Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The discussion and
analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation
of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues
and expenses during the reporting periods. On an ongoing basis, we evaluate estimates and judgments, including those described
in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
As used in this “Management’s
Discussion and Analysis of Financial Condition and Results of Operation,” except where the context otherwise requires, the
term “we,” “us,” “our,” or “the Company,” refers to the business of Ipsidy Inc.
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Overview
Ipsidy Inc. together
with its subsidiaries 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 in my lobby?
Ipsidy provides secure,
biometric, identity verification and electronic transaction authentication services. We have developed an IDaaS platform for our
customers, be they businesses, residences, houses of worship, or other organizations, to enable their users to authenticate their
identity more easily to 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 and embedded attributes of the participant’s identity. 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.
The Company’s
products focus on the broad requirement for identity verification, authentication and access and transaction controls and associated
identity management needs. Organizations of all descriptions require cost-effective and secure mobile electronic solutions for
themselves and their customers. We aim to offer our customers solutions that can be integrated into each customer’s business
and organizational operations in order to facilitate their use and enhance the end user customer experience.
Ipsidy Inc. (formerly
ID Global Solutions Corporation) (formerly IIM Global Corporation) (formerly Silverwood Acquisition Corporation) was incorporated
on September 21, 2011 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not
limited to, selected mergers and acquisitions. Ipsidy has been in the developmental stage since inception.
The Company’s headquarters are in
Long Beach, New York.
Key Trends
We believe that our
financial results will be impacted by several market trends in the identity management security and transaction processing marketplace,
including growing concerns over identity theft and fraud, in part resulting from the impact of the Coronavirus pandemic on the
acceleration of digital transformation and remote working; security of offices, residences, places of worship and other public
places and the increase in electronic payments, solutions provided by non-bank entities. The key drivers for these alternative
payment methods are consumer demands for safe, convenient payment transactions, with less friction. Our results are also impacted
by the changes in levels of spending on identity management and security methods, and thus, negative trends in the global economy
and other factors which negatively impact such spending may negatively impact the growth our revenue from those products. The global
economy has been undergoing a period of political and economic uncertainty and stock markets are experiencing high levels of volatility,
and it is difficult to predict how long this uncertainty and volatility will continue.
We plan to grow our
business by increasing the use of our services by our existing customers, by adding new customers through our channel partners
and by expanding into new markets and innovation. If we are successful in these efforts, we would expect our revenue to continue
to grow. In addition, based on the positive trends in the international payment processing industry noted above, we anticipate
that as and when more payments are made using electronic and mobile methods, such as those that we offer, our revenue would also
increase.
Going Concern
The Company has an
accumulated deficit of approximately $98.2 million as of December 31, 2020. The Company’s continuation as a going concern
is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able
to accomplish to date, and/or obtain additional financing from its stockholders and/or other third parties.
29
Our consolidated
financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations
and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial
support from its stockholders, the ability of the Company to obtain necessary equity or debt financing to continue operations,
successfully locating and negotiating with other business entities for potential acquisition and /or acquiring new clients to generate
revenues. Although the Company has been successful in raising capital, additional financing or improvement in operations is not
assured.
In 2020 and 2019,
the Company raised a total of approximately $8.2 million and $3.3 million, respectively, of additional funds from Accredited Investors.
In order to further
implement its business plan and satisfy its working capital requirements, the Company will need to raise additional capital. There
is no guarantee that the Company will be able to raise additional equity or debt financing at acceptable terms, if at all.
There is no assurance
that the Company will ever be profitable. These consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that
may result should the Company be unable to continue as a going concern. As there can be no assurance that the Company will be able
to achieve positive cash flows (become cash flow profitable) and raise sufficient capital to maintain operations, there is substantial
doubt about the Company’s ability to continue as a going concern.
Critical Accounting Policies and Estimates
Our significant accounting
policies are more fully described in the notes to our consolidated financial statements. Those material accounting estimates that
we believe are the most critical to an investor’s understanding of our financial results and condition are discussed immediately
below and are particularly important to the portrayal of our financial position and results of operations and require the application
of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain estimates.
Use of Estimates
In preparing these
consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that may
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate
to the valuation of long-lived assets, accruals for potential liabilities, and valuation assumptions related to derivative liabilities,
equity instruments and share based payments.
