SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
(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 | ||
| The |
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. ☒
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). ☒
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 ☐ |
| 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 ☐
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 October 31, 2021 | |
| 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, 2020 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, |
| ● | our ability to continue as a going concern, |
| ● | our ability to raise additional working capital as necessary, |
| ● | our ability to satisfy our obligations as they become due, |
| ● | the failure to successfully commercialize our product or sustain market acceptance, |
| ● | the reliance on third party agreements and relationships for development of our business, |
| ● | our operations in foreign markets, |
| ● | breaches of network or information technology services, |
| ● | the control exercised by our management, |
| ● | the impact of government regulation on our business, |
| ● | our ability to effectively compete, |
| ● | the possible inability to effectively protect our intellectual property, |
| ● | the lack of a public market for our securities and the impact of the penny stock rules on trading in our common stock should a public market ever be established, and |
| ● | the impact of the Covid-19 Pandemic. |
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”, 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
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
(Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Current portion of net investment in direct financing lease | ||||||||
| Inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and Equipment, net | ||||||||
| Other Assets | ||||||||
| Intangible Assets, net | ||||||||
| Goodwill | ||||||||
| Net investment in direct financing lease, net of current portion | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Notes payable obligation, current portion | ||||||||
| Capital lease obligation, current portion | ||||||||
| Convertible debt | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Capital lease obligation, net of current portion | ||||||||
| Notes payable, net of discounts and current portion | - | |||||||
| Convertible debt | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See notes to condensed consolidated financial statements.
1
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 | $ | $ | $ | $ | ||||||||||||
| Lease income | ||||||||||||||||
| Total revenues, net | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Cost of Sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expense: | ||||||||||||||||
| Warrant inducement expense | - | ( | ) | |||||||||||||
| Extinguishment of debt - gain (loss) | ( | ) | ||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Tax Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss Per Share - Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Shares Outstanding - Basic and Diluted | ||||||||||||||||
See notes to condensed consolidated financial statements.
2
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation gain (loss) | ( | ) | ||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See notes to condensed consolidated financial statements.
3
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 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Sale of common stock for cash | ||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Settlement of accrued expense with stock options | - | |||||||||||||||||||||||
| Convertible notes converted to common stock | ||||||||||||||||||||||||
| Stock option exercise for cash | ||||||||||||||||||||||||
| Warrant exercise for cash | ||||||||||||||||||||||||
| Cashless stock option exercise | ( | ) | ||||||||||||||||||||||
| Cashless warrant exercise | ( | ) | - | - | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||
| Balances, September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Sale of common stock for cash | ||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Stock option exercise for cash | - | - | ||||||||||||||||||||||
| Warrant exercise for cash | - | - | ||||||||||||||||||||||
| Cashless stock option exercise | ( | ) | ||||||||||||||||||||||
| Cashless warrant exercise | - | - | - | |||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Foreign currency translation | - | - | - | - | ||||||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Modification of warrants issued with debt | - | |||||||||||||||||||||||
| Sale of common stock for cash | ||||||||||||||||||||||||
| Warrant exercise | ||||||||||||||||||||||||
| Warrant exercise inducement | - | |||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Issuance of common stock to settle accounts payable | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Balances, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Warrant and stock cashless exercises | ( | ) | - | - | - | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||
| Balances, September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See notes to condensed consolidated financial statements.
