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
historical data, we could be less profitable or incur losses, which may result in a decline in our stock price.
There can be no assurance that we will
successfully commercialize our products that are currently in development or that our existing products will sustain market acceptance.
There is no assurance
that we will ever successfully commercialize our platform and related solutions that are under development or that we will experience
market reception for our products in development or increased market reception for our existing products. Although our acquisitions
have generated revenue, there is no guarantee that we will be able to successfully implement our new products utilizing the acquired
technology, products, and customer base. There is no assurance that our existing products or solutions will achieve market acceptance
or that our new products or solutions will achieve market acceptance. Further, there can be no guarantee that we will not lose
business to our existing or potential new competitors.
We depend upon key personnel and need
additional personnel.
Our success depends
on the continuing services of Philip Kumnick, CEO, Philip Broenniman, COO, as well as certain other members of the current management
team. Our executive team are incentivized by stock compensation grants that align the interests of investors with the executive
team and certain executives have employment retention agreements. The loss of key management, engineering employees or third-party
contractors could have a material and adverse effect on our business operations. Additionally, the success of our operations will
largely depend upon our ability to successfully attract and maintain competent and qualified key management personnel. As with
any company with limited resources, there can be no guarantee that we will be able to attract such individuals or that the presence
of such individuals will necessarily translate into profitability for our company. If we are successful in attracting and retaining
such individuals, it is likely that our payroll costs and related expenses will increase significantly and that there will be additional
dilution to existing stockholders as a result of equity incentives that may need to be issued to such management personnel. Our
inability to attract and retain key personnel may materially and adversely affect our business operations. Any failure by our management
to effectively anticipate, implement, and manage personnel required to sustain our growth would have a material adverse effect
on our business, financial condition, and results of operations.
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The market for our products is characterized
by changing technology, requirements, standards and products, and we may be adversely affected if we do not respond promptly and
effectively to these changes.
The market for our
payment processing and identity management products is characterized by evolving technologies, changing industry standards, changing
political and regulatory environments, frequent new product introductions and rapid changes in customer requirements. The introduction
of products embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete
and unmarketable. Our future success will depend on our ability to enhance our existing products and to develop and introduce,
on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of our customers. In the future:
If we are unable to
respond promptly and effectively to changing technologies and market requirements, we will be unable to compete effectively in
the future.
There can be no assurance
that we will successfully identify new product opportunities and develop and bring new products to market in a timely manner, or
that the products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
The failure of our new product development efforts could have a material adverse effect on our business, results of operations
and future growth.
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If our technology and solutions cease
to be adopted and used by government and public and private organizations, we may lose some of our existing customers and our operations
will be negatively affected.
Our ability to grow
depends significantly on whether governmental and public and private organizations adopt our technology and solutions as part of
their new standards and whether we will be able to leverage our expertise in governmental solutions into commercial solutions.
If these organizations do not adopt our technology, we may not be able to penetrate some of the new markets we are targeting, or
we may lose some of our existing customer base.
In order for us to
achieve our growth objectives, our identity management technologies and solutions must be adapted to and adopted in a variety of
areas including, among others, physical access control, computer access control, biometric fingerprint matching and identity card
issuance and verification. Further, our payment processing technologies and solutions will need to be adopted by financial institutions,
merchants and consumers.
We cannot accurately
predict the future growth rate, if any, or the ultimate size of these markets. The growth of the market for our products and services
depends on a number of factors such as the cost, performance and reliability of our products and services compared to the products
and services of our competitors, customer perception of the benefits of our products and solutions, public perception of the intrusiveness
of these solutions and the manner in which organizations use the information collected, customer satisfaction with our products
and services and marketing efforts and publicity for our products and services. Our products and services may not adequately address
market requirements and may not gain wide market acceptance. If our solutions or our products and services do not gain wide market
acceptance, our business and our financial results will suffer.
We have sought in the past and will
seek in the future to enter into contracts with governments, as well as state and local governmental agencies and municipalities,
which subjects us to certain risks associated with such types of contracts.