Revenue Recognition
Below is the Company’s revenue
recognition policy determined by revenue stream for its significant revenue generating activities.
Cards Plus - The
Company recognizes revenue for the design and production of cards at the point in time when products are shipped, or services
have been performed due to the short-term nature of the contracts.
Payment
Processing – The Company recognizes revenue for variable fees generated for payment processing solutions that are
earned on a usage fee over time based on monthly transaction volumes or on a monthly flat fee rate. Additionally, the Company
also sells certain equipment from time to time for which revenue is recognized at a point in time the equipment is
delivered to the customer.
Identity Solutions Software –
The Company recognizes revenue based on the identified performance obligations over the performance period for fixed consideration
and for variable fees generated that are earned on a usage fee based over time based on monthly transaction volumes or on a monthly
flat fee rate. We allocate the selling price in the contract to one customer which has multiple performance obligations based on
the contract selling price that we believe represents a fair market price for the service rendered.
30
All contracts are
reviewed for their respective performance obligations and related revenue and expense recognition implications. Certain of the
revenues are derived from the identity services could include multiple performance obligations. A performance obligation under
the revenue standard is defined as a promise to provide a “distinct” good or service to a customer. The Company has
determined that one possible treatment under the standard is that these services will represent a stand-ready series of distinct
daily services that are substantially the same, with the same pattern of transfer to the customer. Further, the Company has determined
that the performance obligation to provide account access and facilitate transactions may meet the criteria for the “as invoiced”
practical expedient, in that the Company has a right to consideration from a customer in an amount that corresponds directly with
the value to the customer of the Company’s performance completed to date. As a result, the Company anticipates it may recognize
revenue in the amount to which the Company has a right to invoice, based on completed performance at the relevant date. Additionally,
the contracts could include implementation services, or support on an “as needed” basis and we will review each contract
and determine whether such performance obligations are separate and distinct and apply the standard accordingly to the revenue
and expense derived from or related to each such service.
Additionally, the
Company capitalizes the incremental costs of acquiring and fulfilling a contract with a customer if the Company expects to recover
those costs. The incremental costs of acquiring and fulfilling a contract are those that the Company incurs to acquire and fulfill
a contract with a customer that it would not have incurred if the contract had not been acquired (for example, a sales commission
or specific incremental costs associated with the contract).
Financing revenue
related to direct financing leases is recognized over the term of the lease using the effective interest rate method.
Accounts Receivable
All customers are
granted credit on a short-term basis and related credit risks are considered minimal. The Company routinely reviews its trade receivables
and makes provisions for probable doubtful accounts; however, those provisions are estimates and actual results could differ from
those estimates and those differences may be material. Trade receivables are deemed uncollectible and removed from accounts receivable
and the allowance for doubtful accounts when collection efforts have been exhausted. On December 31, 2020 and 2019 no allowance
for doubtful accounts was necessary.
Inventories
Inventory of plastic/ID
cards, digital printing material, which are held by Cards Plus Pty Ltd., are at the lower of cost (using the average method) or
market. The Plastic/ID cards and digital printing material are used to provide plastic loyal ID and other types of cards. Inventories
of kiosks held by IDGS S.A.S are stated at the lower of cost (using the first-in, first-out method) or net realizable value. The
kiosks provide electronic ticketing for transit systems.
Inventories on December
31, 2020 consist solely of cards inventory and inventories at December 31, 2019 consist of cards inventory and kiosks that have
not been placed into service. As of December 31, 2020, the Company recorded an inventory valuation allowance of approximately
$18,000 to reflect net realizable value of the cards inventory. As of December 31, 2019, the Company had an inventory valuation
allowance for kiosks of $236,000 that were being held for sale and $18,000 for the cards inventory.
Any adjustments to
reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Property and Equipment, net
Property and equipment
consist of furniture and fixtures and computer equipment and are stated at cost. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of three to five years. Maintenance and repairs are expensed as incurred and
improvements are capitalized. Gains or losses on the disposition of property equipment are recorded upon disposal.
31
Other Assets - Software Development Costs
Other assets includes
when applicable, costs associated with software development of new product offerings and enhancements to existing applications.