4
IPSIDY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss with cash flows from operations: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock-based compensation | ||||||||
| (Gain)/loss on extinguishment of note payable | ( |
) | ||||||
| Amortization of debt discounts and issuance costs | ||||||||
| Impairment losses | ||||||||
| Warrant exercise inducement | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Net investment in direct financing lease | ||||||||
| Other current assets | ( |
) | ||||||
| Inventory | ( |
) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenue | ( |
) | ||||||
| Other liabilities | ( |
) | ||||||
| Net cash flows from operating activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Purchase of intangible assets | ( |
) | ||||||
| Investment in other assets | ( |
) | ||||||
| Net cash flows from investing activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock, net of offering costs | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from paycheck protection program | ||||||||
| Payment of debt issuance costs | ( |
) | ||||||
| Payments on notes payable | ( |
) | ||||||
| Principal payments on capital lease obligation | ( |
) | ( |
) | ||||
| Net cash flows from financing activities | ||||||||
| Effect of Foreign Currencies | ( |
) | ||||||
| Net Change in Cash | ( |
) | ||||||
| Cash, Beginning of the Period | ||||||||
| Cash, End of the Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash Investing and Financing Activities: | ||||||||
| Reclass from other assets to intangible assets | $ | $ | ||||||
| Modification of warrants issued with convertible debt | $ | $ | ||||||
| Exchange of notes payable and accrued interest for convertible notes payable | $ | $ | ||||||
| Settlement of accounts payable with issuance of common stock | $ | $ | ||||||
| Conversion of convertible note payable and accrued interest to common stock | $ | $ | ||||||
See notes to condensed consolidated financial statements.
5
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. The results of operations for the nine months ended September 30, 2021 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 $
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, the Company had an accumulated
deficit of approximately $
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.
6
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 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.
On August
26, 2021, the Company’s completed its public offering (the “Offering”) of
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 $
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.
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.
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, 2021 and 2020 because their effect was antidilutive:
| Security | 2021 | 2020 | ||||||
| Convertible notes payable | ||||||||
| Warrants | ||||||||
| Stock options | ||||||||
7
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 loyal ID and other types of cards.
Inventories
at September 30, 2021 and December 31, 2020 consist of cards inventory. As of September 30, 2021 and December 31, 2020, the Company recorded
an inventory valuation allowance of approximately $
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 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, 2021
and December 31, 2020, Cards Plus had approximately $
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 and for variable fees generated that are earned on a usage fee based over time based on monthly transaction volumes
or on a monthly flat fee rate. The Company had a contract liability of approximately $
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.
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.
8
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 | $ | $ | ||||||
| Prepaid licensing fees | ||||||||
| Operating lease right of use | ||||||||
| Prepaid marketing expense | ||||||||
| Payroll tax receivable | ||||||||
| Prepaid services | ||||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 3 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following as of September 30, 2021 and December 31, 2020:
| September 30,
2021 | December 31,
2020 | |||||||
| Property and equipment | $ | $ | ||||||
| Equipment under finance lease | ||||||||
| Less Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense totaled $
NOTE 4 – OTHER ASSETS
Other assets consisted of the following at September 30, 2021 and December 31, 2020:
| September 30,
2021 | December 31,
2020 | |||||||
| Operating lease right of use assets | $ | $ | ||||||
| Other | ||||||||
| $ | $ | |||||||
9
NOTE 5 – 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 acquisitions and are amortized over their estimated useful lives as indicated below. The following is a summary of activity related to intangible assets for the nine months ended September 30, 2021:
| Customer Relationships | Acquired and Developed Software | Intellectual Property | Patents | Total | ||||||||||||||||
| Useful Lives | ||||||||||||||||||||
| Carrying Value at December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
| Additions | ||||||||||||||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Carrying Value at September 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
The following is a summary of intangible assets as of September 30, 2021
| Customer Relationships | Acquired
and Developed Software | Intellectual Property | Patents | Total | ||||||||||||||||
| Cost | $ | $ | $ | $ | $ | |||||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Carrying Value at September 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
