lease was approximately $474,000 and will be recorded over the term of the lease using the effective income rate method. Future minimum lease payments to be received under the lease for the next five years and thereafter are as follows:
| Year ending December 31 | ||||
| Remainder of 2021 | 30,537 | |||
| 2022 | 122,148 | |||
| 2023 | 122,148 | |||
| 2024 | 122,148 | |||
| 2025 | 122,148 | |||
| Thereafter | 40,716 | |||
| Sub-total | 559,845 | |||
| Less deferred revenue | (118,929 | ) | ||
| Net investment in lease | $ | 440,916 | ||
NOTE 1211 – LEASE OBLIGATION PAYABLE
The Company entered into a lease in March 2017 for the rental of its printer for its secured plastic and credential card products business under an arrangement that is classified as a finance lease. The leased equipment is amortized on a straight-line basis over its lease term including the last payment (61 payments) which would transfer ownership to the Company. The cost basis of the lease equipment is $163,407 and the accumulated amortization as of September 30, 2021March 31, 2022, is $147,334.$131,261. The following is a schedule showing the future minimum lease payments under finance lease by year and the present value of the minimum lease paymentswas fully paid off as of September 30, 2021. The interest rate related to the lease obligation is 12% and the maturity date is March 31, 2022.
| Year ending December 31 | ||||
| Remainder of 2021 | $ | 10,774 | ||
| 2022 | 10,774 | |||
| Total minimum lease payments | 21,548 | |||
| Less: Amount representing interest | (735 | ) | ||
| Present value of minimum lease payments | $ | 20,813 | ||
14
NOTE 1312 – COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company is a party to various legal or administrative proceedings arising in the ordinary course of our business. While any litigation contains an element of uncertainty, we have no reason to believe the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company.
Leases
For the ninethree months ended September 30, 2021,March 31, 2022, lease expense was approximately $141,000$21,000 inclusive of short-term leases.
The lease related balances included in the Condensed Consolidated Balance Sheet as of September 30, 2021March 31, 2022 were as follows:
Assets:
| Assets: | ||||||||
| Current portion of operating lease ROU assets - included in other current assets | $ | 99,667 | $ | 46,383 | ||||
| Operating lease ROU assets – included in Other Assets | $ | - | $ | - | ||||
| Total operating lease assets | $ | 99,667 | $ | 46,383 | ||||
| Liabilities: | ||||||||
| Current portion of ROU liabilities – included in Accounts payable and accrued expenses | $ | 38,290 | ||||||
| Long-term portion of ROU liabilities – included in Other liabilities | - | |||||||
| Total operating lease liabilities | $ | 38,290 | ||||||
Liabilities:
| Current portion of ROU liabilities – included in Accounts payable and accrued expenses | $ | 100,290 | ||
| Long-term portion of ROU liabilities – included in Other liabilities | - | |||
| Total operating lease liabilities | $ | 100,290 |
The original weighted average lease ofterm was 1.8 years and the remaining term is 1.0 year or less and weighted average discount rate used in the calculations waswere 13.55%.
The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2021:March 31, 2022:
| Remainder of 2021 | $ | 34,692 | ||||||
| 2022 | 66,564 | $ | 39,318 | |||||
| Total operating lease payments | 101,256 | 39,318 | ||||||
| Imputed interest | (966 | ) | ||||||
| Less: Imputed interest | (1,028 | ) | ||||||
| Total operating lease liabilities | $ | 100,290 | $ | 38,290 | ||||
The Company rents office space in Long Beach, New York at a monthly cost of $2,500. The agreement is month to month and can be terminated on 30 days’ notice. The agreement is between the Company and Bridgeworks LLC, an entity principally owned by Mr. Beck, our former CEO and Board Member along with his family.
The Company leasedleases an office location in Bogota, Colombia with a base rent of approximately $8,500 per month which was adjusted for inflation when compared to its initial lease date in 2017. The lease expired in April 2021. In April 2021, MultiPay entered into a six-month lease for a monthly rental of approximately $1,375 which terminated in September 2021.Colombia. In October 2021, MultiPay entered into a one-year lease for approximately $2,900 per month.
The Company also leases space for its operation in South Africa. The current lease is through June 30, 2022 and the approximate monthly rent is $8,000.
15
NOTE 1413 – SEGMENT INFORMATION
General information
The segment and geographic information provided in the table below is being reported consistent with the Company’s method of internal reporting. Operating segments are defined as components of an enterprise for which separate financial information is available and which is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The CODM regularly reviews net revenue and gross profit by geographic regions. The Company’s products and services operate in 2two reportable segments; identity management and payment processing.
Information about revenue, profit/loss and assets
The CODM evaluates performance and allocates resources based on net revenue and operating results of the geographic region as the current operations of each geography are either primarily identity management or payment processing. Identity management revenue is generated in North America and Africa and payment processing revenue is earned in South America which are the three geographic regions of the Company. We have included the lease income in payment processing as the leases are related to unattended ticketing kiosks.
