10-K
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f10k2020_ipsidyinc.htm
ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
☐ 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
Ipsidy Inc.
(Exact name of registrant as specified in
its charter)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
670 Long Beach Boulevard
Long Beach, New York 11561
(Address of principal executive offices)
Registrant’s telephone number, including
area code: 516-274-8700
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Not applicable.
Securities registered pursuant to Section
12(g) of the Exchange Act:
Common Stock,
$.0001 par value per share
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act ☐ Yes ☒ No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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). ☐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”, “smaller reporting company” and “emerging growth” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s Knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Yes ☐ No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of June 30, 2020, the last business
day of the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates
was $43,473,109 which is based on the average bid and ask price of such common equity, as of the last practical business day of
the registrant’s most recently completed second fiscal quarter of $0.094.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock as of the latest practicable date.
Class Outstanding at February 28, 2021
Documents incorporated by reference: None
TABLE OF CONTENTS
GENERAL INFORMATION
PART I
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 24
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24
PART II
Item 6. Selected Financial Data 28
Item 8. Financial Statements and Supplementary Data 40
Item 9A. Controls and Procedures 40
Item 9B. Other Information 40
PART III
Item 10. Directors, Executive Officers and Corporate Governance 41
Item 11. Executive Compensation 46
Item 14. Principal Accounting Fees and Services 54
PART IV
Item 15. Exhibits and Financial Statement Schedules F-1
SIGNATURES 59
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FORWARD-LOOKING
STATEMENTS
Certain statements discussed in Item
1 (Business), Item 1A (Risk Factors), Item 3 (Legal Proceedings), Item 7 (Management’s Discussion and Analysis of Financial
Condition and Results of Operations), Item 7A (Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in this
Annual Report on Form 10-K as well as in other materials and oral statements that the Company releases from time to time to the
public constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements concerning management’s expectations, strategic objectives, business prospects, anticipated
economic performance and financial condition and other similar matters involve significant known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or achievements of results to differ materially from
any future results, performance or achievements discussed or implied by such forward-looking statements. Such risks, uncertainties
and other important factors are discussed in Item 1A (Risk Factors) and Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations. In addition, these statements constitute the Company’s cautionary statements under the
Private Securities Litigation Reform Act of 1995. It should be understood that it is not possible to predict or identify all such
factors. Consequently, the following should not be considered to be a complete discussion of all potential risks or uncertainties.
The words “anticipate,” “estimate,” “expect,” “project,” “intend,”
“believe,” “plan,” “target,” “forecast” and similar expressions are intended to
identify forward-looking statements. Forward-looking statements speak only as of the date of the document in which they are made.
The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect
any change in the Company’s expectations or any change in events, conditions or circumstances on which the forward-looking
statement is based. It is advisable, however, to consult any further disclosures the Company makes on related subjects in its Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission.
Emerging Growth Company Status
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an “emerging
growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public
companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404
of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and
proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. We will remain an “emerging growth company” until
the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the
last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant
to an effective registration statement; (iii) the date on which we have issued more than $1 billion in non-convertible debt during
the prior three year period; and (iv) the date on which we are deemed to be a “large accelerated filer.” We may take
advantage of the extended transition period until the first to occur of the date we (i) are no longer an “emerging growth
company” or (ii) affirmatively and irrevocably opt out of the extended transition period. Consequently, our financial statements
may not be comparable to companies that comply with public company effective dates
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PART I
Item 1. Business Overview
Ipsidy Inc. (together
with its subsidiaries, the “Company”, “we” or “our”) is a provider of an Identity as a
Service (IDaaS) platform that delivers a suite of secure, mobile, biometric identity solutions, available to any vertical, anywhere.
In a world that is increasingly digital and mobile, our mission is to help our customers know with biometric certainty the identity
of the people with whom they are engaging. We provide solutions to everyday problems: Who is applying for a loan? Who is accessing
the computer system? Who is chatting with my customer service? Who is transferring funds?
Ipsidy provides secure,
biometric, identity verification and electronic transaction authentication services. We have developed an IDaaS platform for our
customers, be they businesses, residences, governments, or other organizations, to enable their users to more easily verify and
authenticate their identity through a mobile phone or portable device of their choosing (as opposed to dedicated hardware). Our
system enables participants to consent to transactions using their biometric information with a digitally signed authentication
response, including the underlying transaction data. In this way our systems can provide pre-transaction authentication of identity
as well as embed each user’s identity attributes, within every electronic transaction message processed through our platform,
or other electronic systems.