Amortization
expense totaled approximately $
Future expected amortization of intangible assets is as follows:
| Fiscal Year Ending December 31, | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| $ | ||||
10
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of September 30, 2021 and December 31, 2020:
| September 30,
2021 | December 31,
2020 | |||||||
| Trade payables | $ | $ | ||||||
| Accrued interest* | ||||||||
| Accrued payroll and related obligations | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other** | ||||||||
| Total | $ | $ | ||||||
| * |
| ** |
NOTE 7 - NOTES PAYABLE, NET
The following is a summary of notes payable as of September 30, 2021 and December 31, 2020:
| September
30, 2021 | December 31, 2020 | |||||||
| Paycheck Protection Program Loan #1 | $ | $ | ||||||
| Paycheck Protection Program Loan #2 | ||||||||
| Notes Payable, Net | $ | $ | ||||||
| Notes Payable, current portion, | $ | $ | ||||||
| Notes Payable, net of current portion | ||||||||
| $ | $ | |||||||
11
Paycheck Protection Program Loans
In
May 2020, the Company received a loan of approximately $
In
January 2021, the Company received a second loan of approximately $
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, the Company entered into Securities Purchase Agreements with several accredited investors (the “
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
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
In
connection with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, a cash fee
of approximately $
During
the first quarter of 2021, convertible notes totaling $
12
The following is a summary of the convertible notes payable outstanding at September 30, 2021:
| 8% convertible notes payable issued December 2019 | $ | |||
| 15% convertible notes payable issued February 2020 | ||||
| 10% convertible notes payable issued February 2020 | ||||
| $ |
Future maturities of convertible notes payable are as follows:
| 2021 | $ | |||
| 2022 | ||||
| $ |
NOTE 9 – RELATED PARTY TRANSACTIONS
Convertible Notes Payable
In
2021, the Company received conversion notices from Stern Trust of which Theodore Stern, (a former member 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 $
Executive Officers
On June 14, 2021, Phillip L. Kumnick resigned as Chief Executive Officer
of Ipsidy Inc., and Thomas L. Thimot was appointed Chief Executive Officer 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
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 $
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 $
13
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
Other
In
the third quarter of 2021, the Company and Progress Partners Inc. (“Progress”) modified their Business Advisory Agreement
dated
NOTE 10 – STOCKHOLDER’S EQUITY
Common Stock
On
August 26, 2021, the Company completed the Offering of
During the nine months ended September 30, 2021, shares of common stock were issued as a result of the following non-cash transactions:
| ● | In the first quarter of 2021, convertible notes totaling $ |
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| ● | Additionally, during the three and nine months ended September 30, 2021, the Company received conversion notices from (i) the Stern Trust converting the principal amount, repayment premium and interest in the amount of approximately $ |
| ● | 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 nine months ended September 30, 2021:
| Weighted Average | Weighted Average | |||||||||
| Number of | Exercise | Remaining | ||||||||
| Shares | Price | Life | ||||||||
| Outstanding at December 31, 2020 | $ | |||||||||
| Granted | $ | |||||||||
| Exercised/cancelled | ( | ) | $ | |||||||
| Outstanding at September 30, 2021 | $ | |||||||||
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
Stock Options
During the nine months ended September 30, 2021, the Company determined the grant date fair value of the options granted using the Black Scholes Method and use the following assumptions:
Expected
Volatility –
Expected
Term –
Risk
Free Rate –
Dividend
Rate –
Activity related to stock options for the nine months ended September 30, 2021 is summarized as follows:
| ● | The Company granted each of Mr. Kumnick and Mr. Broenniman stock options to acquire 583,333 shares of common stock that vest upon 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. |
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| ● | 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 that vest one third a 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 rendered. The stock options were granted in lieu of other forms of Board of Director Compensation and was used to eliminate previously accrued Board of Director compensation. The Company also granted to each of 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, 6,997 stock options to each of them were vested and the balance was cancelled. |
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 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | $ | ||||||||||||
| Forfeited/cancelled | ( | ) | $ | |||||||||||||
| Outstanding as of September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable as of September 30, 2021 | $ | $ | ||||||||||||||
| Exercise Price | Outstanding | Weighted Average Contractual Life (Yrs.) |
Exercisable | |||||||||
| $.03 - $4.00 | ||||||||||||
| $4.01 - $7.00 | ||||||||||||
| $7.01 - $10.00 | ||||||||||||
| $10.01 - $13.50 | ||||||||||||
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During
the nine months ended September 30, 2021, the Company recognized approximately $