Research & development costs are expensed as incurred. Development costs of computer software to be sold, leased or otherwise
marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending
when a product is available for general release to customers. As of December 31, 2020, all assets have been placed into service.
As of December 31, 2019, a portion of the software was still under development and had not been placed in service. Upon completion,
the amounts were transferred to the appropriate asset category and expensed over their estimated useful lives. In 2020 and 2019,
approximately $0.1 million and $3.1 million of software development costs were placed into service and classified as internally
developed software.
Intangible Assets
Excluding goodwill,
acquired intangible assets and internally developed software are amortized over their estimated useful lives which is currently
five to ten years. Acquired amortizing intangible assets are carried at cost, less accumulated amortization. Internally developed
software costs are capitalized upon reaching technological feasibility.
Goodwill
Goodwill is recorded when
the purchase price paid for an acquisition exceeds the fair value of net identified tangible and intangible assets acquired. The
Company performs an annual impairment test of goodwill and further periodic tests to the extent indicators of impairment develop
between annual impairment tests. The Company’s impairment review process compares the fair value of the reporting unit to
it carrying value, including the goodwill related to the reporting unit utilizing qualitative considerations. To determine the
fair value of the reporting unit, the Company may use various approaches including an asset or cost approach, market approach
or income approach or any combination thereof. These approaches may require the Company to make certain estimates and assumptions
including future cash flows, revenue and expenses. These estimates and assumptions are reviewed each time the Company tests goodwill
for impairment and are typically developed as part of the Company’s routine business planning and forecasting process. While
the Company believes its estimates and assumptions are reasonable, variations from those estimates could produce materially different
results.
During the year ended
December 31, 2020, the Company recorded an impairment loss of approximately $1.0 million, associated with goodwill at one of its
reporting units. As a result of the current pandemic and its potential impact on future results, the Company updated its reporting
unit projections, and it indicated a goodwill impairment as the carrying value may not be recovered as revenue assumptions and
related revenue were revised downward.
During the year ended
December 31, 2019, the Company updated our projections associated with our reporting units and it indicated that the carrying value
may not be recovered as revenue assumptions were not met. The goodwill impairment loss for the year ended December 31, 2019 was
approximately $1.5 million across the three reporting units.
The fair value of
the reporting unit in both years was determined using discounted cash flow as well as future realizable value.
Impairment of Long-Lived Assets
Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset.
If the carrying amount
of an asset exceeds its undiscounted estimated future cash flows, an impairment review is performed. An impairment charge is recognized
in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Generally fair value is determined
using valuations techniques such as expected discounted cash flows or appraisals, as appropriate. Assets to be disposed of would
be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell
and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately
in the appropriate asset and liability sections of the balance sheet. During the year ended December 31, 2020, the Company impaired
intangible assets of approximately $297,000 at one of the reporting units as the carrying were in excess its recoverable amount.
During the year ended December 31, 2019, the Company impaired intangible assets related to developed software of approximately
$155,000 as the net assets were no longer being used for commercial purposes.
32
Research and Development Costs
Research and development
costs consist of expenditures for the research and development of new products and technology. These costs are primarily expenses
to vendors contracted to perform research projects and develop technology for the Company’s products. Research and development
costs are expensed as incurred.
Stock-based compensation
The Company has accounted
for stock-based compensation under the provisions of FASB ASC 718 – “Stock Compensation” which requires the use
of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of
stock or equity instruments (stock options and common stock purchase warrants). For employee awards, the fair value of each stock
option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility,
expected dividends, expected term, and the risk-free interest rate. For non-employees, the fair value of each stock option award
is estimated on the measurement date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected
dividends, expected term, and the risk-free interest rate. For non-employees, the Company utilizes the graded vesting attribution
method under which the entity treats each separately vesting portion (tranche) as a separate award and recognizes compensation
cost for each tranche over its separate vesting schedule. Expected volatilities are based on historical volatility of peer companies
and other factors estimated over the expected term of the stock options. For employee awards, the expected term of options granted
is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term
plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period
of the expected term.