Most contracts with
governments or with state or local agencies or municipalities, or Governmental Contracts, are awarded through a competitive bidding
process, and some of the business that we expect to seek in the future will likely be subject to a competitive bidding process.
Competitive bidding presents a number of risks, including:
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We may not be afforded
the opportunity in the future to bid on contracts that are held by other companies and are scheduled to expire, if the governments,
or the applicable state or local agency or municipality determines to extend the existing contract. If we are unable to win particular
contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for the products
and services that are provided under those contracts for a number of years. If we are unable to win new contract awards or retain
those contracts, if any, that we are awarded over any extended period, our business, prospects, financial condition and results
of operations will be adversely affected.
In addition, Governmental
Contracts subject us to risks associated with public budgetary restrictions and uncertainties, actual contracts that are less than
awarded contract amounts, the requirement for posting a performance bond and the related cost and cancellation at any time at the
option of the governmental agency. Any failure to comply with the terms of any Governmental Contracts could result in substantial
civil and criminal fines and penalties, as well as suspension from future contracts for a significant period of time, any of which
could adversely affect our business by requiring us to pay significant fines and penalties or prevent us from earning revenues
from Governmental Contracts during the suspension period. Cancellation of any one of our major Governmental Contracts could have
a material adverse effect on our financial condition.
Governments may be
in a position to obtain greater rights with respect to our intellectual property than we would grant to other entities. Governmental
agencies also have the power, based on financial difficulties or investigations of their contractors, to deem contractors unsuitable
for new contract awards. Because we will engage in the government contracting business, we will be subject to additional regulatory
and legal compliance requirements, as well as audits, and may be subject to investigation, by governmental entities. Compliance
with such additional regulatory requirements are likely to result in additional operational costs in performing such Governmental
Contracts which may impact our profitability. Failure to comply with the terms of any Governmental Contract could result in substantial
civil and criminal fines and penalties, as well as suspension from future contracts for a significant period of time, any of which
could adversely affect our business by requiring us to pay the fines and penalties and prohibiting us from earning revenues from
Governmental Contracts during the suspension period.
Furthermore, governmental
programs can experience delays or cancellation of funding and suspension of appropriations for example as occurred with the recent
partial United States government, which can be unpredictable; this may make it difficult to forecast our revenues on a quarter-by-quarter
basis.
We rely in part on third-party software
to develop and provide our solutions.
We rely in part on
software licensed from third parties to develop and offer some of our solutions. Any loss of the right to use any such software
or other intellectual property required for the development and maintenance of our solutions, or any defects or other issues with
such software could result in problems or delays in the provision of our solutions until equivalent technology is either developed
by us, or, if available from others, is identified, obtained, and integrated, which could harm our business.
In addition, the recent
emergence of a coronavirus disease (COVID - 19) could impact any or all of the third party providers and suppliers on whom we rely.
While the full impact of this disease and worldwide reaction to it are largely unknown, any disruption of
such providers and suppliers caused by this disease could have a material adverse effect on our business, financial condition,
results of operations, and cash flows.
We have historically depended upon a
small number of large system sales ranging from $100,000 to $2,000,000 and we may fail to achieve one or more large system sales
in the future, or fail to successfully transition to new products generating recurring revenues.
Historically, we have
derived a substantial portion of our revenues from a small number of sales of large, relatively expensive systems, typically ranging
in price from $100,000 to $2,000,000. If we fail to receive orders for these large systems in a given sales cycle on a consistent
basis, our business could be significantly harmed. We are trying to reduce such dependence by developing a range of products and
solutions, which are in a lower price range and intended to generate recurring revenue from a large number of customers. The Company
has invested heavily in developing and launching such products but there is no guarantee that such efforts will be successful and
that a satisfactory return on such investment will be achieved. Further, our quarterly results are difficult to predict because
we cannot predict in which quarter, if any, large system sales will occur in a given year, nor when (if at all), or at what rate
the ramp in sales of new products will occur. As a result, we believe that quarter-to-quarter comparisons of our results of operations
are not a good indication of our future performance. In some future quarters, our operating results may be below the expectations
of securities analysts and investors, in which case the market price of our Common Stock may decrease significantly.