We believe that it
is essential that businesses and consumers know who is on the other side of an electronic transaction and have an audit trail,
proving that the identity of the other party was duly authenticated. Our solutions are intended to provide our customers with the
next level of transaction security, control and certainty. Our platform uses biometric and multi-factor identity solutions, which
are intended to verify and authenticate identity during a wide variety of electronic transactions. We define “electronic
transactions” in the broadest sense to include not only financial transactions (i.e. exchanges of value in all of their forms),
and legal transactions (e.g. approving the release of personal or other confidential data), but also access control to both digital
environments (e.g. accessing financial accounts, voting systems, email systems, healthcare records, and controlling data network
log-ins) and physical environments (e.g. entrances to offices, public buildings, data centers and other sensitive locations).
The Company’s
products focus on the broad requirement for identity verification and multi-factor authentication,. Organizations of all descriptions
require cost-effective and secure means of mitigating identity fraud-whether that fraud takes place during a new account onboarding
or an attempt to takeover an existing account by the misuse of the account holder’s personal information or access credentials.
We aim to offer our customers solutions that can be integrated easily into each customer’s business and organizational operations
in order to facilitate their use and enhance the end user customer experience.
ProofTM
our mobile identity onboarding and verification application, establishes the trusted identity of users based on a variety of ground
truth sources, such as chip-based electronic machine readable travel documents, or eMRTDs, national IDs, drivers licenses, as well
as by means of direct verification by national ID databases in Peru and South Africa. The application uses these sources to obtain
trusted demographic information and the reference facial biometric images that are matched against the user’s captured live
selfie. Proof enables the remote onboarding of people in services associated with fintech, telecom, healthcare, government services
and other online services-based industries.
Our identity authentication
solution, VerifiedTM by Ipsidy, can be delivered seamlessly via mobile web browser, by Ipsidy’s mobile application or
into a customer’s mobile app, using our SDK’s. Verified helps our customers gain identity certainty of their users
(customers and employees) who can conveniently and securely consent to a variety of electronic transactions, using their biometrics.
For example, we signed an agreement with a global financial services banking platform provider, which has integrated Verified to
secure access to their online banking software. Ipsidy has also integrated its authentication services to allow trucking fleets
and drivers to use their biometrics to securely open locks that safeguard valuable assets and physical environments.
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In 2020 we added a
FIDO2 strong authentication solution, AuthentifIDTM, developed under our strategic partnership with LoginID. AuthentifID
by Ipsidy delivers trusted FIDO2 strong authentication for passwordless login and transaction authentication tied to a trusted
identity. During user registration, AuthentifID leverages Ipsidy’s seamless biometric identity verification service to scan
an identity document and take a selfie, to establish a digital chain of trust between biometrically verified individuals, their
accounts, and their devices. An international bank entered into an agreement with us to use AuthentifID in order to provide added
security to users of its banking systems.
The Company’s
solutions for fingerprint-based identity management and electronic payment transaction processing have been in the market for several
years. For example, in December 2017, we won an international competitive tender to provide our SearchTM Automated Fingerprint
Identification de-duplication system (AFIS) to the Zimbabwe Electoral Commission, for them to ensure that no duplicate entries
existed in the voter roll for the 2018 election. The AFIS system was delivered under tight deadlines and within budget, in order
to enable the voter roll to be published and the election to occur as planned.
Management believes
that some of the advantages of the Company’s IDaaS Platform approach are the ability to leverage the platform to support
a variety of vertical markets including the identity solutions and transaction processing sectors and the adaptability of the platform
to the requirements of new markets and new products requiring low cost, secure, and configurable mobile solutions. These vertical
markets include but are not limited to banking and payment transactions, elections, schools, public transportation, government
and enterprise security. At its core, the Company’s offering, combining its proprietary and acquired biometric technologies
is intended to facilitate the processing of diverse electronic transactions, be they payments, votes, or physical or digital access,
all of which can include identity verification, authentication and identity transaction recording. The Company continues to invest
in developing, patenting and acquiring the various elements necessary to enhance the platform, which is intended to allow us to
achieve our goals.
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
traded on the OTCQB U.S. Market under the trading symbol “IDTY”. 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.ipsidy.com.
The contents of our website are not incorporated into, or otherwise to be regarded as part of, this Annual Report on Form 10-K
Global Market Opportunity
We believe that there are several market
trends that drive growth in the identity verification and authentication marketplace. These trends include digital transformation
and the impact of the widespread adoption of mobile technology, increased fraud as a result of that adoption and increased regulation
by governments around the world to protect consumers personally identifiable information, or PII. The events of 2020 and the reaction
to the global COVID-19 pandemic.