The Company adopted
as of January 1, 2019 the requirements of ASU 2018-07 which simplified the accounting for share-based payments granted to non-employees
for share based payments granted to non-employees for goods and services. Under the ASU, most of the guidance on such payments
to non-employees were aligned with the share-based payments granted to employees. The Company determined on the date of adoption
that the impact was not significant.
Recent Accounting Pronouncements
In January 2017, the
FASB issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles-Goodwill and Other: Simplifying
the Test for Goodwill Impairment” (ASU 2017-04). The standard simplifies the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform its
goodwill impairment test by comparing the fair value of a reporting unit with it carrying amount. An entity will recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss
cannot exceed the total amount of goodwill allocated to the reporting unit. The Company adopted ASU 2017-04 for the calendar
year ending December 31, 2020, the effective date for adoption. The adoption of this standard did not have a have a material
impact on the Company’s financial statements.
Adjusted EBITDA.
This discussion includes
information about Adjusted EBITDA that is not prepared in accordance with U.S. GAAP. Adjusted EBITDA is not based on any standardized
methodology prescribed by U.S. GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation
of this non-GAAP measure is included below.
33
Adjusted EBITDA is
a non-GAAP financial measure that represents U.S. GAAP net income (loss) adjusted to exclude (1) interest expense, (2) interest
income, (3) provision for income taxes, (4) depreciation and amortization, (5) stock-based compensation expense (stock options
and restricted stock) and (6) certain other items management believes affect the comparability of operating results. Other items
included the following:
● Severance cost of $0.4 million in 2020
● Impairment loss of $1.3 million in 2020 and $1.7 million in 2019
● Extinguishment of debt of $1.0 million in 2020
● Warrant inducement expense of $0.4 million in 2020.
Management believes
that Adjusted EBITDA, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides useful information
about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information
with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors
and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to
review and assess the operating performance of our company and our management, and it will be a focus as we invest in and grow
the business.
Adjusted EBITDA has
limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for, analysis of our results
as reported under GAAP. Some of these limitations are:
34
Because of these
limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth
of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only
as a supplement to our U.S. GAAP results.
Reconciliation of Net Loss to Adjusted EBITDA
For the Year Ended
Add Back:
Warrant exercise inducement expense 366,795 -
The decrease in Adjusted
EBITDA loss in 2020 compared to 2019 is principally due to the Company’s increased focus and investment on its principal
products combined with its cost minimization programs to reduce overall expenses.
Results of Operations
and Financial Condition for the Year Ended December 31, 2020 as Compared to the Year Ended December 31, 2019
Revenues
For the year ended
December 31, 2020 compared to the year ended December 31, 2019, the Company’s revenue decreased $2.1 million from $2.6 million,
or $0.5 million. The decrease in revenue for the year ended December 31, 2020 is principally due to the Covid-19 pandemic. Revenue
at Cards Plus and our Colombian operations declined by $0.3 million and $0.1 million respectively.
Cost of sales
During the years
ended December 31, 2020 and December 31, 2019, cost of sales was $0.7 million in both periods. Costs of sales was slightly higher
in the year ended December 31, 2020 compared to December 31, 2019 due to lower margin revenue at Cards Plus. Although sales decreased,
cost of sales was comparable year over year due to sales of inventory purchased in prior year that was brought at a higher exchange
rate causing lower margins.
General and administrative
General and administrative
expenses for the year ended December 31, 2020 decreased by approximately $1.2 million as compared to the same period in 2019 due
in part due to lower stock compensation charges (reduced by $0.4 million) with the balance related to staff reductions and other
cost minimization efforts.
Research and development
During the year ended
December 31, 2020 compared to the year ended December 31, 2019, research and development expenses decreased by approximately $0.5
million as the Company reduced its overall spend while focusing its resources on key product initiatives and reducing staff.
35
Impairment loss
During the year ended
December 31, 2020, the Company recorded a goodwill impairment loss of approximately $1.0 million, associated with goodwill at
a reporting unit based in Africa. Additionally, in the year ended December 31, 2020, the Company recorded an impairment
on intangible assets of approximately $0.3 million at a reporting unit in Latin America as the carrying value was in
excess of its estimated recoverable value. As a result of the current pandemic and its potential impact on future results, the
Company updated its reporting unit projections and these indicated impairments for either goodwill or intangible assets were required
as the carrying value may not be recovered as revenue assumptions and related revenue were revised downward. The fair value of
the reporting unit was determined using discounted cash flow.
