SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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 000-54545
780 Long Beach Boulevard
Long Beach, New York11561
(Address of principal executive offices) (Zip code)
407-951-8640
(Registrant's telephone number, including area code)
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.
¨ Yesx No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", "non-accelerated filer", and "smaller reporting company" in Rule 12b-2 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 x
Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date.
TABLE OF CONTENTS
7
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. Forward-looking statements include, but are not limited to, statements about:
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 appearing in our Annual Report on Form 10-K for the year ended December 31, 2015 and our other filings with the Securities and Exchange Commission. 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” “ID Global,” the “Company,” “we,” “our,” “us,” and similar terms refers to Ipsidy Inc., a Delaware corporation formerly known as ID Global Solutions Corporation and its subsidiaries. As of January 31, 2017, the Company formally changed its name to Ipsidy, Inc. from ID Global Solutions Corporation.
The information which appears on our websitewww.ipsidy.com is not part of this report.
ITEM 1. FINANCIAL STATEMENTS
IPSIDY INC. AND SUBSIDIARIES
(FORMERLY ID GLOBAL SOLUTIONS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, 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, 2015. The results of operations for the three months ended March 31, 2016 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., and Cards Plus Pty Ltd. (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Net Income or Loss per Common Share
The Company computes net income or 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 income (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 table illustrates the computation of basic and diluted EPS:
Going concern
As of March 31, 2016, the Company has a working capital and accumulated deficit of approximately $14.4 million and $31.4 million respectively. For the three months ended March 31, 2016, the Company earned revenue of approximately $321,000 and incurred an operating loss of approximately $4.3 million.
These 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.
There is no assurance that the Company will ever be profitable. These 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.
Inventories
Inventories of kiosks held by IDGS S.A.S are stated at the lower of cost (using the first-in, first-out method) or market. The kiosks provide electronic ticketing for transit systems. Inventory of plastic/ID cards, digital printing material, which are held by Card Plus Pty Ltd., are stated at the lower of cost (using the average method) or market. The plastic/ID cards and digital printing material are used to provide plastic loyalty, ID and other types of cards.
Income Taxes
The Company accounts for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Taxes.” Under the asset and liability method of FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. For the quarter ending March 31, 2016, there is no provision for income tax as the Company had tax loss for United States and foreign activities. The Company’s gain on derivative liability during the quarter ended March 31, 2016, is not taxable.
NOTE 2 – FIN HOLDINGS ACQUISITION
On February 8, 2016, the Company entered into a Share Exchange Agreement with Fin Holdings, Inc., a Florida corporation ("FIN"), and all of the FIN shareholders (the "FIN Shareholders"), pursuant to which the Company acquired 100% of the issued and outstanding shares of FIN (the "FIN Shares") and FIN's two wholly-owned subsidiaries, ID Solutions, Inc. and Cards Plus Pty Ltd. (collectively, the "Subsidiaries"), from the FIN Shareholders. In consideration for the FIN Shares, the Company issued and sold to the FIN Shareholders an aggregate of 22,500,000 shares of common stock of the Company (the "Purchase Shares") at a per share price of $0.40 or $9,000,000. The closing occurred on February 8, 2016.
In accordance with ASC 805, “Business Combinations”, the Company accounted for the acquisition of FIN as a business combination of FIN using the acquisition method of accounting. The purchase price was allocated to specific identifiable tangible and intangible assets at their respective fair values at the date of acquisition.
The following table summarizes the total fair value of the consideration transferred as well as the fair values of the assets and liabilities assumed.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and benefits of the combined company. FIN was acquired on February 8, 2016 pursuant to a Share Exchange Agreement at which time control was achieved through a restructuring of the reporting hierarchy to Company management.
The condensed consolidated financial statements for the three months ended March 31, 2016 includes FIN’s results for the period from the date of acquisition to March 31, 2016. FIN Holdings Revenue and net loss included in the consolidated results of operations for the three months ended March 31, 2016, was approximately $273,000 and $71,000, respectively.
The following unaudited pro forma financial information gives effect to the Company’s acquisition of FIN as if the acquisition had occurred on January 1, 2015 and had been included in the Company’s consolidated statement of operations for the quarters ended March 31, 2016 and March 31, 2015.