Digital Transformation
Digital and mobile technologies have significantly
changed people’s lives in a remarkably short time, including how we shop, socialize and bank. In 2020, the response to the
COVID-19 pandemic with its stay-at-home mandates accelerated digital adoption by even the most reluctant consumers. The global
health crisis dramatically altered service delivery across broad market segments, creating lasting effects that we believe are
likely to stay, even after the pandemic ends.
Enterprises that were able to, scrambled
to reduce reliance on physical outlets and to drive customers to remote digital channels offering seamless and secure user experiences.
Electronic services—from mobile banking to online grocery shopping to tele-medicine—have increased multifold within
the past year. According to a study conducted by Enterprise Technology Research of 1,200 chief information officers from across
the world, the number of permanent remote workers is expected to double to 34.4% of their companies’ workforces in 2021,
compared with 16.4% before the coronavirus outbreak (Reuters, “Permanently remote workers seen doubling in 2021 due to
pandemic productivity: survey” 2020).
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Accordingly, digital transformation efforts
that pre-dated the 2020 crisis are likely to have been prioritized and accelerated. Statista estimates that between 2020 and 2023
digital transformation investments are projected to total US$6.8 trillion. The company also forecasts that as much as 65% of the
world’s gross domestic product will be digitalized by 2022. (Statista “Spending
on digital transformation technologies and services worldwide from 2017 to 2023” 2020).
Key to successful transformation efforts
is the ability to onboard new users with speed and accuracy as well as to stop identity fraud at the entrance. MarketsandMarkets,
the B2B research firm, projects that the global digital identity solutions market will grow from US$13.7 billion in 2019 to US$30.5
billion by 2024, at a CAGR of 17.3%. The firm further predicts that the market for digital identity and document verification services,
a subset of the digital identity market, offers significant potential for growth opportunities, with revenues to rise to US$15.8
billion by 2025. (MarketsandMarkets “Digital Identity Market” 2020 and “Identity Verification Market”
2020).
The Increase in Identity Fraud
Unfortunately,
with this increased demand for online services and digital convenience, organizations also face another proliferating challenge
– the need to improve cybersecurity measures. Never before have criminals been able to access such vast quantities of personal
information.
According
to Statista, over 11,000 data breaches have occurred in the United States since 2005 with more than 1.7 billion individual records
breached (Statista “Annual number of data breaches and exposed records in the United
States from 2005 to 1st half 2020” 2021). And in the age of COVID-19, scams grew by 400% in the first quarter
of 2020, making the pandemic not only a health threat but also a significant security risk. (Panda Security “43 Covid-19
Cybersecurity Statistics” 2020). Digital transformation efforts must address these
risks.
Identity Verification Impact Across Sectors
Financial services,
healthcare and government organizations are confronted by the challenges of identifying their customers, patients and benefits
recipients with ease and certainty in the digital world. Governments around the world are imposing new data privacy and authentication
regulations, which also impose a “call to action” for many of these businesses and organizations.
Financial Services
Financial services institutions are facing
a range of digital transformation challenges and a growth in the millennial embrace of non-traditional fin-tech providers, such
as peer-to-peer mobile payment apps. Key to this effort is the ability to accelerate the digital onboarding of customers—offering
a convenient digital onboarding experience with real-time account opening decisions—at lower costs.
Convenience, however, traditionally opposes
stronger identity assurance – the easier it is to open or access an account the less safeguards there may be to prevent fraud. Javelin
Strategy & Research found that in 2019 fraud losses in the financial services industry grew 15% to $16.9 billion, as fraudsters
moved from card payments to financial accounts (Javelin Strategy & Research “2020 Identity Fraud Report”
2020). The study reported that account takeovers—identity theft where a criminal uses stolen credentials or data to take
control of a consumer’s online account—increased a staggering 72% over 2018. And with 40% of all fraudulent activity
related to account takeover reported to occur within a day, the need for strong customer authentication is critical.
Experts
recommend that efforts to combat this fraud must focus on moving consumers from static passwords to safer authentication methods.
According to Gartner, their clients are increasingly seeking “passwordless” authentication methods such as FIDO2 Strong
Authentication to improve user experience (UX) and enhance security by eliminating centrally stored passwords—a key target
for cyber criminals (Gartner Research Ibid). Goode Intelligence believes that mobile biometrics are key to securely effecting
this transformation and forecasts that over $1.67 trillion of mobile biometric payments will be made annually by 2023, with over
$8.7 billion in annual revenue generated for suppliers of mobile biometric technology by 2023 (Goode Intelligence “Mobile
Biometrics for Financial Services; Market and Technology Analysis, Adoption Strategies and Forecasts 2018-2023” 2019).