Depreciation and amortization
Depreciation and amortization
expense increased during the year ended December 31, 2020 compared to December 31, 2019 due to increased amortization expense
associated with approximately $3.1 million in capitalized software being placed into service in 2019.
Interest Expense
Interest expense
increased during the year ended December 31, 2020 compared to the year ended December 31, 2019 due to convertible debt offerings
in December 2019 and February 2020 that increased the level of debt outstanding and related interest expense.
Other Income (Expense)
During the year ended
December 31, 2020, the Company recorded a charge of approximately $986,000 related to the amendment of a promissory note which
was treated as an extinguishment of a note payable and a charge of $367,000 in connection with the inducement to certain warrant
holders to exercise their outstanding warrants.
Covid-19
A
novel strain of coronavirus (“Covid-19”) emerged globally in December 2019 and has been declared a pandemic. The extent
to which Covid-19 has impacted and will impact our customers, business, results and financial condition will depend on current
and future developments, which are highly uncertain and cannot be predicted at this time. The Company’s day-to-day operations
beginning March 2020 have been impacted differently depending on geographic location and services that are being performed. The
Cards Plus business located in South Africa did not have any operations in April 2020 and has had limitations on its operations
starting in May 2020, as the Company is following the guidance and requirements of the South African government. Our operations
in the United States and Colombia have suffered less immediate impact as most staff can work remotely and can continue to develop
our product offerings.
That said, we have
seen our business opportunities develop more slowly as business partners and potential customers are dealing with Covid-19 issues,
working remotely and these issues are causing delays in decision making and finalization of negotiations and agreements. However,
the level of inquiries about our services has increased during the last quarter of 2020, as our products are designed to serve
an increasingly mobile economy and workforce.
Liquidity and Capital Resources
As of December 31,
2020, current assets were $4.4 million and current liabilities outstanding amounted to $2.9 million which resulted in net working
capital of $1.5 million.
Net cash used by
operating activities was $4.7 million for the year ended December 31, 2020 compared to $6.1 million in 2019. Cash used in operations
for 2020 and 2019 was the primarily result of funding the business operations as the Company invested in people and product a developing
business.
36
Net cash used in investing
activities in 2020 and 2019 was approximately $0.3 million and $1.6 million as the Company invested in software development
expenditures which were capitalized.
Net cash provided
by financing activities for 2020 and 2019 was approximately $8.2 million and $3.3 million, which consisted primarily of the net
proceeds from the sale of common stock, issuance of convertible notes payable, and the exercise of warrants in 2020 and the sale
of common stock and issuance of convertible notes payable in 2019.
Description of Indebtedness
As described in Item
1A, (Risk Factors) the Company has a history of losses and may not be able to achieve profitability in the near term. The Company
has not been able to achieve positive cash flows from operations and raised additional financing in 2019 and 2020 from equity financing
and convertible notes payable financing.
See Notes 6 and 7
of the Consolidated Financial Statements for additional information associated with the notes and convertible notes payable.
The following is a summary of the convertible
notes payable outstanding on December 31, 2020:
8% convertible notes payable issued December 2019 $ 428,000
Unamortized discount on convertible notes (494,138 )
Unamortized debt issuance costs (59,886 )
37
Paycheck Protection Program
If the USSBA determines
that the PPP loan was not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company would
need to repay some or all of the PPP loan and record additional expense which could have a material adverse effect on the Company’s
financial condition and results of operations in a future period.
As of December 31,
2020, the total notes payable is approximately $493,300 of which approximately $485,800 could be forgiven under the provisions
of the USSBA PPP. Additionally, the Company has approximately $5.8 million of Convertible Notes Payable outstanding, net of discounts
as of December 31, 2020.
Equity Financing
See Note 9 of the
Consolidated Financial Statements for additional information associated with equity financing in 2020 and 2019.
2020 Common Stock Transactions
38
2019 Common Stock
Transactions
In 2021, the Company
will continue to be opportunistic as well as judicious in raising additional funds to support its operations and investments as
it creates a sustainable organization. There is no guarantee that such financing will be available if available on acceptable terms.
