Item 1A. Risk Factors
Summary of Risk Factors The following summarizes
the principal factors that make an investment in our company speculative or risky, all of which are more fully described in the Risk Factors
section below. This summary should be read in conjunction with the Risk Factors section and should not be relied upon as an exhaustive
summary of the material risks facing our business. The following factors could result in harm to our business, reputation, revenue, financial
results, and prospects, among other impacts:
● We depend upon key personnel and need additional personnel.
● We rely in part on third-party software to develop and provide our solutions.
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● Government regulation could negatively impact the business.
● We do not anticipate paying any cash dividends in the foreseeable future.
We have a history of losses and we may not be able to
achieve profitability going forward.
We have an
accumulated deficit of approximately $140.1 million as of December 31, 2022 and incurred an operating loss of approximately $24.2 million
for the year ended December 31, 2022. We have had net losses in most of our quarters since our inception. We expect that we will continue
to incur net losses in 2023. 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 $12.8 million and approximately $8.8 million for the years ended December
31, 2022 and 2021, respectively. We anticipate that we will continue to have negative cash flows from operating activities through March
31, 2024 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 $22.5 million and $11.1 million in 2022 and 2021, respectively, through equity and debt
financing at varying terms.
On February 14, 2023, the Board of Directors of authID resolved to
implement a revised budget for 2023 in order to reduce expenses and cash requirements and as part of such revised budget decided to re-balance
staffing levels to better align with the evolving needs of the Company (the “Labor Reduction Plan”). Under the Labor Reduction
Plan the Company intends that up to 20 of the Company’s 31 employees and contractors be terminated, of which 21 are United States
based employees. 12 employees and 6 contractors have been given notice of their termination and the remainder may be terminated over the
next several months. The Company has also given termination notice to certain vendors and contractors that provide services to the Company.
As a result, the Company’s revised budget is expected to reduce the Company’s monthly net cash used in operating activities,
which reduces the expenses and cash requirements for the continued operation of the business. Therefore in order to implement and grow
our operations through March 31, 2024, and achieve an expected annual revenue stream from our products, we expect that we will need to
raise additional capital or finance facilities. 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. As an emerging growth company, we may take advantage of reduced reporting requirements
that are otherwise applicable to public companies. We may take advantage of these provisions until December 31, 2023. However, if certain
events occur prior to such date, including if we are deemed a “large accelerated filer” under the Exchange Act, our annual
gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we may cease
to be an emerging growth company prior to such date. 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. 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.
On March 9, 2023, our CEO Tom Thimot gave notice of his resignation
to the Board of Directors and his successor Rhon Daguro was appointed March 23, 2023. Our success depends on the continued services of
our new CEO and of certain other members of the current management team. Our executive team is 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 verified 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.
If our technology and solutions are not adopted and
used by customer organizations, we will not be able to grow our business and our operations will be negatively affected.
Our ability
to grow depends significantly on whether organizations of various types and sizes adopt our technology and solutions as part of their
new standards. 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 verification and authentication technologies and solutions must be adapted to and adopted
in a variety of areas including, among others, computer and online systems access control, and identity verification for transaction authentication
purposes.
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.
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We have sought in the past and may 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:
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 has occurred, for example the
partial United States government shutdown in 2018/19, 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.
We have historically depended upon a small number of
large system sales ranging from $50,000 to $1,500,000 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 $50,000 to $1,500,000. 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. We have 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 historically to date are attributable to sales and business operations in jurisdictions other than the United States, although
we are now focusing our efforts in generating more United States based revenues. 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;
● increased collection risks; and
● impact of the Coronavirus or other pandemics;
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. We could be exposed to fines and
penalties in the event of breach any applicable sanctions legislation or orders. In addition, we 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
cash flows.