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Our efforts to expand our international operations are subject
to a number of risks, any of which could adversely reduce our future international sales and increase our losses.
Most of our revenues
to date are attributable to sales and business operations in jurisdictions other than the United States. Our international operations
could be subject to a number of risks, any of which could adversely affect our future international sales and operating results,
including:
● trade restrictions;
● export duties and tariffs;
● export regulations or restrictions including sanctions;
● uncertain political, regulatory and economic developments;
● labor and social unrest;
● inability to protect our intellectual property rights;
● highly aggressive competitors;
● currency issues, including currency exchange risk;
● difficulties in staffing, managing and supporting foreign operations;
● longer payment cycles; and
● increased collection risks;
● impact of the Coronavirus;
Negative developments
in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay
of orders already placed, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely
affect our business, results of operations or financial condition.
We are exposed to risks in operating
in foreign markets, which may make operating in those markets difficult and thereby force us to curtail our business operations.
In conducting our business
in foreign countries, we are subject to political, economic, legal, operational and other risks that are inherent in operating
in other countries. Risks inherent to operating in other countries range from difficulties in settling transactions in emerging
markets to possible nationalization, expropriation, price controls and other restrictive governmental actions. We also face the
risk that exchange controls or similar restrictions imposed by foreign governmental authorities may restrict our ability to convert
local currency received or held by us in their countries into U.S. dollars or other currencies, or to take those dollars or other
currencies out of those countries.
It is possible that
countries in which we do or intend to do business, or companies and their principals become subject to sanctions under U.S. law.
This would prevent us from doing business with those countries or with those entities or individuals. The Company could be exposed
to fines and penalties in the event of breach any applicable sanctions legislation or orders. In addition, the Company might be
required to suspend or terminate existing contracts in order to comply with such sanctions legislation or orders, which would adversely
impact our future revenues and cashflows.
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Additionally, we are
subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws in the United States and elsewhere that prohibit
improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining
or retaining business. We have operations in and deal with governments and officials in foreign countries. Our activities in these
countries create the risk of unauthorized payments or offers of payments by one of our employees, contractors or customers that
could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. We
have implemented safeguards to discourage these practices by our employees, consultants and customers. However, our existing safeguards
and any future improvements may prove to be less than effective, and our employees, contractors or customers may engage in conduct
for which we might be held responsible. Violations of the FCPA or similar laws may result in severe criminal or civil sanctions
and we may be subject to other liabilities, which could adversely affect our business, financial condition and results of operations.
Breaches of network or information technology
security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other
breaches of network or information technology (IT) security, natural disasters, terrorist acts or acts of war may cause equipment
failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure
through cyber-attack, malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for
some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. A
failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result
in damage to our reputation. To date, we have not been subject to cyber-attacks or other cyber incidents that we are aware of which,
individually or in the aggregate, resulted in a material impact to our operations or financial condition.
For us to further penetrate
the marketplace, the marketplace must be confident that we provide effective security protection for national and other secured
identification documents and cards and other personally identifiable information or protected personal information, or PII. Although
we are not aware that we have experienced any act of sabotage or unauthorized access by a third party of our software or technology
to date, if an actual or perceived breach of security occurs in our internal systems or those of our customers, regardless of whether
we caused the breach, it could adversely affect the market’s perception of our products and services. This could cause us
to lose customers, resellers, alliance partners or other business partners, thereby causing our revenues to decline. If we or our
customers were to experience a breach of our internal systems, our business could be severely harmed by adversely affecting the
market’s perception of our products and services.
Most recently, we have
considered the impacts of coronavirus disease (COVID - 19) on our overall operations. The full impact of this disease and the worldwide
reaction to it are still developing rapidly at this time, and the widespread growth in infections, or travel restrictions, quarantines
or site closures imposed as a result of the disease, is among other things, impacting the ability of our employees, sub-contractors,
or our customers employees and sub-contractors to attend places of work, to meet with potential customers, or undertake implementations
at our customer’s locations. In addition, the disease could lead to disruptions in our supply chain, causing shortages or
unavailability of software updates, or necessary equipment. Any of these outcomes could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
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Interruptions, delays in service or
defects in our systems could impair the delivery of our services and harm our business.