Long lived assets are in North America, South America and Africa. Most assets are intangible assets recorded from the acquisition of MultiPay (South America) in 2015 and FIN Holdings (North America and Africa) in 2016. Long-lived assetsAssets for North America, South America and Africa amounted to approximately $7.7$6.4 million, $0.1 million and $0.2$0.0 million, consisting of property and equipment – net, intangible assets – net and goodwill.respectively.
Analysis of revenue by segment and geographic region and reconciliation to consolidated revenue, gross profit, and net loss are provided below. The Company has included in the schedule below an allocation of corporate overhead based on management’s estimate of resource requirements.
| (Unaudited) | ||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September | September, | September, | September, | (unaudited) Three Months Ended | ||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||
| Net Revenues: | ||||||||||||||||||||||||
| North America | $ | 162,433 | $ | 176,448 | $ | 464,181 | $ | 445,700 | $ | 165,052 | $ | 148,060 | ||||||||||||
| South America | 89,581 | 106,453 | 275,179 | 292,208 | 69,152 | 96,183 | ||||||||||||||||||
| Africa | 276,335 | 232,791 | 955,769 | 892,692 | 373,158 | 344,756 | ||||||||||||||||||
| 528,349 | 515,692 | 1,695,129 | 1,630,600 | 607,362 | 588,999 | |||||||||||||||||||
| Identity Management | 438,768 | 409,239 | 1,419,950 | 1,338,392 | 538,210 | 492,816 | ||||||||||||||||||
| Payment Processing | 89,581 | 106,453 | 275,179 | 292,208 | 69,152 | 96,183 | ||||||||||||||||||
| 528,349 | 515,692 | 1,695,129 | 1,630,600 | 607,362 | 588,999 | |||||||||||||||||||
| Loss From Operations | ||||||||||||||||||||||||
| Loss From Operations: | ||||||||||||||||||||||||
| North America | (3,614,358 | ) | (562,729 | ) | (6,902,429 | ) | (1,536,138 | ) | (4,058,689 | ) | (1,270,403 | ) | ||||||||||||
| South America | (1,655,667 | ) | (937,281 | ) | (3,440,771 | ) | (4,852,094 | ) | (572,881 | ) | (731,688 | ) | ||||||||||||
| Africa | (392,624 | ) | (211,276 | ) | (796,946 | ) | (802,283 | ) | (634,767 | ) | (184,819 | ) | ||||||||||||
| (5,662,649 | ) | (1,711,286 | ) | (11,140,146 | ) | (7,190,515 | ) | (5,266,337 | ) | (2,186,910 | ) | |||||||||||||
| Identity Management | (4,010,982 | ) | (774,005 | ) | (7,699,375 | ) | (2,338,421 | ) | (4,693,456 | ) | (1,455,222 | ) | ||||||||||||
| Payment Processing | (1,655,667 | ) | (937,281 | ) | (3,440,771 | ) | (4,852,094 | ) | (572,881 | ) | (731,688 | ) | ||||||||||||
| (5,662,649 | ) | (1,711,286 | ) | (11,140,146 | ) | (7,190,515 | ) | (5,266,337 | ) | (2,186,910 | ) | |||||||||||||
| Interest Expense | (25,780 | ) | (212,658 | ) | (579,768 | ) | (701,861 | ) | (33,221 | ) | (297,438 | ) | ||||||||||||
| Other income/(expense) | 492,498 | 16,779 | 985,916 | (1,301,192 | ) | 5,151 | 1,537 | |||||||||||||||||
| Loss before income taxes | (3,015,256 | ) | (1,907,165 | ) | (10,733,998 | ) | (9,193,568 | ) | (5,294,407 | ) | (2,482,811 | ) | ||||||||||||
| Income tax expense | (2,974 | ) | (11,074 | ) | (12,516 | ) | (23,540 | ) | (6,321 | ) | (7,188 | ) | ||||||||||||
| Net loss | $ | (5,198,905 | ) | $ | (1,918,239 | ) | $ | (10,746,514 | ) | $ | (9,217,108 | ) | $ | (5,300,728 | ) | $ | (2,489,999 | ) | ||||||
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Going concern
As of September 30, 2021, the Company had an accumulated deficit of approximately $109.0 million. For the nine months ended September 30, 2021, the Company earned revenue of approximately $1.7 million and incurred a loss from operations of approximately $11.1 million.
The reports of our independent registered public accounting firm on our consolidated financial statements for the years ended December 31, 2020 and 2019 contained an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses.
These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial support from the Company’s current shareholders, the ability of the Company to obtain additional equity financing to continue operations, the Company’s ability to generate sufficient cash flows from operations, successfully locating and negotiating with other business entities for potential acquisition and /or acquiring new clients to generate revenues and cash flows.
In January 2021, the Company received a second loan of approximately $486,000 under the PPP of the USSBA related to its U.S. operations. The first PPP loan was received in 2020 and both of the PPP loans were forgiven as the Company met the applicable requirements.