NOTE 3 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)
The Company’s intangible assets consist of intellectual property acquired from MultiPay 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 three months ended March 31, 2016:
The following is a summary of intangible assets as of March 31, 2016:
Future expected amortization of intangible assets is as follows:
NOTE 4 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following as of March 31, 2016 and December 31, 2015:
Depreciation expense totaled $9,013 and $3,016 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of March 31, 2016 and December 31, 2015:
NOTE 6 - NOTES PAYABLE, NET
The following is a summary of notes payable as of March 31, 2016 and December 31, 2015:
(Continued on next page)
The following is a roll-forward of the Company’s notes payable and related discounts for the three months ended March 31, 2016:
NOTE 7 - CONVERTIBLE NOTES PAYABLE, NET
Convertible notes consisted of the following as of March 31, 2016 and December 31, 2015:
In January 2017, the below convertible notes payable, which were being renegotiated, and related accrued interest were converted into Common stock of the Company (Note 12).
The following is a roll-forward of the Company’s convertible notes and related discounts for the three months ended March 31, 2016:
NOTE 8 –DERIVATIVE LIABLITY
Due to the potential adjustment in the conversion price associated with certain of the convertible debentures and the potential adjustment in the exercise price of certain of the warrants, the Company has determined that certain conversion features and warrants are derivative liabilities.
The fair values of the embedded conversion features and the warrants are estimated and recorded as derivative liabilities on the date of issuance, offset by a discount on the related convertible note payable up to the face amount of the note, with any excess fair value recorded as derivative expense on the date of issuance. The Company’s convertible debt is convertible into common stock at conversion rates that vary based on the trading prices of the Company’s common stock. Accordingly, the conversion feature is required to be presented at fair value on the dates of issuance, settlement, and at each reporting date. The Company also has warrants to purchase common stock outstanding that provide for adjustments to the exercise prices upon the future dilutive issuances. The Company utilizes Monte Carlo simulations and stochastic forecasting to estimate the fair value of the warrants and conversion options. The ranges of assumptions utilized in estimating the fair value of the warrants and conversion options during the three months ended March 31, 2016, are as follows:
A summary of derivative activity for the three months ended March 31, 2016 is as follows:
NOTE 9 – RELATED PARTY TRANSACTIONS
Convertible Notes Payable
As of March 31, 2016, the Company has outstanding convertible notes payable to a member of the Company’s Board of Directors. Total amounts due the Board Member included in convertible notes payable amounted to $150,000 at March 31, 2016. See Note 7.
Fin Holdings Acquisition
As discussed in Note 2, on February 8, 2016, the Company closed on the acquisition of FIN Holdings Inc. ("FIN"), a related party as a result of common management and partial common ownership, and its wholly owned subsidiaries, ID Solutions Inc. a Delaware Corporation specializing in field proven, cutting-edge biometric fingerprint software technology and algorithms, as well as Cards Plus Pty Ltd, a South African company which provides unique secure credential products and solutions to government customers in Africa.
Other
In connection with the Company’s ability to secure third-party financing, the Company issued Network 1 Financial Securities, Inc. (“Network 1”), a registered broker-dealer, 190,000 shares of common stock of the Company in accordance with its agreement in the first quarter of 2016. A member of the Company’s Board of Directors previously maintained a partnership with a key principal of Network 1. In addition to the fee paid, the agreement calls for Network 1 to receive an 8% commission of the total amount of proceeds from any financing it secures for the Company.
NOTE 10 – STOCKHOLDER’S DEFICIT
Common Stock
During the three months ended March 31, 2016, the Company issued 704,074 shares of common stock upon the conversion of principal and interest on convertible debt totaling $21,222.
During the three months ended March 31, 2016, the Company issued 675,000 shares of common stock as consideration for services related to its acquisition of FIN Holdings. The fair value of the shares, totaling $270,000, was estimated based on the publicly quoted trading price and recorded as an expense on the date of the acquisition.
During the three months ended March 31, 2016, the Company issued 190,000 shares of common stock as consideration for debt issuance costs. The fair value of the shares, totaling $76,000, was estimated based on publicly quoted trading prices and recorded as debt issuance costs to be amortized into interest expense over the terms of the respective debt agreements.
During the three months ended March 31, 2016, the Company issued 22,500,000 shares of common stock as consideration for the acquisition of FIN Holdings Inc. (See Note 2.)
Warrants
During the three months ended March 31, 2016, in connection with the issuance of convertible debt, the Company issued warrants to acquire 208,332 shares of common stock over five-year terms for an exercise price of $0.48 per share.