We depend on the efficient
and uninterrupted operation of our computer network systems, software, telecommunications networks, and processing centers, as
well as the systems and services of third parties, in order to provide services to our customers. Almost all of our network systems
are hosted “in the cloud” by internationally recognized third party service providers such as Amazon Web Services and
Microsoft Azure. Our systems and data centers are vulnerable to damage or interruption from, among other things, fire, natural
disaster, power loss, telecommunications failure, terrorist acts, war, unauthorized entry, human error, and computer viruses or
other defects. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. We have security,
backup and recovery systems in place, and we are in the process of implementing business continuity plans that will be designed
to ensure our systems will not be inoperable. However, there is still a risk that a system outage or data loss may occur which
would not only damage our reputation but could also require the payment of penalties or damages to our clients if our systems do
not meet certain operating standards. Despite precautions taken at these facilities, the occurrence of a natural disaster or an
act of sabotage or terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these
facilities could result in lengthy interruptions in our service. Our property and business interruption insurance may not be applicable
or adequate to compensate us for all losses or failures that may occur.
Any damage to, failure
of, or defects, bugs or errors in our systems or those of third parties, errors or delays in the processing of payment or other
transactions, telecommunications failures or other difficulties could result in loss of revenue, loss of customers, loss of customer
and consumer data, harm to our business or reputation, exposure to fraud losses or other liabilities, negative publicity, additional
operating and development costs, and diversion of technical and other resources.
Third parties could obtain access to
our proprietary information or could independently develop similar technologies.
Despite the precautions
we take, third parties may copy or obtain and use our technologies, ideas, know-how and other proprietary information without authorization
or may independently develop technologies similar or superior to our technologies. In addition, the confidentiality and non-competition
agreements between us and most of our employees, distributors and clients may not provide meaningful protection of our proprietary
technologies or other intellectual property in the event of unauthorized use or disclosure. If we are not able to successfully
defend our industrial or intellectual property rights, we may lose rights to technologies that we need to develop our business,
which may cause us to lose potential revenues, or we may be required to pay significant license fees for the use of such technologies.
To date, we have relied primarily on a combination of patents, trade secret and copyright laws, as well as nondisclosure and other
contractual restrictions on copying, reverse engineering and distribution to protect our proprietary technology.
Our current patents
and any patents that we may register in the future may provide only limited protection for our technology and may not be sufficient
to provide competitive advantages to us. For example, competitors could be successful in challenging any issued patents or, alternatively,
could develop similar or more advantageous technologies on their own or design around our patents. Any inability to protect intellectual
property rights in our technology could enable third parties to compete more effectively with us.
In addition, the laws
of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
Our means of protecting our intellectual property rights in the United States or any other country in which we operate may not
be adequate to fully protect our intellectual property rights.
Third parties may assert that we are
infringing their intellectual property rights; IP litigation could require us to incur substantial costs even when our efforts
are successful.
We may face intellectual
property litigation, which could be costly, harm our reputation, limit our ability to sell our products, force us to modify our
products or obtain appropriate licenses, and divert the attention of management and technical personnel. Our products employ technology
that may infringe on the proprietary rights of others, and, as a result, we could become liable for significant damages and suffer
other harm to our business.
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We have not been subject
to material intellectual property litigation to date. Litigation may be necessary in the future to enforce any patents we have
or may obtain and/or any other intellectual property rights, to protect our trade secrets, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement or invalidity, and we may not prevail in any such
future litigation. Litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and
could divert the efforts and attention of our management and technical personnel from normal business operations. In addition,
adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities,
require us to seek licenses from third parties, prevent us from licensing our technology or selling or manufacturing our products,
or require us to expend significant resources to modify our products or attempt to develop non-infringing technology, any of which
could seriously harm our business.