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Healthcare
During 2020, remote healthcare services
have expanded exponentially - virtual urgent-care visits spiked by 683% between March and April 2020, while virtual, nonurgent
care visits grew by an unprecedented 4,345%. (Journal of the American Medical Informatics Association “COVID-19 transforms
health care through telemedicine: Evidence from the field” 2020). ResearchAndMarkets predicts that the global telemedicine
market will increase to a value of $144.2 billion by 2030, from $27.8 billion in 2019. (ResearchAndMarkets “Telemedicine
Market Research Report to 2030”. 2020).
Unfortunately, with this shift to remote
care, a record of weak authentication practices such as shared passwords, and a trove of rich personal data, the healthcare market
is believed to be even more susceptible to identity fraud. Further, IBM reported that data breaches in the healthcare sector had
the highest average cost amounting to $7.13 million per breach amid the COVID-19 pandemic (IBM Security “Cost of Data
Breach Report 2020” 2020).
Government Benefits
Many government agencies continue to utilize
inadequate identity verification and identity authentication methods. Following the passage of the March 2020 Coronavirus Aid,
Relief, and Economic Security Act (CARES Act), an unprecedented volume of criminal attacks surrounding pandemic relief efforts
exposed vulnerabilities in government fraud prevention efforts.
According
to USA Today, in 2020, states lost over $36 billion to criminals filing fraudulent unemployment claims under the names of other
people (USA Today “How scammers siphoned $36B in fraudulent unemployment payments from US” December 30,
2020). According to State investigators, California paid out over $400 million on 21,000 unemployment claims improperly filed using
the names of California prison inmates (LA Times “California’s prisoner unemployment fraud now estimated at $400
million, officials say” December 1, 2020). Much of the data used to identify claimants such as Social Security numbers
has long been compromised and is available for criminal exploitation. The Federal Trade Commission (FTC), reported that in 2020
they received more than 1.4 million reports of identity theft, almost double the number received in 2019. Furthermore, the FTC
reported more than 30% of those reports were attributed to misuse of personal identity in applying for a government benefit, a
significant increase from 2019 when only 3% of fraud was attributed to this reason. (FTC Press Release “New Data Shows
FTC Received 2.2 Million Fraud Reports from Consumers in 2020” February 4, 2021)
With these statistics in mind, Congress
included new provisions to combat grifters when they rolled out a second COVID-19 stimulus package under the Consolidated Appropriations
Act of 2021. Section 242 of the new Act mandates that State agencies verify the identity of eligible applicants for pandemic unemployment
assistance. The Act also provides federal funding to state agencies to implement new identity proofing measures.
The FIDO Alliance – The Mission To Eliminate Passwords
The reliance on passwords has long been
acknowledged as highly frustrating for users, costly for organizations to maintain and reset quickly, as well as one of the weakest
security practices for user authentication. The reuse of the same passwords by individuals across multiple sites, the massive data
breaches targeting user credentials, and widespread phishing efforts by hackers to entice users to ‘reveal’ passwords
creates security risks for every organization.
The FIDO (Fast Identity Online) Alliance
was formed in 2012 to address the security risks to enterprises and the problems individual users face in creating and remembering
multiple usernames and passwords. FIDO compliant solutions eliminate passwords by using the combination of biometric verification
and device authentication via cryptographic security, thereby speeding up and securing user login. FIDO Alliance members include
global leaders and household names in technology and across enterprise software, payments, banking, telecom, ecommerce, identity,
government, and healthcare (https://fidoalliance.org/members/). This cross-industry coalition works jointly to develop interoperable
authentication standards that reduce reliance on passwords with authentication that is more secure, private, and easier to use.
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The Global Unbanked Population
The
World Bank estimates that approximately 1.7 billion adults, representing 31% of the global adult population, are “unbanked”
as of 2017, meaning they have no record of credit, or have no account with a financial institution or a mobile money service. (The
World Bank “Global Findex Database 2017” 2017). The World Bank’s Identification for Development (ID4D)
initiative also estimates that more than 1 billion people worldwide do not have basic ID credentials, with many more people who
have poor quality IDs that cannot be trusted or reliably verified. The ID4D initiative aims to provide everyone on the planet with
a legal identity by 2030. The majority of the population sets reside in Sub-Saharan Africa and Asia.(The
World Bank “Inclusive and Trusted Digital ID Can Unlock Opportunities for the World’s Most Vulnerable”
2019)
The widespread adoption of mobile phones
and access to the internet, estimated at over 79% of adults in developing economies, continue to increase opportunities for leveraging
digital identity services and online financial services to these populations (The World Bank Ibid).