The following is a summary of the Company’s warrant activity for the three months ended March 31, 2016:
Stock Options
During the three months ended March 31, 2016, the Company granted to employees, options to acquire 2,500,000 shares of common stock, of which 1,000,000 are exercisable at an exercise price of $0.45 per share vesting over two years, 1,000,000 are exercisable at an exercise price of $0.40 per share vesting on the date of grant and 500,000 are exercisable at an exercise price of $0.10 per share vesting quarterly over two years. The options have a 5 year term. The Company determined the grant date fair value of the options granted during the three months ended March 31, 2016 using the Black Scholes Method and the following assumptions:
Expected Volatility – 82% to 93%
Expected Term – 2.5 to 4.2 Years
Risk Free Rate – 1.31% to 1.51%
Dividend Rate – 0.00%
Activity related to stock options for the three months ended March 31, 2016 is summarized as follows:
The following table summarizes stock option information as of March 31, 2016:
As discussed in note 12, the term of the options were extended to ten years in August 2016 from their original grant dates and therefore the remaining contractual term in the table above would be 9.5 years.
During the three months ended March 31, 2016, the Company recognized approximately $3,215,000 of stock-based compensation expense. As of March 31, 2016, there was approximately $5,222,000 of unrecognized compensation costs related to stock options outstanding, which is expected to be recognized through 2018.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Contingent Purchase Consideration
The Company has recorded a contingent liability of approximately $370,000 related to the acquisition of Multipay because of the contingency of the shares to be issued and debt to be released upon the payment of certain liabilities by the Multipay Shareholders.
Legal Matters
From time to time, claims are made against the Company in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting the Company from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on the Company’s results of operations for that period or future periods. The Company is not presently a party to any pending or threatened legal proceedings.
NOTE 12 – SUBSEQUENT EVENTS
On April 19, 2016, the Company entered into and closed on several Securities Purchase Agreements with accredited investors (the "April 2016 Accredited Investors") pursuant to which the Company borrowed an aggregate of $1,550,000 in consideration of Secured Convertible Debentures and common stock purchase warrants to acquire an aggregate of 6,200,000 shares of common stock exercisable for a period of five years at an exercise price of $0.25 subject to antidilution protection. However, the exercise price shall be adjusted to equal the conversion price or the per share purchase price of the Company's next offering in the minimum amount of $5,000,000 if such price is less than $0.25 (the "Adjustment Price") and the number of shares of common stock issuable upon exercise of the warrants shall be adjusted to equal the consideration paid by the April 2016 Accredited Investors by the Adjustment Price. The Company also issued 1,033,337 shares of common stock to the noteholders. The Secured Convertible Debentures bear interest of 12% and are payable on the six (6) month anniversary of the Secured Convertible Debentures (“October 2016”). The conversion price shall be adjusted to equal the Adjustment Price less a 20% discount if such Adjustment Price is less than $0.25 per share. The Secured Convertible Debentures are secured by 18,235,295 issued and outstanding shares of common stock of the Company held by certain shareholders of the Company (the "Pledgors") pursuant to stock pledge agreements entered into between the April 2016 Accredited Investors and the Pledgors. Each of the April 2016 Accredited Investors have individually agreed to restrict their ability to convert the Secured Convertible Debentures or exercise their Common Stock Purchase Warrants and receive shares of common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, a cash fee of $124,000 and issued 1,240,000 shares of common stock of the Company (See Note 9). On August 10, 2016, the Company and the April 2016 Accredited Investors entered into a Letter Agreement whereby the conversion price of the Secured Convertible Debentures was reduced to $0.10 in consideration of the removal of certain price protection features in such Secured Convertible Debentures. Further, the exercise price of such Common Stock Purchase Warrant was reduced to $0.10 per share and the number of shares upon exercise of the Common Stock Purchase Warrant was increased to 15,500,000. This note and accrued interest was converted into common stock of the Company on January 31, 2017 (see below).