Our products may contain
technology provided to us by third parties. Because we did not develop such technology ourselves, we may have little or no ability
to determine in advance whether such technology infringes the intellectual property rights of any other party. Our suppliers and
licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be
required to indemnify us only with respect to intellectual property infringement claims in certain jurisdictions, and/or only up
to a maximum amount, above which we would be responsible for any further costs or damages. In addition, we have indemnification
obligations to certain parties with respect to any infringement of third-party patents and intellectual property rights by our
products. If litigation were to be filed against these parties in connection with our technology, we would be required to defend
and indemnify such parties.
Our officers and directors beneficially
own a significant portion of our common stock and, as a result, can exercise control over stockholder and corporate actions.
Our officers and directors
of the Company currently beneficially own approximately 11.1% of our outstanding common stock, and 19.3% on a fully diluted basis
assuming the exercise of both vested and unvested options as well as warrants and the conversion of convertible debt. As such,
they have a significant influence over most matters requiring approval by stockholders, including the election of directors and
approval of significant corporate transactions. In addition, our directors hold approximately 61% of the secured debt issued by
the Company, which is convertible into common stock. This concentration of ownership may also have the effect of delaying or preventing
a change in control, which in turn could have a material adverse effect on the market price of the Company’s common stock
or prevent stockholders from realizing a premium over the market price for their Shares.
We face competition. Some of our competitors
have greater financial or other resources, longer operating histories and greater name recognition than we do and one or more of
these competitors could use their greater resources and/or name recognition to gain market share at our expense or could make it
very difficult for us to establish market share.
The Company has created
an Identity as a Service (IDaaS) platform allowing it to onboard 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 provide physical and digital access, as well as transaction and device authentication,
all digitally signed by the user using their identity. The Company’s platform utilizes commodity, consumer grade tablets
for customer deployment with users engaging the platform via a web-browser or a 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 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 identity verification and identification services which cover both physical and digital identity access
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.
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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 both digital and physical
use cases, are major legacy providers offering hardware heavy solutions principally for governmental users. These include IDEMIA,
Gemalto and Supercom. This is in contrast to Ipsidy’s approach which is based on offering apps 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 providers. Major competitors offering solutions in both areas include IDEMIA, Gemalto, ID.ME, HID Global,
and Yoti. Major competitors offering only authentication, include Twillio/Authy, HYPR, Datacard, Duo, Daon, and Trusona. Companies
offering only biometric identification & verification include NEC, Imageware, Element, and Veridium.
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 customers 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, 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 now offers its own identity proofing service for use in digital onboarding solutions, in conjunction with our
biometric authentication and 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 Callsign, Gemalto, Danal (acquired by Boku in 2018), Datacard/Entrust,
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.
With respect to SaaS
based services for physical identity access management, the competitive landscape for Ipsidy also includes companies such as HID
Global, NEC, and IDEMIA. All of these companies offer a broad range of solutions from complete biometric access control systems
to complex biometric e-gate and passenger flow management solutions. Ipsidy’s offering focuses on the SaaS based biometric
identity solutions portion of this market, using mobile apps but also offers API integration with hardware suppliers to create
competitive solutions.
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.
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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.
The resources available
to our competitors to develop new products and introduce them into the marketplace exceed the resources currently available to
us. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period of
time that we can. This intense competitive environment may require us to make changes in our products, pricing, licensing, services,
distribution, or marketing to develop a market position. Each of these competitors has the potential to capture market share in
our target markets which could have an adverse effect on our position in our industry and on our business and operating results.
Government regulation could negatively impact the business.
We do not have or require
any approval from government authorities or agencies in order to operate our regular business and operations. However, data protection
legislation in various countries in which the Company does business (including Columbia 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.
To the extent that our business is based on Governmental Contracts, the relevant government authorities will need to approve us
as a supplier and the terms of those contracts. However, it is possible that any proposed expansion to our business and operations
in the future would require government approvals. Due to the security applications and biometric technology associated with our
products and platforms the activities and operations of our company are or could become subject to license restrictions and other
regulations, such as (without limitation) export controls and other security regulation by government agencies. Expansion of our
activities in payment processing may in due course require government licensing in different jurisdictions and may subject us to
additional regulation and oversight. Aspects of payment processing and related financial services are already subject to legislation
and regulations in various jurisdictions. As indicated, “We are exposed to risks in operating in foreign markets” above,
the imposition of sanctions on particular countries, entities or individuals would prevent us from doing business with such countries,
entities or individuals. If our existing and proposed products become subject to licensing, export control and other regulations,
we may incur increased costs necessary to comply with existing and newly adopted or amended laws and regulations or penalties for
any failure to comply. Our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations
(and amendments thereto) relating to our business or industry.