On August 26, 2021, the Company’s completed its public offering (the “Offering”) of 1,642,856 shares of its common stock at a public offering price of $7.00 per share, including 214,285 shares sold upon full exercise of the underwriter’s option to purchase additional shares, for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and offering expenses.
In November 2021, the Company filed an S-3 to register an indeterminate number of securities of each identified class of securities up to a proposed aggregate offering price of $200,000,000, which may from time to time be offered in unspecified numbers and at indeterminate prices.
There is no assurance that the Company will ever be profitable or be able to secure funding or generate sufficient revenues to sustain operations. As such, there is substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Overview
Ipsidy Inc. dba authID.ai (Ipsidy Inc.(together with its subsidiaries, the “Company”, “authID.ai”, “we” or “our”) is a leading provider of secure, mobile, biometric identity verification software products delivered by an easy to integrate Identity as a Service (IDaaS) platform. Our mission is ultimately to eliminate all passwords and to be the preferred global platform for biometric identity authentication. Our vision is to enable every organization to “Recognise Your Customer” instantly, without friction or loss of privacy, powered by the most sophisticated biometric and artificial intelligence technologies.
The explosive growth in online and mobile commerce, telemedicine, remote working and digital activities of all descriptions is self-evident to everyone who lived into 2021.through the Covid 19 pandemic since 2020. Identity theft, phishing attacks, spear-phishing, password vulnerabilities, account takeovers, benefits fraud - it seems like these words that have entered our daily lexicon it seems like overnight. These risks are significant impediments to the operations and growth of any business or organization, and dealing with the risks and consequences of these criminal activities has created significant friction in both time, cost and lost opportunity. Consider all the outdated methods that organizations have had to implementimplemented in order to prevent fraud. The requests to receive and enter one-time passwords.passwords, that can be easily hijacked. The maddeningvulnerable security questions you get asked – whether on-line or when reaching out to a call center – what was your first pet’s name? who was your best friend in high school? These steps all add up to friction, making it difficult for consumers to login, transact and execute daily tasks.tasks, with little added protection from fraud. Surely there is a better way to address these challenges? authID.ai believes there is.
authID.ai provides secure, facial biometric, identity verification, FIDO2 passwordless login and strong customer authentication. We maintain a global, cloud-based IDaaS platform for our enterprise customers to enable their users to easily verify and authenticate their identity through a mobile phonedevice or portable devicedesktop (with camera) of their choosing (as opposed to(without requiring dedicated hardware)hardware, or authentication apps). We can help our customers establish a proven identity, creating a root of trust that ensures the highest level of assurance for our passwordless login and step-up verification products. Our system enables participants to consent to transactions using their biometric information with a digitally signed authentication response, embedding the underlying transaction data and each user’s identity attributes within every electronic transaction message processed through our platform.
Digital transformation across all market segments requires trusted identity. Our identity platform offers innovative solutions that are flexible, fast and easy to integrate and offer seamless user experiences. authID’s products help advance digital transformation efforts without the fear of identity fraud, while delivering frictionless user experiences. We believe that it is also essential that every electronic transaction hastransactions have an audit trail, proving that the identity of the individual was duly authenticated. Our platform provides biometric and multi-factor identity software, which are intended to establish, authenticate and verify identity across a wide range of use cases and electronic transactions.
authID ’sauthID’s products focus on the broad requirement for enabling frictionless commerce by allowing an entity to instantly “Recognise their Customer”. Organizations of all descriptions require cost-effective and secure means of growing their business while mitigating identity fraud. We aim to offer our enterprise customers products that can be integrated easily into each of their business and organizational operations, in order to facilitate their adoption and enhance the end user customer experience.
Our management believes that some of the advantages of our IDaaS Platform approach are the ability to leverage the platform to support a variety of vertical markets and the adaptability of the platform to the requirements of new markets and new products requiring cost-effective, secure, and configurable mobile solutions. Our target markets include banking, fintech and other disrupters of traditional commerce, small and medium sized businesses, and system integrators working with government and Fortune 1000 enterprises. At its core, the Company’s offering, combining its proprietary and acquired biometric and artificial intelligence technologies (or AI), is intended to facilitate frictionless commerce, whether in the physical or digital world. The Company intends to increase its investment in developing, patenting and acquiring the various elements necessary to enhance the platform, which are intended to allow us to achieve our goals. One of the principal intended areas of investment is to enhance and expand our use of artificial intelligence in proprietary software, that we believe will increase our value to enterprise customers and stockholders alike.
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authid.ai is dedicated to developing advanced methods of protecting consumer privacy and deploying ethical and socially responsible AI. authID is developing a culture that proactively encourages and rewards our employees for considering the ethical implications of our products. We believe that a proactive commitment to ethical AI presents a strong business opportunity for authID and will enable us to bring more accurate products to market more quickly and with less risk to better serve our global user base. Our methods to achieve ethical AI include engaging the users of our products with informed consent, prioritizing the security of our user’s personal information, considering and avoiding potential bias in our algorithms, and monitoring of algorithm performance in our applications.