Additionally,
the Company recorded approximately $
Total
stock-based compensation expense consisting of stock options and restricted stock in the nine months ended September 30, 2021 was approximately
$
At
the Annual Meeting of Stockholders held on March 22, 2021, the stockholders approved and ratified an increase of
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
The
Company has recorded the transaction as its net investment in the lease and will receive monthly payments of $
The
equipment is subject to a direct lease valued at approximately $
| Year ending December 31 | ||||
| Remainder of 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Sub-total | ||||
| Less deferred revenue | ( | ) | ||
| Net investment in lease | $ | |||
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NOTE 12 – 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 $
| Year ending December 31 | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| Total minimum lease payments | ||||
| Less: Amount representing interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
NOTE 13 – 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 nine months ended September 30, 2021, lease expense was approximately
$
The lease related balances included in the Condensed Consolidated Balance Sheet as of September 30, 2021 were as follows:
Assets:
| Current portion of operating lease ROU assets - included in other current assets | $ | |||
| Operating lease ROU assets – included in Other Assets | $ | |||
| Total operating lease assets | $ |
Liabilities:
| Current portion of ROU liabilities – included in Accounts payable and accrued expenses | $ | |||
| Long-term portion of ROU liabilities – included in Other liabilities | ||||
| Total operating lease liabilities | $ |
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The weighted average lease of the remaining term
is
The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2021:
| Remainder of 2021 | $ | |||
| 2022 | ||||
| Total operating lease payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease liabilities | $ |
The Company rents office space in Long Beach,
New York at a monthly cost of $
The Company leased an office location in Bogota,
Colombia with a base rent of approximately $
The Company also leases space for its operation
in South Africa. The current lease is through
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NOTE 14 – 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
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 assets for North America, South America and Africa amounted to approximately $
20
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, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Revenues: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| South America | ||||||||||||||||
| Africa | ||||||||||||||||
| Identity Management | ||||||||||||||||
| Payment Processing | ||||||||||||||||
| Loss From Operations | ||||||||||||||||
| North America | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| South America | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Africa | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Identity Management | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Payment Processing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expense) | ( | ) | ||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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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
authID.ai (Ipsidy Inc.) 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 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. Identity theft, phishing attacks, spear-phishing, password vulnerabilities, account takeovers, benefits fraud - 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 consequences of these criminal activities has created significant friction in both time, cost and lost opportunity. Consider all the methods that organizations have had to implement in order to prevent fraud. The requests to receive and enter one-time passwords. The maddening 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. Surely there is a better way to address these challenges? authID.ai believes there is.
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authID.ai provides secure, 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 phone or portable device of their choosing (as opposed to dedicated hardware). We 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 has 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 ’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.
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 was incorporated in the State of Delaware on September 21, 2011 and changed its name to Ipsidy Inc. on February 1, 2017, and our common stock is currently (beginning July 13, 2021) traded on the NASDAQ 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. The contents of our website are not incorporated into, or otherwise to be regarded as part of, this Quarterly Report on Form 10-Q
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.
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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:
| ● | Gain on extinguishment of notes payable - $1.0 million |
For the nine months ended September 30, 2020:
| ● | Loss on extinguishment of debt of $1.0 million |
| ● | Impairment loss of $0.9 million |
| ● | Warrant exercise inducement expense $0.4 million |
| ● | Severance expense $0.4 million |
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.
24
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.