Some states in the
United States have adopted legislation governing the collection, use of, and storage of biometric information and other states
are considering such legislation. 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 lawsuits. The widespread adoption of such legislation could result in restrictions
on our current or proposed business activities or we may incur increased costs to comply with such regulations. 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. These regulations could have a significant impact on our businesses.
Our common stock is thinly traded, so
you may be unable to sell at or near asking prices or at all if you need to sell your shares to raise money or otherwise desire
to liquidate your shares.
Currently, our common
stock is quoted on the OTC and future trading volume may be limited by the fact that many major institutional investment funds,
including mutual funds, as well as individual investors follow a policy of not investing in OTC stocks and certain major brokerage
firms restrict their brokers from recommending OTC stocks because they are considered speculative, volatile and thinly traded.
The OTC market is an inter-dealer market much less regulated than the major exchanges and our common stock is subject to abuses,
volatility and shorting. Thus, there is currently no broadly followed and established trading market for our common stock. An established
trading market may never develop or, if developed, be maintained. Active trading markets generally result in lower price volatility
and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded
there.
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Our stock is considered a penny stock
and any investment in our stock will be considered a high-risk investment and subject to restrictions on marketability.
The trading price of
our common stock is below $5.00 per share. If the price of the common stock is below such level, trading in our common stock would
be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended. These rules
require additional disclosure by broker-dealers in connection with any trades generally involving any non-NASDAQ equity security
that has a market price of less than $5.00 per share, subject to certain exceptions. Such rules require the delivery, before any
penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the broker-dealer must determine the suitability of the penny
stock for the purchaser and receive the purchaser’s written consent to the transactions before sale. The additional burdens
imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock,
which could impact the liquidity of our common stock.
Our business is subject to changing
regulations regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance
areas that will increase both our costs and the risk of noncompliance. If we fail to comply with these regulations, we could face
difficulties in preparing and filing timely and accurate financial reports.
We are subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the
Dodd-Frank Act. Maintaining compliance with these rules and regulations, particularly after we cease to be an emerging growth company,
will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and
costly and may also place increased strain on our personnel, systems and resources.
The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and at the time we cease to be
an emerging growth company and a smaller reporting company, we will be required to provide attestation that we maintain effective
disclosure controls and procedures by our registered public accounting firm. Any failure to develop or maintain effective controls,
or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to
meet our reporting obligations. Any failure to implement and maintain effective internal control also could adversely affect the
results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that are
required to include in our periodic reports filed with the SEC, under Section 404(a) of the Sarbanes-Oxley Act or the annual auditor
attestation reports regarding effectiveness of our internal controls over financial reporting that we will be required to include
in our periodic reports filed with the SEC upon our ceasing to be an emerging growth company and a smaller reporting company, unless,
under the JOBS Act, we meet certain criteria that would require such reports to be included prior to then, under Section 404(b)
of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also
cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on
the trading price of shares of our common stock.
In order to maintain
the effectiveness of our disclosure controls and procedures and internal control over financial reporting going forward, we will
need to expend significant resources and provide significant management oversight. There is a substantial effort involved in continuing
to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate
any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business
concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial
accounting-related costs. We may experience difficulty in meeting these reporting requirements in a timely manner.
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If we are unable to
maintain key controls currently in place or that we implement in the future and pending such implementation, or if any difficulties
are encountered in their implementation or improvement, (1) our management might not be able to certify, and our independent registered
public accounting firm might not be able to report on, the adequacy of our internal control over financial reporting, which would
cause us to fail to meet our reporting obligations, (2) misstatements in our financial statements may occur that may not be prevented
or detected on a timely basis and (3) we may be deemed to have significant deficiencies or material weaknesses, any of which could
adversely affect our business, financial condition and results of operations.