Privacy Regulations
All business, governmental and other sectors
of society are impacted by the need for organizations to comply with increasing data privacy and authentication regulations. The
European Union has lead the way with its General Data Protection Regulation, or GDPR, widely considered the gold standard of data
privacy regulation, and other jurisdictions around the world are scrambling to catch up. The United States has been slow and has
only limited regulation at the Federal Level, which applies only to specific industries such as the Health Insurance Portability
and Accountability Act, or HIPAA. It is therefore falling to the States and local authorities to adopt data privacy requirements
such as the California Consumer Privacy Act or CCP and Illinois’ Biometric Information Privacy Act or BIPA, which are being
cloned by other jurisdictions. We believe that this growing trend will impose an urgency on organizations of all descriptions to
improve their data security and privacy processes, and we believe that biometric identity verification will be a key part of the
solution.
Our Solutions and Products
The Company has established
its Identity as a Service Platform with internally developed software as well as acquired and licensed technology, which provide
solutions for the following services: (1) biometric capture and matching (e.g. for finger prints, or facial recognition); (2) remote
document collection and authentication; (3) multi-factor authentication; (4) access control comprising out of band identity and
transaction authentication for virtual as well as physical environments; and (5) electronic transactions (e.g. payment transactions).
Identity as a Service (IDaaS) Platform Solutions
Ipsidy’s customers
can leverage our IDaaS Platform by using an Ipsidy out-of-the-box identity solution or by a custom integration. The solutions
suite includes a full-range of developer integration tools and documentation that help our customers create their own identity
and transaction authentication solutions via integration to our RestFul API’s. Our platform is designed to support a wide
variety of identity and electronic transactions across a broad range of verticals. Our technical implementation team can assist
our customers to configure our platform, mobile biometric identity authentication services and our AFIS to meet a specific commercial,
geographic or market need and to provide the next level of transaction security, control and certainty for everyday transactions.
We also make certain services available without integration. The Company has the following product lines that are part of our IDaaS
platform capabilities:
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Other Identity Products
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Payment Processing
Payment Gateway and Kiosks
Modular Mobile Authentication and Authorization
Platform
Growth Strategy
We seek to extend our
position and execute our business plan by continuing to penetrate our existing markets and expand into new geographies and market
segments. Our goal is to continue to deliver innovative security and payment services to our customers that help them achieve their
operational or business goals. The execution of our strategy is subject to our obtaining sufficient additional working capital
to finance the various initiatives discussed, whether through investment or otherwise. The key components of our strategy are discussed
below.
Add new customers
The Company plans to
grow its core business through focused sales and marketing of its products and solutions. Our sales, marketing and product professionals
are developing additional distribution channels and seeking out new customers. We are leveraging our internal personnel with resellers,
agents and distribution partners, who generally are focused on a particular industry vertical and have an existing customer base
to which they can offer our products, in addition to their existing lines. Some of the industry sectors covered by our resellers
include financial institutions, e-commerce merchants, and logistics. These resellers enable us to target a significantly larger
customer base, while maintaining a lower overhead of our own FTE’s sales personnel. We are also dealing directly with potential
customers in response to our digital marketing efforts.
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Channel Strategy
The Company believes
that its channel strategy will be an effective way to bring its products and solutions to a broad market in an efficient and cost-effective
way. We have signed and are pursuing channel partners, that play a key role in their respective verticals, such as Temenos, a technology
provider for banks, Atos, a global leader in digital transformation and Inetum (formerly IECISA gfi) which has a focus on the telecom
and financial services industries globally (among others) . These channel partners provide access to their customers, who in turn
work with many thousands of individual consumers and businesses all of whom could benefit from the use of our solutions. By entering
into agreements with such channel partners and leveraging their relationships, we believe we can expand our footprint much more
rapidly and cost effectively, as compared to pursuing separate agreements with each customer.
Enter new markets
The Company has already
entered new markets by virtue of our subsidiaries in Colombia, Peru and South Africa. The Company believes that the solutions that
are currently being offered and developed in those countries will be suitable to be similarly offered in other emerging markets
in the Latin American and African regions. The Company also recently signed an agreement with a leading IT consulting and business
process services company in India. Furthermore, the improvements to the Company’s platforms and the expansion of the sales
teams are being undertaken with a view to being able to support transaction processing and customers across borders without the
need to establish and build new facilities in each new country, thereby reducing the costs of entry into each new market.
Innovation
As the electronic and
cybersecurity industry continues to evolve, we aim to be at the forefront by developing new services and solutions that leverage
our platform and core competencies and thereby enable us to enter new markets, attract new customers and retain existing ones.