Our growth-oriented
business plan to offer products to our customers will require continued capital investment. Research and development activities
will also require continued investment. We raised approximately $8.2 million and $3.5 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 conversion options of 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.
As of December 31,
2020, the total notes payable is approximately $493,300 of which approximately $485,800 could be forgiven under the provisions
of the USSBA Paycheck Protection Program. Additionally, the Company has approximately $5.8 million of Convertible Notes Payable
outstanding, net of discounts as of December 31, 2020.
Off-Balance Sheet Arrangements
We have no off-balance
sheet financing arrangements.
39
Contractual Obligations
As of December 31,
2020, the Company had the following contractual obligations.
Payments due by period
Item 8. Financial Statements and Supplementary Data
Our consolidated
financial statements and notes thereto and the report of our independent registered public accounting firm, are set forth on pages
F-1 through F-33 of this report.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of
the period covered by this Annual Report, our Chief Executive Officer and Chief Financial Officer performed an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based
on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, the Company’s
disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the
report that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms.
Management’s Report on Internal Control Over Financial
Reporting
The Company’s
management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company,
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial
reporting is designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with U.S. generally accepted accounting principles. Our management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed
and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if
any, have been detected and such evaluation is subject to the risks discussed in item 1A – Risk Factors of this Report.
The Company’s
management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020,
using the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on management’s assessment using the above criteria, management concluded that the
Company maintained effective internal control over financial reporting as of December 31, 2020. During 2020, the Company revised
their quarterly and annual financial reporting and closing procedures to remediate previously reported control deficiency.
Changes in Internal Control over
Financial Reporting
There have been no
changes in our internal control over financial reporting that occurred during our last fiscal year that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting except that, during 2020, the Company
revised their quarterly and annual financial reporting and closing procedures to remediate previously reported control deficiency.
Item 9B. Other Information
None.
40
PART III
Item 10. Directors, Executive Officers, and Corporate
Governance;
The current Directors and Officers of the Company are as
follows:
Name Age Position (s) and Offices Held
Philip R. Broenniman** 55 Chief Operating Officer, President and Director
Herbert Selzer (1)(2)(3*) 74 Director
Theodore Stern (1*)(2)(3) 91 Director
Stuart Stoller 65 Chief Financial Officer
Thomas Szoke 56 Chief Solutions Architect and Director
Christopher White 48 Chief Technology Officer
* denote Committee Chair
** Appointed March 2020
(1) Audit Committee
(2) Governance Committee
(3) Compensation Committee
Phillip Kumnick
Phillip Kumnick serves
as Chief Executive Officer and Chairman of the Board of Directors of the Company, having been appointed as CEO in May 2020, as
a director in 2019 and Chairman of the Board of Directors in October 2020. From 2010 to 2018, Mr. Kumnick was Senior Vice President
Global Acquirer Processing at Visa, Inc., and was the executive in charge of leading and growing Visa’s acquirer and merchant
processing services and omni-channel solutions on a global basis. Mr. Kumnick was also a key contributor to the design of
the Secure Remote Commerce (SRC) standard now being rolled out by the card brands, which aims to provide a simple and secure card
payment experience. SRC uses tokenization to protect consumers’ sensitive data and intelligent identity authentication
to help distinguish legitimate cardholders from fraudsters. Mr. Kumnick was the product owner and developer of Visa’s
critical entry into encryption and tokenization products and services for their acquiring partners for transactions at the physical
point of sale. Prior to joining Visa, Mr. Kumnick was the leader of the Cards & Payments practice of Cap Gemini Consulting
from October 2009 through June 2010. Prior to Cap Gemini Consulting. Mr. Kumnick was a Senior Vice President at TSYS Acquiring
Solutions from 2001 to 2009, with responsibility for leading the Product Management team and expanding the Company’s portfolio
of merchant and acquirer products. He was also a leader of key M&A activities, including business development and strategic
investment in Europe, Latin America and Asia, and helped expand TSYS’ client footprint to over 70 countries.