From August 10, 2016 through August 26, 2016, the Company entered into and closed Subscription Agreements with several accredited investors (the "August 2016 Accredited Investors") pursuant to which the August 2016 Accredited Investors purchased an aggregate of 25,000,000 shares of the Company's common stock (the "2016 Subscription Shares") for an aggregate purchase price of $1,250,000. In order to reduce the dilution to the other shareholders as a result of this private offering, certain shareholders of the Company including the Chief Executive Officer, directors and others agreed to return to the Company 10,000,000 shares of common stock in the aggregate for cancellation. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, a cash fee of $100,000 and issued 2,000,000 shares of common stock of the Company (See Note 9).
On August 10, 2016, the Company issued to several of its employees and consultants stock options (the "Plan Options") under its Equity Compensation Plan to acquire an aggregate of 17,000,000 shares of common stock of the Company exercisable at $0.05 per share. The Plan Options contain vesting periods over 12 quarters commencing on October 1, 2016 as well as various vesting milestones. The Plan Options are exercisable for a period of ten years. Further, the Company amended existing stock options to acquire 50,800,000 shares of common stock under its Equity Compensation Plan to extend the term from five years to 10 years.
On August 10, 2016, the Company entered into an amended agreement (the "Amendment") with Parity Labs, LLC ("Parity") to amend the compensation section of an existing Advisory Agreement previously entered into between the Company and Parity on November 16, 2015 for the provision of strategic advisory services. Pursuant to an Amendment, the Company issued to Parity the option (the "Parity Option") to acquire 20,000,000 shares of common stock of the Company, exercisable at $0.05 per share for a period of ten years. The Parity Option vests as to 10,000,000 shares of common stock immediately and then in 12 equal tranches of 833,333 shares per month commencing on September 1, 2016. Parity’s option vested in full upon Mr. Beck becoming CEO of Ipsidy in January 2017. Mr. Beck is the manager of Parity Labs.
From December 1, 2016 through December 27, 2016, the Company entered into and closed Securities Purchase Agreements with several accredited investors (the "December 2016 Accredited Investors") pursuant to which the December 2016 Accredited Investors invested an aggregate of $1,275,000 (the "Offering") into the Company in consideration of Promissory Notes (the "Notes") and an aggregate of 1,912,500 shares of common stock. The Notes were payable one year from the date of issuance and bear interest of 10% per annum for the initial six months of the term of the Notes and 15% per annum for the remaining six months of the term of the Notes. The Notes could be prepaid in whole or in part by the Company at any time without penalty; provided, that any partial payment of principal was to be accompanied by payment of accrued interest to the date of prepayment. Any payment made to the December 2016 Accredited Investors which is not a full payment of all principal and interest on all of the Notes was to be made pro rata to the December 2016 Accredited Investors based on the respective principal amounts of the Notes. The Notes were converted into shares of common stock January 31, 2017 as more full described below.
On December 30, 2016, ID Global LATAM S.A.S. (“IDG LATAM”), a wholly owned subsidiary of the Company, entered into a Contract for the Provision of Cash Collection Services (the "Contract") with Recaudo Bogota S.A.S. ("RB"), a Colombian company, pursuant to which the Company agreed to supply, maintain and provide platform services for 740 unattended payment collection and fare ticketing kiosks, in consideration of approximately $30 million dollars (excluding VAT) payable over the ten year period of the Contract. Pursuant to the contract IDG LATAM is required to obtain a performance bond from a financial institution in the amount of $6 million dollars. In addition, IDG LATAM will need to obtain financing for the cost of the equipment to be supplied but has not as of the date hereof entered into a definitive agreement for such financing nor has the required performance bond been obtained.
On January 31, 2017, the Company converted then outstanding debt and accrued interest amount of approximately $6.3 million dollars into approximately 84.8 million shares of common stock, $.0001 par value per share (“Common Stock’), at a conversion price of $0.10 per share unless such conversion price was less than $0.10 per share. Additionally, the exercise price of approximately 11.7 million warrants to acquire shares of Common Stock were reduced to $0.10 per share and certain price protection and anti-dilution provisions were removed. See Notes 6 and 7 related to all of the Company’s convertible debt and outstanding warrants.
On January 31, 2017, the Company entered into and closed a Securities Purchase Agreement with an accredited investor pursuant to which the Company borrowed $3,000,000 in consideration of a Senior Unsecured Note and an aggregate of 4,500,000 shares of Common Stock. The Senior Unsecured Note matures in January 2019 and bears interest at a rate of 10%. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, a cash fee of $120,000 and issued 1,020,000 shares of common stock of the Company.