We also believe it will be critical to our growth for us to continue to enhance our platform capabilities. For example in 202 we
signed an agreement with LoginID, under which we have jointly developed a FIDO2 compliant strong authentication solution, which
we offer as AuthentifID. We also became a member of the FIDO Alliance, the leading international organization comprising global
leaders in technology that help establish best practices for FIDO authentication deployment. We believe the development
of new services and solutions will be an important revenue source in the future and enable us to continue to differentiate our
platform and capabilities. The Company believes that by using our core technologies we will be able to create solutions that address
some of today’s major global market challenges and opportunities arising in identity solutions and access control, coupled
with the ubiquitous use of mobile devices. By combining our core technologies, we have built an IDaaS platform using biometric
and multi-factor identity solutions, which are intended to support a wide variety of electronic transactions.
Select Acquisitions
As we have done in
the past, we intend to selectively pursue acquisitions that will help us achieve our strategic goals, enhance our technology capabilities
and accelerate growth. We believe pursuing these types of acquisitions will increase our ability to work with existing customers,
add new customers, enter new markets, develop new services and enhance our processing platform capabilities. However, we have no
commitments with respect to any such acquisitions at this time.
Marketing and Sales
The Company is focusing
its sales activities in the Fintech, Telcom, and Logistics verticals due to their increased demand for remote online transactions.
The sales teams are concentrated in the Latam, MEA, and US regions representing what we believe to be the markets with the greatest
growth potential for identity transaction services. The marketing team is tasked with the continued sharpening of our external
brand messaging to help focus the mission, sales strategy and product development as the Company strives to reach target markets
and customers. The objective is to produce industry-specific marketing assets that highlight our platform, solutions, and their
role in digital transformation.
The Marketing, Sales,
and Product Development and Customer Success teams are collaborating closely to develop products that our target customers need
and want and to convert prospects into new customers with simplified on-boarding and strong authentication experiences. The
Sales and Marketing Teams are also focusing on driving sales and new revenue by developing, attracting, and supporting a partner
network of resellers and technology integrators.
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Revenue Model
Identity Management Solutions and Products
The biometric software
products are priced based on a multi-year licensing model which is driven by the number of enrollees in the system. The Company
provides its new IDaaS platform services based on a subscription model, with tiered fees per enrolled user, or device, comprising
an initial enrollment fee, a periodic subscription and where applicable a per transaction fee. The Company’s CardPlus plastic
and credentials card products are sold at a per unit price which will vary based on the configuration of the features and functionality
of the product, as well as the services provided.
Payment Processing Solutions and Products
The electronic payment
gateway services are volume priced on a per transaction basis. The pricing for the Company’s new closed loop financial payment
platform is expected to be based on a combination of transaction fee and a subscription model based on numbers of cardholders and
merchants enrolled. The Company also earns leasing income from the rental of unattended kiosks.
Competition
The Company has created
an IDaaS platform allowing it to on-board customers who wish to deploy Ipsidy’s services and solutions in order to know with
biometric certainty who is engaging with them. Ipsidy’s solutions include the ability to verify the identity of a user, via
remote identity proofing, then enable digital access, as well as transaction and device authentication, all digitally signed by
the user’s identity. The Company’s platform utilizes commodity, consumer grade mobile devices for customer deployment
with users engaging the platform via a web-browser or corresponding Android or iOS smartphone app.
The Company also offers
certain payment processing solutions and smart card products manufacturing and printing. The industry sectors in which these products
compete are characterized by rapid change and new entrants. The Company will need to consistently develop and improve its products
in order to remain competitive.
In reviewing the competitors
that exist for the Company’s current and planned products and platform services relating to biometric identity solutions,
the Company considers a number of factors. Ipsidy’s platform approach offers an Identity as a Service (IDaaS) approach which
seeks to combine a number of different elements into a single platform. Ipsidy believes that its full stack platform is exceptional
in that it provides a combination of SaaS based documentary identity verification, FIDO device authentication, and identification
services which cover digital account access and transaction confirmation use cases. The competitive landscape includes several
companies that mainly address only one or other area, with some addressing multiple areas independently. However, it is believed
that some companies are attempting to create combined identity offerings, similar to Ipsidy’s.
In looking at our competition,
the Company does not consider providers who do not offer a consumer application solution for smartphones, such as the Ipsidy App.