Mr. Kumnick started his payments career at MasterCard International where he worked from 1988 to 2000, in various capacities,
rising to Vice President & Chief Settlement Officer – Global Settlement Operations. In that role he was responsible
for the 7 x 24 x 365 mission critical clearing and payment operations of a $3.0 billion per day global EFT and treasury
operation. Mr. Kumnick was a strategic subject matter expert and key contributor to the evolution of MasterCard’s global
processing functions. Mr. Kumnick has an MBA- Finance and a BS Finance from St. Louis University.
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Philip R. Broenniman.
Mr. Broenniman, serves
as Chief Operating Officer and President, having been appointed in May 2020, as well as a Director of the Company, having been
appointed in March 2020, Mr. Broenniman has been, for the last nine years, Managing Partner and Portfolio Manager for Varana Capital,
LLC (“VCLLC”), a firm he co-founded in 2011. Through his position at VCLLC, Mr. Broenniman invests in, and consults
with the Board of Directors of, certain public and private companies, working with each on strategic planning, financing, and/or
balance sheet restructuring. Mr. Broenniman began his portfolio management career with the Bass family of Fort Worth, TX in 1993,
investing in event strategies, assisting on a $1 billion book of derivative hedging and investment strategies, and developing his
skills in derivative analytics, risk management, and portfolio construction. Privately, from August 2010 until February 2018, Mr.
Broenniman was co-founder and a member of Cadence Distributors, LLC, an import/export company focused on the fragrance industry.
From February 2012 to April 2017, Mr. Broenniman was a founding investor in Cacao Prieto, a bourbon and rum distillery, providing
strategic guidance during the initial launch of the business. Mr. Broenniman served as a member of the Board of Directors and Special
Committee evaluating strategic options for CSS Industries, Inc. (Formerly NYSE: CSS) from July 2019 until March 2020, upon the
successful closing of its merger. Mr. Broenniman has a BS from Duke University, an MBA from University of Virginia and is a Chartered
Financial Analyst.
Herbert Selzer
Herbert Selzer serves
as an Independent Director of the Company. Mr. Selzer is an attorney based on New York, New York with a focus in corporate, international
estate planning, trust and estates and wealth management. Mr. Selzer has been with Loeb, Block & Partners LLP since 1972 and
became a partner in 1978. Prior to 1972, Mr. Selzer was employed by Ernst & Young. Mr. Selzer holds a BS Economics from Brooklyn
College, a JD from George Washington University Law Center, an LLM in Taxation from New York University Law School.
Theodore Stern
Mr. Stern has served
in several executive positions in the energy and software industries over his career. Previously he served as Chairman of the Board
of inContact Inc. from 2000 to 2016 (when the company was acquired). He was Chairman and CEO from 2000 to 2005 when the positions
were split. He oversaw the acquisition of four companies and the transition of inContact from a telecommunications company to a
rapidly growing software-as-a-service company. Additionally, he previously served as a member of the Board of Directors of Ensync
Inc and served on the Governance, Audit and Compensation Committees.
Mr. Stern also was
a Senior Executive Vice President and member of the Board of Directors of Westinghouse Electric Corporation until his retirement.
In his last position at Westinghouse Electric, Mr. Stern was responsible for multiple business units. Mr. Stern served as Vice
Chairman of the Board of Directors of Superconductivity, Inc. of Madison, Wisconsin, a small technology company, until it was acquired
in April 2007. Mr. Stern also served on the Board of Directors of Copperweld Corporation of Pittsburgh, Pennsylvania, a privately-owned
steel and cable manufacturer, until its acquisition by LTV. Mr. Stern also served on the Board of Directors of Northern Power Systems
of Waitsfield, Vermont, a privately-owned manufacturer of renewable and distributed generation systems until it was acquired by
Distributed Energy Systems Incorporated (DESC). Mr. Stern also served on the board of directors of DESC. Mr. Stern holds a Bachelor
of Science degree in Mechanical Engineering from the Pratt Institute and a Master of Arts degree in Theoretical Mathematics from
New York University. He is a fellow of the American Society of Mechanical Engineers and a member of the National Academy of Engineering.
He is the author of a number of technical papers on nuclear power technology.