On January 31, 2017, the Company engaged Philip D. Beck as Chief Executive Officer, President and Chairman of the Board of Directors and Stuart P. Stoller as Chief Financial Officer. In addition, Andras Vago, David Jones and Charles Albanese resigned as directors of the Company and Mr. Albanese also resigned as Chief Financial Officer. Thomas Szoke resigned as Chief Executive Officer and was engaged as Chief Technology Officer. Douglas Solomon resigned as Chief Operating Officer and was engaged as Executive Director, Government Relations and Enterprise Security.
In connection with the engagement of Philip D. Beck and Stuart P. Stoller, the Company granted Mr. Beck and Mr. Stoller, stock options to acquire 15 million shares and 5 million shares of common stock of the Company, respectively, at an exercise price of $0.10 per share for a period of ten years. Further, upon the Company being legally entitled to do so, the Company has agreed to enter a Restricted Stock Purchase Agreements with Mr. Beck and Mr. Stoller to sell 15 million shares and 5 million shares of common stock, respectively, at a per share price of $0.0001, which shares of common stock vest upon achieving a performance threshold.
Effective February 1, 2017, the Company amended its certificate of incorporation to change its legal name to “Ipsidy Inc.” from ID Global Solutions Corporation. The name change was effected pursuant to Section 242 of the Delaware Corporation Law (the “DGCL”). Under the DGCL, the amendment to the Company’s certificate of incorporation to effect the name change did not require stockholder approval. The name change does not affect the rights of the Company’s security holders. There were no other changes to the Company’s incorporation in connection with the name change.
On March 22, 2017, Ipsidy Inc. (the “Company”) entered into Subscription Agreements with several accredited investors (the “March 2017 Accredited Investors”) pursuant to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4,000,000. The Company has received proceeds of $3,170,000 as of March 22, 2017. An individual March 2017 Accredited Investor has agreed to fund $830,000 by April 30, 2017. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc. (Network”), a registered broker-dealer, a cash fee of $240,000 and agreed to issue Network 1,000,000 shares of common stock of the Company upon increasing its authorized shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Ipsidy Inc., together with its subsidiaries (the “Company”, “we” or “our”), is a provider of secure, biometric identification, identity management and electronic transaction processing services. Founded to pioneer innovative digital identification solutions, the Company is focused on addressing the growing need for highly secure and convenient methods for identity management during a variety of electronic transactions. The Company provides its biometric identification services to government and public sector organizations, seeking to verify and manage identities for a variety of security purposes, including issuing identity cards and exercise of rights such as voting in elections. With the acquisition of MultiPay S.A., or MultiPay, the Company acquired a transaction processing platform that offers secure multifunctional payment gateway services to merchants and financial institutions. With the development of the OnePayTM electronic payment solution the Company believes it will be able to combine its core technologies and use its platform to power a solution that will provide cost effective and secure means of financial inclusion for the un-banked and under banked population around the globe.
With the acquisition of FIN, the Company acquired a proven cutting-edge biometric fingerprint software technology and algorithms, as well as Cards Plus Pty, a South African company which provides unique secure credit products and solutions to government customers in Africa. The acquisition enhances the Company’s Transaction Security and Financial Inclusion platforms with highly accurate, fully integrated biometric fingerprint verification and backend matching capabilities in addition to Cards Plus portfolio of physical card and card personalization solutions which allow for delivery to its customers a complete solution for identity programs and financial payment systems.
The Company is continuing to develop secure biometric identity management and electronic transaction solutions for international and domestic government, enterprise, and consumer markets. The Company’s products focus on two distinct yet complementary requirements, for which the Company believes there is significant market demand. One is the broad requirement for identity, access and transaction verification and associated identity management needs. The other is for providing cost effective and secure methods of conversion of cash and paper to electronic payments for the un-banked and under banked population, to enable them to participate in the digital economy there by facilitating financial inclusion. The Company has invested in developing, patenting and acquiring both hardware and software platforms, which are intended to address these specific market requirements.
Management believes that one of the advantages of the Company’s platform approach is the ability to leverage the platform to support a variety of vertical markets in both the identity management and payment processing sectors and could be easily adapted to new markets requiring low cost, secure, and configurable solutions. These vertical markets include but are not limited to border security, public safety, enterprise security, payment transactions and banking. The Company’s recent launch of unattended kiosks providing electronic ticketing for public transportation in Colombia, is a further example of the innovative solutions that the Company can offer. In addition, if the OnePay, closed loop, electronic payment service is successfully launched, the Company believes that it can be a cost effective solution for providing the un-banked access to secure electronic payment solutions. In this way the Company believes that the various technologies that the Company is developing and has acquired can be combined into a single offering, which at its core can facilitate the processing of electronic transactions, be they payments, votes, or identity verification.