The Company also owns an entity in South Africa, Cards Plus, which manufactures secure plastic identity credentials and loyalty card products. On May 4, 2022, the Board approved a plan to exit from certain non-core activities comprising the MultiPay correspondent bank, payments services in Colombia and the Card Plus cards manufacturing and printing business in South Africa. See subsequent event.
The Company was incorporated in the State of Delaware on September 21, 2011, and changed itsour name to Ipsidy Inc. on February 1, 2017,2017. In order to better align the branding of our Company with our future focus and goals on June 14, 2021 we changed our common stockbusiness name to “authID.ai”. To that end, we registered domain names under that name and applied for a United States trademark registration in that name.
Our Common Stock is currently (beginning July 13, 2021) traded on the NASDAQNasdaq Capital Market under the trading symbol “AUID”. Our corporate headquarters is located at 670 Long Beach Blvd., Long Beach, NY 11561 and our main phone number is (516) 274-8700. We maintain a website at www.authID.ai.www.authid.ai. The contents ofinformation contained on, or that can be accessed through, our website arewebsites is not incorporated by reference into or otherwise to be regarded as part of, this Quarterly Report on Form 10-Qprospectus and is intended for informational purposes only.
Adjusted EBITDA
This discussion includes information about Adjusted EBITDA that is not prepared in accordance with GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.
Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income (loss) adjusted to exclude (1) interest expense, (2) interest income, (3) provision for income taxes, (4) depreciation and amortization, (5) stock-based compensation expense (stock options and restricted stock) and (6) certain other items management believes affect the comparability of operating results.
Other items include the following:
For the nine months ended September 30, 2021:
For the nine months ended September 30, 2020:
Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management, and it will be a focus as we invest in and grow the business. Additionally, we will continue to use Adjusted EBITDA in connection with our executive performance-based compensation in 2021.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations. |
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplement to our GAAP results.
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Reconciliation of Net Loss to Adjusted EBITDA Loss
| For the Quarter Ended | For the Nine Months Ended | For the Quarter Ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||
| Net loss | $ | (5,198,905 | ) | $ | (1,918,239 | ) | $ | (10,746,514 | ) | $ | (9,217,108 | ) | $ | (5,300,728 | ) | $ | (2,489,999 | ) | ||||||
| Add Back: | ||||||||||||||||||||||||
| Interest Expense | 25,780 | 212,658 | 579,768 | 701,861 | 33,221 | 297,438 | ||||||||||||||||||
| Debt extinguishment – loss/(gain) | (485,762 | ) | - | (971,522 | ) | 985,842 | ||||||||||||||||||
| Warrant exercise inducement expense | - | - | - | 366,795 | ||||||||||||||||||||
| Other expense/(income) | (5,151 | ) | (1,537 | ) | ||||||||||||||||||||
| Severance cost | - | - | - | 426,175 | 150,000 | - | ||||||||||||||||||
| Other expense/(income) | (6,736 | ) | (16,779 | ) | (14,394 | ) | (51,445 | ) | ||||||||||||||||
| Depreciation and amortization | 319,017 | 276,232 | 943,436 | 923,563 | 243,678 | 309,829 | ||||||||||||||||||
| Taxes | 2,974 | 11,074 | 12,516 | 23,540 | 6,321 | 7,188 | ||||||||||||||||||
| Impairment loss | - | - | - | 1,035,629 | 143,703 | - | ||||||||||||||||||
| Stock compensation | 2,533,943 | 112,125 | 4,795,069 | 741,668 | 1,866,989 | 626,579 | ||||||||||||||||||
| Adjusted EBITDA (Non-GAAP) | $ | (2,809,689 | ) | $ | (1,322,929 | ) | $ | (5,401,641 | ) | $ | (4,063,480 | ) | $ | (2,861,967 | ) | $ | (1,250,502 | ) | ||||||
Adjusted EBITDA loss for the nine monthsquarter ended September 30, 2021,March 31, 2022, increased by approximately $1.3$1.6 million compareddue to the previous year, principally due to higher compensation, marketingCompany’s investment in people, technology and targeting technology.marketing.
Three and Nine Months Ended September 30,March 31, 2022 and March 31, 2021 and September 30, 2020
Revenues, net
During the three months and nine months ended September 30, 2021,March 31, 2022, the Company had revenues of approximately $0.5 million and $1.7 million$607,000 compared to $0.5 million and $1.6 millionapproximately $589,000 in the three months and nine months ended September 30, 2020.March 31, 2021. The increase in revenue is principally related to higher income at authID.ai, resulting from adding new customers for identity services offset by a reduction in the three and nine month periods ended September 30, 2021 was higherrevenue at Cards Plus comparedand our Colombian business due to the prior year, when business was severely impacted due toimpact of Covid-19. Ipsidy, North America new revenue increased slightly in the nine month period ended September 30, 2021 and revenue at MultiPay decreased slightly in the three and nine month periods ended September 30, 2021.