Neither do we consider competitors, which are major conglomerates with vertically integrated cybersecurity companies, due to the
vast array of services which they offer. Furthermore, some of the competitors which do offer solutions for digital use cases, are
major legacy providers offering hardware heavy solutions principally for governmental users. These include IDEMIA, Thales, and
Supercom. This is in contrast to Ipsidy’s IDaaS approach which is based on offering app and browser-based solutions which
are usable on mobile devices with minimal hardware requirements. Furthermore, our identity solutions are designed to address the
requirements of private, commercial and governmental uses for enrolled users.
To further analyze
the competitive landscape, the market must be segmented into authentication solution vendors and biometric identification &
verification solution vendors. Major competitors offering solutions in both areas include IDEMIA, Thales, HID Global, and Aware.
Major competitors offering only authentication, include Twillio/Authy, HYPR, Datacard, Duo, Daon, Ping Identity, Callsign, and
Trusona. Companies offering only biometric identification & verification include NEC, Imageware, Element, and Aware.
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The Ipsidy IDaaS platform
is based on a patent-pending methodology, which combines digital signature authentication and biometric identity verification into
a single out-of-band transaction. This provides functionality for our users to have real-time control over their electronic transactions
and every-day events through a mobile application, with a detailed audit trail created for each event, containing the digitally
signed transaction details and biometric identity of the user. This patent-pending approach of combining transaction details and
identity into a single, digitally signed message could allow the Ipsidy platform to be a complimentary solution to many of its
competitors and hence differentiate itself in the market.
Companies that focused
on offerings for ID proofing, include Jumio, InCode, Au10Tix, OnFido, Clear, Mitek and Acuant. Companies that provide a single
solution may be seeking to combine with authentication and biometric verification technology providers to expand their ID proofing
solutions’ capabilities. The Ipsidy platform offers its own document based identity verification service for use in digital
onboarding solutions, in conjunction with our device authentication and biometric verification solutions.
Another aspect of the
competitive landscape for platform service arises from market demand for SaaS based identity services that are both high assurance
and low friction. This combination is the ideal balance that Ipsidy and its competitors are trying to achieve. Companies that are
believed to be competing with Ipsidy with their offerings today are Thales, Jumio, OnFido, Acuant, Incode, Au10Tix, and IDEMIA
(Formerly Morpho and Obertur). In addition, Ipsidy offers its customers the flexibility to adapt its solutions to their specific
use cases for either high assurance or to decrease friction.
There are new entrants
into each of these markets continually. Each competitor may have a different offering or approach to solve similar problems, which
overlap with those of the Company. Some competitors also include manufacturers who provide systems, or platform solutions to third
party operators and, therefore, do not directly compete with the Company, which operates its own systems.
The Cards Plus business
faces competition both locally in South Africa and internationally. China has become a source of imports of card products at highly
competitive pricing and some local suppliers are reliant on Chinese card manufacturers. Local competitors include Card Technology
Services, Easy Card and Open Gate, Cardz Group and XH Smart Technology (Africa). That said, we believe that we are the only significant
manufacturer in South Africa using digital print technology.
The payment processing
industry has many competitors who provide gateway services, closed loop end-to-end solutions, payment processing, peer-to-peer
payments and bill payments. As these types of services are usually supplied by regional or country specific companies, the following
summary of this competitive landscape, is focused on those countries or regions the Company is actively pursuing business in today.
In Colombia and elsewhere in Latin America where the Company is focused, major competitors include PayU, Credibanco, Redeban, Mercado
Pago, Nequi, and QPagos. Some of these companies may on the other hand be potential customers for our identify transaction platform
and biometric authentication services. Companies in this region that also compete in those sectors include Veritran, Certicamaras,
Olimpia IT, Evertec-Processa and Indra.
Governmental Regulations
The Company does not
need or require any approval from government authorities or agencies in order to operate its regular business and operations. However,
it is possible that any proposed expansion to the Company’s business and operations in the future would require government
approvals.
Due to the security
applications and biometric technology associated with the Company’s products and platforms, the activities and operations
of the Company are subject to license restrictions and other regulations, such as (without limitation) export controls and other
security regulation by government agencies. Expansion of the Company’s activities in payment processing may in due course
require government licensing in different jurisdictions and may subject it to additional regulation and oversight.
Data protection legislation
in various countries in which the Company does business (including Colombia and the United Kingdom) may require it to register
its databases with governmental authorities in those countries and to comply with additional disclosure and consent requirements
with regard to the collection, storage and use of personal information of individuals resident in those countries. In addition,
a new privacy law took effect in California at the beginning of 2020, and in Maine in July 2020, and other states are considering
additional regulations. Specifically, several states are considering adopting a Biometric Information Privacy Act, or BIPA modelled
on the Illinois statute, which governs the collection, processing, storage and distribution of biometric information such as facial
biometric templates and fingerprints. Several of these new statutes give individuals rights of action to sue violators, which have
resulted in a number of class action law suits. These regulations could have a significant impact on our businesses.