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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, presentation attacks, 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, presentation attacks to biometric data capture systems, malware, computer viruses and other means of unauthorized
access. While we regularly review our security policies, protocols, controls and systems to determine their effectiveness for detection
and prevention of such attacks, and to make improvements and fix any known vulnerabilities where necessary, new means and methods for
such attacks are constantly being developed by bad actors and we may not become aware of such new attacks or vulnerabilities prior to
being subject to such an attack. There is no guarantee that we can prevent all such attacks, even if we become aware of their potential.
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 impact of the coronavirus pandemic (COVID-19) on our overall operations. The continuing impact of this disease
or any other disease which may give rise to a pandemic in the United States and worldwide are unknown, and the widespread growth in infections,
or travel restrictions, quarantines or site closures imposed as a result of 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.
War in Ukraine may impact the business of the Company,
the markets in which it operates and the financial markets, in which the Company needs to raise capital.
The war in
Ukraine may impact the Company and its operations in a number of different ways, which are yet to be fully assessed and are therefore
uncertain. The Company’s principal concern is for the safety of the personnel who support from that region. The Company works with
third party sub- contractors for outsourced services, including software engineering and development, some of whom are based in Eastern
Europe, including Ukraine. The Company also works with outsourced engineers and developers and third-party providers in other parts of
the world, including the United States, Europe, India, and South America. While the continuing impact of this conflict and the response
of the United States and other countries to it by means of trade and economic sanctions, or other actions is still unknown, it could disrupt
our ability to work with certain contractors. The Company has taken steps to diversify its sub-contractor base, which may in the short
term give rise to additional costs and delays in delivering software and product upgrades.
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The uncertainty
impacting and potential interruption in energy and other supply chains resulting from military hostilities in Europe and the response
of the United States and other countries to it by means of trade and economic sanctions, or other actions, may give rise to increases
in costs of goods and services generally and may impact the market for our products as prospective customers reconsider additional capital
expenditure, or other investment plans until the situation becomes clearer. On the other hand the threat of increased cyber-attacks from
Russia and other countries may prompt enterprises to adopt additional security measures such as those offered by the Company.
For so long
as the hostilities continue and perhaps even thereafter as the situation in Europe unfolds, we may see increased volatility in financial
markets and a flight to safety by investors, which may impact our stock price and make it more difficult for the Company to raise additional
capital at the time when it needs to do so, or for financing to be available upon acceptable terms. All or any of these risks separately,
or in combination could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
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 Microsoft Azure and Amazon Web
Services. 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 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.
Our success
depends in part on our ability to protect our core technology and intellectual property. To date, we have relied primarily on a combination
of patents, patent applications, trade secret and copyright laws, as well as nondisclosure and other contractual restrictions on copying,
reverse engineering and distribution to protect our proprietary technology. There can be no assurance that any of our patent applications
will result in the issuance of a patent or that the examination process will not require us to narrow our claims in any application. In
addition, any patents may be contested, circumvented, found unenforceable or invalid and we may not be able to prevent third parties from
infringing on them.
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.
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.
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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.
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, directors and holders of 5% of outstanding
shares together 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 and the holders of at least 5% of the outstanding shares of the Company currently beneficially own approximately 18.6% of
our outstanding Common Stock, and 32.2% on a fully diluted basis assuming the exercise of both vested and unvested options and warrants.
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. 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.
authID offers
its VerifiedTM Identity Authentication platform allowing the Company to on-board customers who wish to deploy our services and solutions
in order to eliminate passwords and know with biometric certainty the user who is engaging with their systems. authID’s solutions
include the ability to verify the identity of a user, via remote identity verification, then enable device and transaction authentication
using both device and cloud biometrics and, all digitally signed by the user’s identity. The Company’s platform allows our
customers’ users to engage with the Verified platform using commodity, consumer grade mobile or desktop devices via a web-browser
or corresponding Android or iOS smartphone app.
In 2022 we
exited the payment processing and smart card products manufacturing and printing businesses and accordingly these are not discussed here.