Cost of sales
During the three months ended September 30, 2021,March 31, 2022, cost of sales was higherless than the cost of sales in the three months ended September 30, 2020,March 31, 2021 principally due to higher margin revenue at Cards Plus. In the nine-month period ended September 30, 2021, compared to September 30, 2020, cost of sales was lower as Cards Plus sold products at higher margins.
General and administrative expenses
During the three-month and nine-month periodsperiod ended September 30, 2021,March 31, 2022 compared to September 30, 2020,March 31, 2021, general and administrative expense increased by approximately $3.8$2.8 million and $4.9 millionprincipally due to increased compensation, marketing and technology costs in addition to higher non-cash stock compensation charges. Stockcharges ($1.2 million), higher compensation, charges were $2.4 millionmarketing, and $4.1 million higherprofessional fee costs as the Company makes investment in threepeople, marketing and nine months ended September 30, 2021 compared to the prior year.its product offering.
Research and development expenses
During the three-month and nine-month periodsperiod ended September 30, 2021,March 31, 2022 compared to September 30, 2020,March 31, 2021, research and development expenses increased by approximately $0.1 million and $0.2 million as the Company has focusedincreased staffing and third party resources as it focuses on key products initiatives.
Impairment loss
During the ninethree months ended September 30, 2020,March 31, 2022, the Company recorded an impairment loss of approximately $144,000 associated with goodwill ofintangible assets at one of its reporting units of approximately $1,036,000.
As a result of the current pandemic and its potential impact on future results, the Company updated its reporting unit projections, and it indicated a goodwill impairment as the carrying value was in excess of its estimated recoverable value. The fair value of the reporting unit was determined using a discounted cash flow analysis.units.
Depreciation and amortization expense
DepreciationDuring the three-month period ended March 31, 2022 compared to March 31, 2021, depreciation and amortization expense increased slightly bothwas approximately $0.1 million less as the three and nine months ended September 30, 2021 compared to September 30, 2020.Company reduced the value of certain legacy business asset values.
Other Income (Expense)
During the three- and nine-month periods ended September 30, 2021, the Company recorded a gain on the extinguishment of a note payable of approximately $486,000 and $972,000, respectively, related to the forgiveness of the two Paycheck Protection Program loans as the Company met the applicable requirements.
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During the nine months ended September 30, 2020, the Company recorded a charge of approximately $985,000 related to an extinguishment of a note payable and a charge of approximately $367,000 in connection with an inducement to certain warrant holders to exercise their outstanding warrants.
Interest expense
Interest expense decreased during the three months and nine monthsthree-month period ended September 30, 2021March 31, 2022, compared to March 31, 2021, principally due to the three and nine months ended September 30, 2020 as the Company received conversion notices fromof the majority of convertible noteholdersnotes, which were outstanding in June 2021, and converted the Company’s outstanding indebtedness into common shares reducing its interest obligation.in June 2021.
Liquidity and Capital Resources
As of September 30, 2021 theThe Company hadhas approximately $9.2$13.8 million of cash on hand and had working capital of approximately $7.4$12.0 million as of March 31, 2022, as the recent fund raise provided cash of approximately $11.4 million.
Cash used in operating activities was approximately $5.5$3.1 million and $3.1$1.7 million in the ninethree months ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, respectively.
In January 2021,Cash provided by financing activities in the Company received a second loan of approximately $486,000 under the Paycheck Protection Program of the U.S. Small Business Association (“USSBA”) related to its U.S. operations. The Company received notice in August 2021, the January 2021 Paycheck Protection Program loanthree months ended March 31, 2022, was forgiven as the Company met the applicable requirements.follows:
| ● | The Company entered into an SPA with the Note Investors, and, pursuant to the SPA, sold to the Note Investors the Convertible Notes with an aggregate initial principal amount of approximately $9.2 million and a conversion price of $3.70 per share. The Convertible Notes were sold with an aggregate cash origination fee of approximately $200,000, and we are issuing a total of approximately 28,500 shares of our common stock to the Note Investors as an additional origination fee. |
During the first quarter of 2021, convertible notes totaling $120,000 and a portion of their accrued interest at the option of the noteholders were converted into approximately 33,000 shares of common stock of the Company.
| ● | The Company entered into Subscription Agreements with the PIPE Investors, and, pursuant to the Subscription Agreements, sold to the PIPE Investors a total of 1,063,514 shares of our common stock at prices of $3.03 per share for an outside investor and $3.70 per share for the management investors. The aggregate gross proceeds from the PIPE are approximately $3.3 million. |
Additionally, the Company entered into a Credit Facility with an accredited investor, who is both a current shareholder of the Company and a Note Investor, pursuant to which the accredited investor agreed to provide a $10.0 million unsecured standby line of credit facility that will rank behind the Convertible Notes and may be drawn down in several tranches, subject to certain conditions described in the nine months ended September 30, 2021,Credit Facility. Pursuant to the Credit Facility, the Company received conversion notices from (i)agreed to pay the Stern Trust convertinglender a facility commitment fee of 100,000 shares of our common stock upon the principal amount, repayment premium and interest ineffective date of the amount of approximately $3.5 million payableCredit Facility Agreement. There were no borrowings under the Restated Stern Note into approximately 561,000 sharesCredit Facility as of common stock, (ii) the 8% Note Investors converting principal and interest in the amount of approximately $0.4 million into approximately 180,000 shares of common stock and (iii) the 2020 Note Investors converting principal, repayment premium and interest in the amount of approximately $2.5 million into approximately 398,000 shares of common stock. The Stern Trust is owed approximately $0.7 million in interest under the Restated Stern Note, which has not been converted and remains outstanding. As a result, a total of approximately $6.1 million of Company net indebtedness was converted and the Company issued 1,138,000 shares of common stock in the aggregate.March 31, 2022.