The Company has solutions for fingerprint based identity management and electronic transaction processing in the market today. However, it is still in the process of integrating the technologies, which it has developed with those acquired via MultiPay and transactions completed in the last year and expanding these solutions to be able to better service our target markets. In order to achieve this integration and development, the Company needs to raise substantial additional capital.
The Company was incorporated in the State of Delaware on September 21, 2011, and our common stock is traded on the OTC Markets under the trading symbol “IDGS”. Our corporate headquarters is located at 780 Long Beach Boulevard, Long Beach, New York 11561 and our main phone number is (407) 951-8640.
For the quarter ended March 31, 2016 the Company has revenue of approximately $321,000 and accumulated losses of approximately $31.4 million.
The reports of our independent registered public accounting firms on our consolidated financial statements for the years ended December 31, 2015 and 2014 contained an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses.
These 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.
There is no assurance that the Company will ever be profitable. These 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.
Three Month Period Ended March 31, 2016 and 2015
Revenues, net
During the three months ended March 31, 2016, the Company had approximately $321,000 of revenue of which Cards Plus was $197,000, ID Solutions was $76,000, and the Colombian Operations was $48,000. The Company did not have revenue in the first quarter of 2015 as it had not yet acquired MultiPay and FIN.
Cost of sales
During the three months ended March 31, 2016, costs of sales amounted to $118,000 which is principally attributable to the Cards Plus business acquired in the FIN Acquisition. Cost of sales in the three month period March 31, 2015 was zero as the Company had no revenue.
Operating Expenses
During the three months ended March 31, 2016 compared to March 31, 2015, general and administrative expense increased approximately $.7 million dollars (excluding stock compensation expense of $3.2 million dollars) due in part to higher compensation expense as staff was added in the first quarter of 2016 to support the current and future operations and certain executives did not draw a salary in the first quarter of 2015.
During the quarter ended March 31, 2016, the Company recorded approximately $3.2 million for stock option compensation expense. There was no stock option compensation expense in the first quarter of 2015.
Depreciation and amortization expense increased approximately $92,000 in the quarter ended March 31, 2016 compared to March 31, 2015 as a result of the acquisitions of FIN and Multipay and their related assets acquired.
Other Income (Expense)
Derivative Liability
During 2015, the Company recorded an expense of $26.6 million for the derivative liability associated with potential adjustments in the conversion price associated with certain convertible debentures and warrants that were used to finance the business. As a result of the March 31, 2016 valuation of these derivatives, the Company reduced the value of the liability and recorded a benefit of $12.9 million. The decline in the derivative liability is associated with the decline in stock price.
Interest expense
Interest expense increased $0.9 million in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to higher levels of debt outstanding.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of March 31, 2016, the Company had approximately $1.3 million and $15.7 million of current assets and current liabilities respectively. Current liabilities include $12.3 million related to the derivative liability, $1.8 million of promissory and convertible notes payable, (see subsequent events in consolidated financial statements). The Company has an accumulated deficit of approximately $31.4 million.
Net cash used in operating activities was principally related to making investments in personnel and infrastructure as the Company is seeking to monetize the assets it owns.
The Company raised $100,000 of additional financing in the first three months of 2016 and conserved cash by issuing common stock to pay for certain services.
Additionally, in the acquisition of FIN Holdings by issuing common stock, cash of approximately $.4 million became available to the Company.
As of March 31, 2016, and the date of this report, we expect to incur ongoing expenditures related to developing the technology and services we will offer. Our current cash position will not be sufficient to support our development. The success of our business plan is contingent upon us obtaining additional financing. See subsequent events in consolidated financial statements.
We intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. Our current set of investors and interested parties have provided financing to support the business.
We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all. Our failure to obtain financing would have a material adverse effect on our business.