The Company’s
proprietary, patented Verified platform allows our customers to establish trust in identity, authenticate and verify an identity without
a password but with both device and biometric certainty, and not with phishable passwords or one-time pin codes. authID.ai’s Verified
platform has several identity verification and authentication products each facing different competitors and incumbent technologies we
can replace.
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For onboarding
users, employees or customers remotely, Verified delivers seamless identity verification with quick, online identity document verification
and facial biometric matching of a selfie to the identity credential photo with iBeta-certified liveness confirmation. Our FIDO2 strong
customer authentication and passwordless login product leverages strong identity verification during device authenticator registration
to create a digital chain of trust between biometrically verified individuals, their accounts, and their devices. Our FIDO2 authentication
service also eliminates the risks and costs of legacy passwords and phishable MFA such as one-time pin codes. Rooted to a trusted identity
obtained during the identity verification and onboarding process, our Verified biometric multi-factor authentication offers high-assurance,
biometric, cloud-based, multi-factor authentication to secure high-risk transactions.
In reviewing
the competitors that exist for the Company’s current and planned platform products relating to the three main elements of identity
management: the establishing of identity, use of identity through device-based biometric authentication, and use of identity through cloud-based
biometric verification, the Company considers a number of factors. authID’s platform utilizes an Identity as a Service (IDaaS) approach
which combines the three elements into a single fast, secure, and fully automated, platform. authID believes that this full stack platform
approach is exceptional in that it offers documentary identity verification, FIDO device authentication, and cloud based, biometric, multi-factor
verification covering digital account access and transaction confirmation use cases for both consumer and workforce applications. The
competitive landscape includes several companies that mainly address only one element, with some addressing multiple elements independently
without a seamless integration between them.
In looking
further at our competition, the Company does not consider providers which are major conglomerates with vertically integrated cybersecurity
companies, due to the vast array of services which they offer. Furthermore, some of the competitors which do offer solutions for digital
use cases, are major legacy providers offering hardware heavy solutions principally for governmental users. These include Idemia, Thales,
and Supercom. This is in contrast to authID’s Identity authentication platform approach which is based on offering app and browser-based
software products which are usable on mobile and desktop computing devices without additional hardware requirements.
To further
breakdown the competitive landscape into companies that provide identity proofing we consider the following competitors: Jumio, Au10Tix,
OnFido, Mitek, Trulioo, ID.me, Veriff, and Acuant. Companies that provide only a single solution may be seeking to combine with authentication
and biometric verification technology providers to expand their ID proofing solutions’ capabilities. authID offers Identity Verification,
which is used once at enrollment, whereas our authentication service is used over and over in a recurring revenue model. In appropriate
cases we may decide to cooperate with these entities and yield the one-time revenue to gain the recurring authentication revenue.
Another aspect
of the competitive landscape is device-based authentication products using the FIDO2 passwordless standard. Companies that are believed
to be competing with authID in this area are: HYPR, Strongkey, Daon, Trusona, Callsign, Duo and Transmit Security.
authID believes
that the added security of combining integrated cloud biometric authentication with device based FIDO2 authentication with integrated
cloud biometric authentication meets the Zero Trust mandates for unphishable authentication that provides both device and identity signals
of a user. Further the simplicity of looking at your phone to “trust your selfie” should compete well against these incumbents,
and offer a more adoptable, ubiquitous, and cost-effective solution without dedicated hardware.
Finally, looking
at the competitive landscape for cloud-based biometric identity authentication applications the companies that are believed to be competing
with authID in this area are Jumio, Aware, Acuant, Au10Tix, and 1Kosmos.
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 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.
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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 Colombia and the United Kingdom) may require
it to register its databases with governmental authorities in those countries and to comply with additional disclosure and consent requirements
with regard to the collection, storage and use of personal information of individuals resident in those countries. 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. 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, such as New York are considering additional legislation. Specifically,
several states have adopted or are considering adopting a Biometric Information Privacy Act, or BIPA modelled on the Illinois statute,
which governs the collection, processing, storage and distribution of biometric information such as facial biometric templates and fingerprints.