On August 26, 2021,The Company may need additional capital in the Company’s completed its public offering (the “Offering”) of 1,642,856 shares of its common stock at a public offering price of $7.00 per share, including 214,285 shares sold upon full exercisefuture but because of the underwriter’s optionabove financing activities, we believe we have sufficient funds to purchase additional shares, for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and offering expenses.
In order to implement and grow our operationsoperate its business through December 31, 2022, achieve an expected revenue stream from our products and repay our outstanding convertible debt obligation, we expect that we will need to raise approximately $5.0 to $10.0 million. There is no guarantee that our current business plan will not change and, as a result of such change, that we will need additional capital to implement such business plan.
In November 2021, the Company filed an S-3 to register an indeterminate number of securities of each identified class of securities up to a proposed aggregate offering price of $200,000,000, which may from time to time be offered in unspecified numbers and at indeterminate prices.2023.
Covid 19
Covid-19 emerged globally in December 2019, and it has been declared a pandemic. Covid-19 is still impacting customers, business, results and financial condition throughout the world. The Company’s day-to-day operations have been impacted differently depending on geographic location and services that are being performed. The Cards Plus business located in South Africa operations has had limitations on its operations as they are following the guidance and requirements of the South African government. Our operations in the United States and Colombia have suffered less immediate impact as most staff can work remotely and can continue to develop our product offerings.
That said we have seen our business opportunities develop more slowly as business partners and potential customers include Covid-19 considerations. Furthermore, working remotely can cause a delay in decision making and finalization of negotiations and agreements.
Ukraine
The war in Ukraine may impact the Company and its operations in a number of different ways, which are yet to be fully assessed and are therefore uncertain. The Company works with third party sub-contractors for outsourced services, including software engineering and development, some of whom are based in Eastern Europe, including Russia and Ukraine. The Company also works with outsourced engineers and developers and third-party providers in other parts of the world, including the United States, India, South Africa and South America. While the continuing impact of this conflict and the response of the United States and other countries to it by means of trade and economic sanctions, or other actions is still unknown, any disruption of our ability to work with such contractors caused by this conflict could require the Company to seek alternative sub-contractors at short notice, which may give rise to additional costs and delays in delivering software and product upgrades.
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The uncertainty impacting and potential interruption in energy and other supply chains resulting from military hostilities in Europe and the response of the United States and other countries to it by means of trade and economic sanctions, or other actions, may give rise to increases in costs of goods and services generally and may impact the market for our products as prospective customers reconsider additional capital expenditure, or other investment plans until the situation becomes clearer. On the other hand, the threat of increased cyber-attacks from Russia or other countries may prompt enterprises to adopt additional security measures such as those offered by the Company.
For so long as the hostilities continue and perhaps even thereafter as the situation in Europe unfolds, we may see increased volatility in financial markets and a flight to safety by investors, which may make it more difficult for the Company to raise additional capital at the time when it needs to do so, or for financing to be available upon acceptable terms. All or any of these risks separately, or in combination could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Subsequent Event
The Board of Directors of Ipsidy considers it in the best interests of the Company to focus its business activities on providing biometric identity verification products and services by means of our proprietary IDaaS platform. Accordingly, on May 4, 2022, the Board approved a plan to start to exit from certain non-core activities comprising the MultiPay correspondent bank, payments services in Colombia and the Card Plus cards manufacturing and printing business in South Africa.
Colombia
The Company plans to exit the MultiPay business in Colombia in an orderly fashion through the end of 2022, honoring our obligations to employees, customers and under applicable laws and regulations. We plan to maintain our customer support and operations team in Bogota, which performs essential functions to support the global operations of our Verified family of products.
The Company will incur certain costs associated with its employees and other contractual obligations. MultiPay will continue to service its customer base in the interim as it will look to minimize all such costs and in addition to realize proceeds from the potential disposition of its assets. The Company cannot estimate the net costs to be incurred as a result of this decision at this time, but believes that the overall additional cash costs will not exceed $250,000. The Company has not recorded the potential costs or write-down in the three months ended March 31, 2022.
South Africa
The Company plans to exit the Cards Plus business and will seek a buy out of our interests. We have had preliminary discussions with one group but no definitive terms for the sale have been agreed at this point.