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Stuart Stoller
Stuart Stoller serves
as Chief Financial Officer of the Company having been appointed in January 2017. Mr. Stoller. Prior to joining the Company served
as Chief Financial Officer and Board Member for TestAmerica Environmental Services LLC from May 2016 to October 2017. From December
2013 to April 2016, he was the Chief Financial Officer of Associated Food Stores. Mr. Stoller served as Chief Financial and Administrative
Officer for Sleep Innovations from August 2009 to October 2013. Prior to joining Sleep Innovations, Mr. Stoller for 27 years served
various roles with the New York Times Company including Senior Vice President for Process Reengineering and Corporate Controller
and various capacities at Macy’s which included the role of Senior Vice President and Corporate Controller. He also was the
controller of Coopers & Lybrand LLP. He is a Certified Public Accountant.
Thomas Szoke
Thomas R. Szoke serves
as Chief Solutions Architect and a Director of the Company. Mr. Szoke is a co-founder of Innovation in Motion (“IIM”)
a predecessor of Ipsidy and has over 25 years of product engineering, global sales and operations management experience. He has
held several executive positions in the Company and has successfully led it from its inception to its listing on the OTC Market
as well as expanding its market presence and product portfolio through strategic acquisitions in the United States, South America
and Africa. Mr. Szoke pioneered the concept and development of certain product lines as well as its Multi-Factor Out-of-Band Identity
and Transaction Authentication Platform.
Prior to founding
IIM, Mr. Szoke spent 23 years with Motorola, Inc. holding various management positions in field and product engineering, systems
integration, program management and sales. He spent the last 10 years of his career at Motorola in the Biometrics Industry as Director
of Integration and Project Management and then Director of Global Business Development for Civil Biometrics. From 2008-2011, Mr.
Szoke was President of Thomas Szoke LLC, a technology consulting company focused on identity management and secure credentialing
solutions. Mr. Szoke holds a degree in Electrical Engineering and Applied Mathematics from the University of Akron, in Ohio and
is fluent in Hungarian.
Christopher White
Chris White was
appointed Chief Technology Officer in January 2020. Mr. White joined the Company in 2018, initially as Director Dev-Ops, and was
promoted to SVP Engineering in February 2019. In those roles he was responsible for the Company’s payments and mobile solutions
application development. Prior to joining Ipsidy from 2016 to 2018, Mr. White served as Software Engineering Director at NCR Corporation
and was responsible for development and maintenance of retail location management and point-of-sale systems for the petroleum industry.
From 2015 to 2016 he was Director, Software Device & Tools at Verifone responsible for SDK’s, which were used by internal
and third-party developers to develop software on Verifone devices. Prior to joining Verifone, Chris White was at Ingenico from
2011 to 2015, rising to VP of Core Engineering, where he was responsible for North American payment systems. Mr. White is a veteran
of the United States Marine Corps in which he served honorably from 1991-1996 and received multiple certifications in electronics.
Board & Committees
Board meetings during calendar year ended 2020
During 2020, the
Board of Directors held thirteen meetings as well as committee meetings, as outlined below. Each director attended all of the meetings
of the Board and all of the meetings held by all committees on which such director served. The Board also approved certain actions
by unanimous written consent.
43
Committees established by the Board
The Board of Directors
has standing Audit, Compensation, and Governance Committees. Information concerning the function of each Board committee follows.
Audit Committee
The Audit Committee
is responsible for overseeing management’s implementation of effective internal accounting and financial controls, supervising
matters relating to audit functions, reviewing and setting internal policies and procedures regarding audits, accounting and other
financial controls, reviewing the results of our audit performed by the independent public accountants, and evaluating and selecting
the independent public accountants. The Audit Committee has adopted an Audit Committee Charter which is posted on our Corporate
Governance landing page under the tab labeled “Investors” on our website at http://www.ipsidy.com. The Board has not
designated a member as the “audit committee financial expert” as defined by the SEC, which is not required at this
time. During 2020, the Audit Committee held five conference call meetings.
Compensation Committee
The Compensation
Committee determines matters pertaining to the compensation of our named executive officers and administers our stock option and
incentive compensation plans. The Compensation Committee has adopted a Compensation Committee Charter which is posted on our Corporate
Governance landing page under the tab labeled “Investors” on our website at http://www.ipsidy.com. During 2020, the
Compensation Committee held two meetings through conference calls.
Governance Committee
The Governance Committee
is responsible for considering potential Board members, nominating Directors for election to the Board, implementing the Company’s