Subsequent Events
On January 31, 2017, the Company converted its outstanding debt and accrued interest of approximately $6.3 million dollars into approximately 84.8 million shares of common stock, $.0001 par value per share (“Common Stock”), at a conversion price of $0.10 per share unless such shares were priced at less than the $0.10 per share. Additionally, the exercise price of approximately 11.7 million warrants to acquire shares of common stock were reduced to $0.10 per share and certain price protection and antidilution provisions were removed.
Additionally on January 31, 2017, the Company entered into and closed a Securities Purchase Agreement with an Accredited Investors pursuant which the Company borrowed $3,000,000 in consideration of a Senior Unsecured Note an aggregate of 4,500,000 shares of Common Stock the Senior Unsecured Note matures in January 2019 and bears interest at a rate of 10%.
Furthermore, on March 22, 2017, Ipsidy Inc. (the “Company”) entered into Subscription Agreements with several accredited investors (the “March 2017 Accredited Investors”) pursuant to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4,000,000. The Company has received proceeds of $3,170,000 as of March 22, 2017. The combination of the above events effectively refinanced the Company’s financial position and provided new term financing requirements. The Company anticipates additional financing will be required beyond these current actions and the amount will be dependent on current operations and the investments the Company may pursue
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 2 of the December 31, 2015 Audited 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
Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s former Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon the evaluation of the disclosure controls and procedures at the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effectiveas a result of continuing weaknesses in its internal control over financial reporting initially identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 which are as follows:
In order to address the above material weaknesses, Philip D. Beck, the Chief Executive Officer and President of the Company, and Stuart P. Stoller, the Chief Financial Officer of the Company, which were appointed to such offices on January 31, 2017, a date subsequent to the relevant filing period disclosed herein, have initiated the following actions to remediate the material weaknesses:
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended March 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
We are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material legal or administrative proceedings arising in the ordinary course of business. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
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, 2015. 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
On February 8, 2016, the Company closed on the acquisition of FIN Holdings Inc. ("FIN"), a related party as a result of common management and partial common ownership, and its wholly owned subsidiaries, ID Solutions Inc. a Delaware Corporation specializing in field proven, cutting-edge biometric fingerprint software technology and algorithms, as well as Cards Plus Pty Ltd, a South African company which provides unique secure credential products and solutions to government customers in Africa. The purchase price of $9,000,000 was paid in the form of common stock of the Company, resulting in the issuance of 22,500,000 shares of the Company’s common stock to the FIN shareholders.
The above offers and sales of the securities were made to accredited investors and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regards to the sales. No advertising or general solicitation was employed in offerings the securities. The offers and sales were made to accredited investors and transfer of the securities was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to our operations.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Amendment No. 1 to the Share Purchase Agreement by and between ID Global Solutions Corporation and the Multipay S.A. Shareholders dated May 7, 2015 to the March 31, 2016 10Q.
* Filed herein
(1) Previously filed on Form 10-12G on November 9, 2011 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(2) Previously filed on Form 8-K on August 13, 2013 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(3) Previously filed on Form S-1 on February 13, 2014 (File No.: 333-193924), as amended, as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(4) Previously filed on Form S-1 on June 26, 2014 (File No.: 333-193924), as amended, as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference
(5) Previously filed on Form S-1 on August 12, 2014 (File No.: 333-193924), as amended, as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference
(6) Previously filed on Form 8-K on September 25, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(7) Previously filed on Form 8-K on October 9, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(8) Previously filed on Form 10-Q on November 14, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(9) Previously filed on Form 8-K on November 28, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(10) Previously filed on Form 8-K on December 22, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
(11) Previously filed on Form 8-K on March 12, 2015 (File No.: 000-54545) and incorporated herein by this reference.
(12) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 12, 2015.
(13) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.
(14) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.
(15) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.
(16) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.
(17) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.
(18) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.
(19) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.
(20) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.
(21) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015.
(22) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015.
(23) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015.
(24) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015
(25) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 22, 2015.
(26) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(27) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(28) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(29) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(30) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(31) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(32) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(33) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(34) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(35) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(36) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(37) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(38) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(39) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(40) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(41) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(42) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.
(43) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.
(44) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.
(45) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.
(46) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.
(47) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on January 8, 2016.
(48) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 12, 2016.
(49) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.
(50) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.
(51) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.
(52) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.
(53) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 28, 2016.
(54) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 28, 2016.
(55) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on January 6, 2017.
(56) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on August 16, 2016.
(57) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 1, 2017.
(58) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 6, 2017.
(59) Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 23,
2017
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.