If we are successful in achieving a sale of our interest it is expected that there will be a net cash inflow resulting from the planned exit of our business in South Africa. There is no guarantee that we will be successful in finding a buyer for our interest, that such sale will be on acceptable terms or that this will result in a net cash inflow. As a result of these preliminary discussions, the Company has decided to write-down the value of the Cards Plus intangible assets and has recorded an impairment charge of approximately $144,000 in the three months ended March 31, 2022.
In the three months ended March 31, 2022, MultiPay and Cards Plus revenue was approximately $69,000 and $373,000, respectively, and MultiPay had a loss of approximately $68,000 with Cards Plus contributing approximately $11,000 of net income. These amounts do not include any corporate overhead allocation nor any amounts relating to the proposed exits.
The financial statements of Cards Plus and the Colombian operations have not been classified as discontinued operations as of March 31, 2022, as all required classification criteria under Accounting Standards Codification 205 were not met until May 2022.
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Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.
Recent Accounting Policies
The recent material accounting policies that may be the most critical to understanding of the financial results and conditions are discussed in Note 1 of the unaudited financial statements.
In August the FASB issued a new standard (ASU 2021-06) to reduce the complexity of accounting for convertible debt and other equity-linked instruments. For certain convertible debt instruments with a cash conversion feature, the changes are a trade-off between simplifications in the accounting model (no separation of an “equity” component to impute a market interest rate, and simpler analysis of embedded equity features) and a potentially adverse impact to diluted EPS by requiring the use of the if-converted method. The new standard will also impact other financial instruments commonly issued by both public and private companies. For example, the separation model for beneficial conversion features is eliminated simplifying the analysis for issuers of convertible debt and convertible preferred stock. Also, certain specific requirements to achieve equity classification and/ or qualify for the derivative scope exception for contracts indexed to an entity’s own equity are removed, enabling more freestanding instruments and embedded features to avoid mark-to-market accounting. The new standard is effective for companies that are SEC filers (except for Smaller Reporting Companies) for fiscal years beginning after December 15, 2021 and interim periods within that year, and two years later for other companies. Companies can early adopt the standard at the start of a fiscal year beginning after December 15, 2021. The standard can either be adopted on a modified retrospective or a full retrospective basis. The Company is currently reviewing the newly issued standard and does not believe it will materially impact the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required to include disclosure under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021,March 31, 2022, the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the report that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the ninethree months ended September 30, 2021March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal or administrative proceedings arising in the ordinary course of business. While any litigation contains an element of uncertainty, we have no reason to believe the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 1A. RISK FACTORS
Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.On March 21, 2022, the Company entered into a Securities Purchase Agreement (“SPA”) with certain accredited investors, including certain directors of the Company or their affiliates (the “Note Investors”), and, pursuant to the SPA, sold to the Note Investors Senior Secured Convertible Notes (the “Convertible Notes”) with an aggregate initial principal amount of approximately $9.2 million and a conversion price of $3.70 per share. The Convertible Notes were sold with an aggregate cash origination fee of approximately $200,000, and we issued a total of approximately 28,500 shares of our common stock to the Note Investors as an additional origination fee. The Convertible Notes will accrue interest at the rate of 9.75% per annum, which will be payable in cash or, for some or all of the first five interest payments, in shares of our common stock at the Company’s option, on the last day of each calendar quarter before the maturity date and on the maturity date. The maturity date of the Convertible Notes is March 31, 2025.
On March 18 and March 21, 2022, the Company entered into Subscription Agreements (the “Subscription Agreements”) with an accredited investor and certain members of authID.ai’s management team (the “PIPE Investors”), and, pursuant to the Subscription Agreements, sold to the PIPE Investors a total of 1,063,514 shares of our common stock at prices of $3.03 per share for an outside investor and $3.70 per share for the management investors (the “PIPE”). The aggregate gross proceeds from the PIPE are approximately $3.3 million.
Additionally, the Company entered into a Credit Facility with an accredited investor, who is both a current shareholder of the Company and a Note Investor, pursuant to which the accredited investor agreed to provide a $10.0 million unsecured standby line of credit facility that will rank behind the Convertible Notes and may be drawn down in several tranches, subject to certain conditions described in the Credit Facility. Pursuant to the Credit Facility, the Company agreed to pay the Lender a facility commitment fee of 100,000 shares of our common stock upon the effective date of the Facility Agreement.
The gross proceeds of the sale of the Convertible Notes and the PIPE were used to pay the expenses of those offerings and to provide working capital for the Company.
During the quarter ended March 31, 2022, the Company issued approximately 186,488 shares of common stock pursuant to cashless exercises of common stock purchase warrants and options.
The securities described herein been offered and sold pursuant to exemptions from the registration requirements of the Securities Act afforded by Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder, for the sale of securities not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to our operations.