Reconciliation of Net Loss to Adjusted EBITDA
| For the Quarter Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Net loss | $ | (5,198,905 | ) | $ | (1,918,239 | ) | $ | (10,746,514 | ) | $ | (9,217,108 | ) | ||||
| Add Back: | ||||||||||||||||
| Interest Expense | 25,780 | 212,658 | 579,768 | 701,861 | ||||||||||||
| Debt extinguishment – loss/(gain) | (485,762 | ) | - | (971,522 | ) | 985,842 | ||||||||||
| Warrant exercise inducement expense | - | - | - | 366,795 | ||||||||||||
| Severance cost | - | - | - | 426,175 | ||||||||||||
| Other expense/(income) | (6,736 | ) | (16,779 | ) | (14,394 | ) | (51,445 | ) | ||||||||
| Depreciation and amortization | 319,017 | 276,232 | 943,436 | 923,563 | ||||||||||||
| Taxes | 2,974 | 11,074 | 12,516 | 23,540 | ||||||||||||
| Impairment loss | - | - | - | 1,035,629 | ||||||||||||
| Stock compensation | 2,533,943 | 112,125 | 4,795,069 | 741,668 | ||||||||||||
| Adjusted EBITDA (Non-GAAP) | $ | (2,809,689 | ) | $ | (1,322,929 | ) | $ | (5,401,641 | ) | $ | (4,063,480 | ) | ||||
Adjusted EBITDA loss for the nine months ended September 30, 2021, increased by approximately $1.3 million compared to the previous year, principally due to higher compensation, marketing and targeting technology.
Three and Nine Months Ended September 30, 2021 and September 30, 2020
Revenues, net
During the three months and nine months ended September 30, 2021, the Company had revenues of approximately $0.5 million and $1.7 million compared to $0.5 million and $1.6 million in the three months and nine months ended September 30, 2020. The revenue in the three and nine month periods ended September 30, 2021 was higher at Cards Plus compared to the prior year, when business was severely impacted due to 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.
25
Cost of sales
During the three months ended September 30, 2021, cost of sales was higher than the cost of sales in the three months ended September 30, 2020, principally due to higher 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 periods ended September 30, 2021, compared to September 30, 2020, general and administrative expense increased by approximately $3.8 million and $4.9 million due to increased compensation, marketing and technology costs in addition to higher non-cash stock compensation charges. Stock compensation charges were $2.4 million and $4.1 million higher in three and nine months ended September 30, 2021 compared to the prior year.
Research and development expenses
During the three-month and nine-month periods ended September 30, 2021, compared to September 30, 2020, research and development expenses increased by approximately $0.1 million and $0.2 million as the Company has focused resources on key products initiatives.
Impairment loss
During the nine months ended September 30, 2020, the Company recorded an impairment loss associated with goodwill of 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.
Depreciation and amortization expense
Depreciation and amortization expense increased slightly both the three and nine months ended September 30, 2021 compared to September 30, 2020.
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.
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 months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 as the Company received conversion notices from the majority of convertible noteholders in June 2021 and converted the Company’s outstanding indebtedness into common shares reducing its interest obligation.
26
Liquidity and Capital Resources
As of September 30, 2021 the Company had approximately $9.2 million of cash on hand and had working capital of approximately $7.4 million.
Cash used in operating activities was approximately $5.5 million and $3.1 million in the nine months ended September 30, 2021, and September 30, 2020, respectively.
In January 2021, 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 loan was forgiven as the Company met the applicable requirements.
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.
Additionally, in the nine months ended September 30, 2021, the Company received conversion notices from (i) the Stern Trust converting the principal amount, repayment premium and interest in the amount of approximately $3.5 million payable under the Restated Stern Note into approximately 561,000 shares 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.
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 order to implement and grow our operations 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.
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.
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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.
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, 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 nine months ended September 30, 2021 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. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to our operations.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| * | Filed herewith |
| (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, 2021 |
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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 Thimot | |
| Thomas Thimot, Chief Executive Officer | ||
| Principal Executive Officer | ||
| By: | /s/ Stuart Stoller | |
| Chief Financial Officer, | ||
| Principal Financial and Accounting Officer | ||
| Dated: November 8, 2021 | ||
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