Implementing any appropriate
changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial
costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not,
however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent
inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair
our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley
Act in a timely manner, our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial
statements, our stock price could decline and we could be subject to sanctions or investigations by the SEC or other regulatory
authorities, which would require additional financial and management resources.
We are an “emerging growth company”
and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make
our common stock less attractive to investors.
We are an “emerging
growth company,” as defined in the JOBS Act, and we expect to take advantage of certain exemptions and relief from various
reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular,
while we are an “emerging growth company” (1) we will not be required to comply with the auditor attestation requirements
of Section 404(b) of the Sarbanes-Oxley Act, (2) we will be exempt from any rules that may be adopted by the Public Company Accounting
Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements,
(3) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements
and (4) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden
parachute payments not previously approved.
In addition, we are
eligible to delay the adoption of new or revised accounting standards applicable to public companies until those standards apply
to private companies, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which
adoption of such standards is required for non-emerging growth companies. The Company has adopted and will be adopting all standards
as they have become effective for public companies.
We also take advantage
of reduced disclosure requirements, including regarding executive compensation. If we remain an “emerging growth company”
in the future, we may take advantage of other exemptions, including the exemptions from the advisory vote requirements and executive
compensation disclosures under the Dodd-Frank Wall Street Reform and Customer Protection Act, and the exemption from the provisions
of Section 404(b) of the Sarbanes-Oxley Act. We may remain an “emerging growth company” until (1) the market value
of our common stock that is held by non-affiliates exceeds $700 million as of any June 30, in which case we would cease to be an
“emerging growth company” as of the following December 31, (2) our gross revenue exceeds $1 billion in any fiscal year,
(3) we issue more than $1 billion in nonconvertible notes in any three-year period or (4) 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.
The exact implications
of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure
that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our common stock
less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more
volatile.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s
headquarters are located in Long Beach, New York where the Company currently leases office space. The facilities in Long Beach,
New York are owned by Bridgeworks LLC, a company providing office facilities to emerging companies principally owned by Mr. Beck
and his family, the former CEO and Board Member. The arrangement with Bridgeworks LLC allows the Company to use certain office
services for a fixed, monthly fee of $2,500 reduced from $5,000 in September 2020. The arrangement with Bridgeworks LLC is terminable
upon 30 days’ notice.
The Company leased
an office in Plantation, Florida for $2,600 per month plus a share of building expenses. The lease expired in July 2020
and we did not renew the lease.
In October 2018, the
Company subleased an office in Alpharetta, Georgia for approximately $3,800 per month. The sub-lease expired on March 31, 2020
and we did not renew the lease.
MultiPay S.A.S. leases
space in Bogotá, Colombia. In April 2017, MultiPay S.A.S. entered into a lease beginning April 22, 2017 for two years. The
rent is approximately $9,000 per month with an inflation adjustment after one year. The lease was extended through April 21, 2021.
The Company intends to enter into a new lease within Bogota, Colombia with a smaller footprint and lower expense.
Cards Plus leases its
office and production facility in a suburb of Johannesburg, South Africa. The location consists of approximately 39,500 square
feet. The current lease is through June 30, 2022 at an approximate rent of $8,000 per month.
We believe our facilities
are in good operating condition and that our facilities are adequate for present and near term uses.
Item 3. Legal Proceedings
From time to time the
Company is a party to various legal or administrative proceedings arising in the ordinary course of our business. While any litigation
contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings will have a material adverse
effect on the financial condition or results of operations of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The high and low
per share closing sales prices of the Company’s stock on the OTCQB (ticker symbol: IDTY) for each quarter for the years ended
December 31, 2020 and 2019 were as follows:
Quarter Ended High Low
Holders of our Common Stock
As of February 28,
2021, there were approximately 255 stockholders of record of our common stock. This number does not include shares held by brokerage
clearing houses, depositories or others in unregistered form. The stock transfer agent for our securities is Computershare Shareholder
Services, PO Box 505000, Louisville, Kentucky 40233.
Dividends
The Company has never
declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance
the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.