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ITEM 5. OTHER INFORMATION
None.On March 21, 2022, the Company entered into a Credit Facility with Stephen J. Garchik, who is both a current shareholder of the Company and holds Senior Secured Convertible Notes (“Garchik”), pursuant to which Garchik agreed to provide to the Company a $10.0 million unsecured standby line of credit facility that will rank behind the Senior Secured Convertible Notes and may be drawn down in several tranches, subject to certain conditions described in the Facility Agreement. Upon request by Garchik and until the full amount due under the Credit Facility is repaid in full, the Company will provide for the nomination of one designee specified in writing by Garchik for appointment to our board of directors and for subsequent election to our board of directors and to recommend such nominee for election to our board of directors. The Company will be entitled to reject any nominee upon reasonable grounds, or the nominee may not be elected by the stockholders, in which case Garchik may nominate another person to be a director.
On April 18, 2022, Joseph Trelin, as Garchik’s designee under the Credit Facility, was appointed as a member of the Board of Directors of the Company. Except as set forth above, there is no understanding or arrangement between Mr. Trelin and any other person pursuant to which Mr. Trelin was selected as a director of the Company. Mr. Trelin does not have any family relationship with any director, executive officer or person nominated or chosen by us to become a director or an executive officer. Mr. Trelin has not had direct or indirect material interest in any transaction or proposed transaction, in which the Company was or is a proposed participant exceeding $120,000.
On April 18, 2022, Mr. Trelin entered into a letter agreement with the Company pursuant to which he was appointed as a director of the Company in consideration of (i) an initial equity award having a Black Scholes value on the date of grant of $270,000, subject to annual vesting of one-third of the common shares over three years on the date of each Annual Meeting commencing with the 2022 Annual Meeting and (b) commencing following the Company’s 2023 Annual Meeting, assuming Mr. Trelin is re-elected to office, an annual equity award having a Black Scholes value on the date of grant of $90,000, subject to vesting over twelve months.
On April 25, 2022, Stuart Stoller indicated his intention to resign as Chief Financial Officer of the Company in connection with his planned retirement. The resignation and retirement have a planned effective date of June 17, 2022 at which time Annie Pham will be appointed Chief Financial Officer in his place.
On April 25, 2022, Ms. Pham and the Company entered an Offer Letter pursuant to which Ms. Pham agreed to serve as Chief Financial Officer with a planned employment date commencing June 20, 2022 or such other date as may be agreed. Ms. Pham will receive an annual salary of $275,000. The Company agreed to provide a bonus of 40% of the base salary (pro rated for 2022) based on achievement of performance milestones, calculated and payable in accordance with the corporate milestones approved by the Board for the year 2022. For subsequent fiscal years the bonus shall be subject to performance targets to be mutually agreed with the Compensation Committee of the Board. In addition, Ms. Pham will receive a signing bonus in the amount of $25,000, which is fully refundable to the Company if Ms. Pham leaves her employment voluntarily or is terminated for cause prior to the first anniversary of the commencement of employment. The employment of Ms. Pham will be at will and may be terminated at any time, with or without formal cause. The Company also entered an Executive Retention Agreement with Ms. Pham, pursuant to which the Company agreed to provide specified severance and bonus amounts and to accelerate the vesting on her equity awards upon termination upon a change of control or an involuntary termination, as each term is defined in the agreements. In the event of a termination upon a change of control or an involuntary termination, Ms. Pham is entitled to receive an amount equal to 100% of her base salary and the target bonus then in effect for the executive officer for the year in which such termination occurs. At the election of the executive officer, the Company will also continue to provide health related employee insurance coverage for up to twelve months, at the Company’s expense. Upon commencing employment, Ms. Pham will be granted an option to acquire 350,000 shares of common stock with an exercise price equal to the closing price of the Company’s common stock on the date of grant and an exercise period of ten years subject to certain performance vesting requirements.
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ITEM 6. EXHIBITS
| * | Filed herewith |
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| (1) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 23, 2021. |
| (2) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on January 22, 2021. |
| (3) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 15, 2021. |
| (4) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 16, 2019. |
| (5) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 18, 2020. |
| (6) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on May 13, 2020. |
| (7) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on May 6, 2021. |
| (8) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 6, 2017. |
| (9) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on May 4, 2018. |
| (10) | Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on July 12, 2017. |
| (11) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 1, 2017. |
| (12) | Incorporated by reference to the Form S-1/A Amendment No. 1 to the S-1 Registration Statement filed with the Securities Exchange Commission on July 16, |
| (13) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on November 8, 2021. |
| (14) | Incorporated by reference to the Form S-8 Registration Statement filed with the Securities Exchange Commission on February 1, 2022. |
| (15) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 21, 2022. |
| (16) | Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on March 22, 2022. |
| (17) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 18, 2022. |
(18) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2022. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IPSIDY INC. | ||
| By: | /s/ Thomas L. Thimot | |
| Thomas L. Thimot Chief Executive Officer | ||
| Principal Executive Officer | ||
| By: | /s/ Stuart Stoller | |
| Chief Financial Officer, | ||
| Principal Financial and Accounting Officer | ||
| Dated: | ||
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