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Human Capital - Employees and Organization
The Company, as of
December 31, 2020, had a total of approximately 60 employees that are located in four countries: Colombia, South Africa, the United
Kingdom and the United States as well as outsourced service providers. There are approximately 17 employees in the United States
that provide overall Company strategic, business and technological leadership. Employees in the U.S. receive health benefits on
a cost sharing basis and employees in Colombia and South Africa are provided the respective Government required benefits. The Company
may enhance or offer additional fringe and welfare benefits in the future as the Company’s profits grow and/or the Company
secures additional outside financing.
Subsidiaries
Currently, the Company
has three U.S. subsidiaries: Innovation in Motion Inc., Fin Holdings, Inc., and ID Solutions Inc. The Company has three subsidiaries
in Colombia: MultiPay S.A.S., IDGS LATAM S.A.S., and IDGS S.A.S.. The Company has one subsidiary in South Africa: CardsPlus Pty
Ltd. The Company has one subsidiary in the United Kingdom: Ipsidy Enterprises Limited and a subsidiary in Peru, Ipsidy Perú,
SAC. The Company is the sole shareholder of all of its subsidiaries.
Item 1A. Risk Factors
We have a history of losses and we may not be able to achieve
profitability going forward.
We have an accumulated
deficit of approximately $98.2 million as of December 31, 2020 and incurred an operating loss of approximately $9.0 million for
the year ended December 31, 2020. We have had net losses in most of our quarters since our inception. We expect that we will continue
to incur net losses in 2021. We may incur losses in the future for a number of reasons, including the other risks described in
this report, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly,
we may not be able to achieve or maintain profitability. Our management is developing plans and executing certain programs to alleviate
the negative trends and conditions described above, however there is no guarantee that such plans will be successfully implemented.
Our ability to curtail our operating losses or generate a profit may be further impacted by the fact that our business plan is
largely unproven. There is no assurance that even if we successfully implement our business plan, that we will be able to curtail
our losses. If we incur significant additional operating losses, our stock price may decline, perhaps significantly and the Company
will need to raise substantial additional capital in order to be able to continue to operate, which will dilute the existing stockholders
and such dilution may be significant. Additional capital may not be available on terms acceptable to the Company, or at all.
We have yet to achieve positive cash flow and, given our
projected funding needs, our ability to generate positive cash flow is uncertain.
We have had negative
cash flow from operating activities of approximately $4.7 million and approximately $6.0 million for the years ended December 31,
2020 and 2019, respectively. We anticipate that we will continue to have negative cash flows from operating activities for the
foreseeable future as we expect to incur increased research and development, sales and marketing, and general and administrative
expenses. Our business will require significant amounts of working capital to support our growth, particularly as we seek to introduce
our new offered products. An inability to generate positive cash flow from operations may adversely affect our ability to raise
needed capital for our business on reasonable terms, if at all. It may also diminish supplier or customer willingness to enter
into transactions with us, and have other adverse effects that may impact our long-term viability. There can be no assurance we
will achieve positive cash flows in the foreseeable future.
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We need access to additional
financing, which may not be available to us on acceptable terms, or at all. If we cannot access additional financing when we need
it and on acceptable terms, our business, prospects, financial condition, operating results and ability to continue as a going
concern will be adversely affected.
Our growth-oriented
business plan to offer products to our customers will require continued capital investment. Our research and development activities
will also require continued investment. We raised approximately $8.2 million and $3.3 million and in 2020 and 2019, respectively,
through equity and debt financing at varying terms. In order to implement and grow our operations through December 31, 2022, achieve
an expected annual revenue stream from our products and repay our outstanding convertible debt obligations ($7.6 million) in February
2022 we expect that we will need to raise between $14 and $16 million dollars. See Note 7 of the Consolidated Financial Statements
for additional information with respect to conversion options or the respective convertible noteholders. There is no guarantee
that our current business plan will not change, and as a result of such change, we will need additional capital to implement such
business plan. Further, assuming we achieve our expected growth plan, of which there is no guarantee, we will need additional capital
to implement growth beyond our current business plan.
Our limited operating history makes
it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
We have been an emerging
growth company since beginning operations. We have a limited operating history and have generated limited revenue. As we look to
further expand our existing products it is difficult, if not impossible, to forecast our future results based upon our historical
data. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate
and timely adapt to increases or decreases in revenues or expenses. If we make poor budgetary decisions as a result of unreliable