Several of these new statutes give individuals rights of action to sue violators, which have resulted in a number of class action law
suits. These regulations could have a significant impact on our businesses.
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. We are also subject to the corporate governance and other listing rules of the Nasdaq Stock Market. 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.
Our amended and restated bylaws
designate certain courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers,
or employees.
Our amended
and restated bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware
will be the exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Company; (ii) any action asserting a
claim for breach of a fiduciary duty owed by any director, officer, employee, or agent of ours to us or our stockholders; (iii) any action
asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the Certificate of Incorporation, or the
bylaws; and (iv) any action asserting a claim governed by the internal affairs doctrine (the “Delaware Forum Provision”).
In addition, our amended and restated bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares
of our common stock is deemed to have notice of and consented to the Delaware Forum Provision.
Section 27
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), creates exclusive federal jurisdiction over all suits
brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the Delaware
Forum Provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which
the federal courts have exclusive jurisdiction. We note, however, that there is uncertainty as to whether a court would enforce this provision
and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
We recognize
that the Delaware Forum Provision in our amended and restated bylaws may impose additional litigation costs on stockholders in pursuing
any such claims, particularly if the stockholders do not reside in or near the State of Delaware. Additionally, the Delaware Forum Provision
may limit our stockholders’ ability to bring a claim in a forum that they find favorable for disputes with us or our directors,
officers or employees, which may discourage such lawsuits against us and our directors, officers and employees even though an action,
if successful, might benefit our stockholders. The Court of Chancery of the State of Delaware may also reach different judgments or results
than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring
the action, and such judgments may be more or less favorable to us than our stockholders.
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.
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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 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 take advantage of these provisions at least until December 31, 2024. However, if certain events occur
prior to such date, including if we are deemed a “large accelerated filer” under the Exchange Act, our annual gross revenues
exceed $1.07 billion or we issue more than $1.0 billion of non- convertible debt in any three-year period, we may cease to be an emerging
growth company prior to such date.
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 you 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.
There can be no assurance that we will be able to comply
with the continued listing standards of the Nasdaq Capital Market. Our failure to meet the continued listing requirements of the Nasdaq
Capital Market could result in a de-listing of our Common Stock.
We cannot assure you that we will
be able to comply with the continuing listing requirements that we are required to meet in order to maintain a listing of our Common Stock
on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate
governance requirements or the minimum stockholder’s equity requirement, the Nasdaq Capital Market may take steps to de-list our
Common Stock. Such a de-listing would likely have a negative effect on the price of our Common Stock and would impair our stockholders’
ability to sell or purchase our Common Stock when they wish to do so. In the event of a de-listing, we would take actions to restore our
compliance with the Nasdaq Capital Market’s listing requirements, but we can provide no assurance that any action taken by us would
result in our Common Stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity of
our Common Stock.
On January 25, 2023, the Company
received notice from The Nasdaq Stock Market that the closing bid price for the Company’s common stock had been below $1.00 per
share for the previous 30 consecutive business days, and that the Company is therefore not in compliance with the minimum bid price requirement
for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). Nasdaq’s notice has no immediate effect
on the listing or trading of the Company’s common stock on The Nasdaq Capital Market. The notice indicates that the Company will
have 180 calendar days, until July 24, 2023, to regain compliance with this requirement.
The Company is also required to
comply with one of the Continued Listing Standards set forth under Nasdaq Listing Rule 5550(b) (the “Rule”), which obligates
the Company to maintain either Stockholders’ equity of at least $2.5 million, Market Value of Listed Securities of at least $35
million, or Net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently
completed fiscal years. As of the date of filing of this Annual Report the Company does not comply with Rule 5550(b), although no notice
has yet been received from The Nasdaq Stock Market to that effect. While the Company has plans to cure the deficiency by restructuring
its balance sheet and raising additional equity investment, there is no assurance that such plans will be successful and if the Company
is not able to regain compliance with the Rules within the time periods set forth in the applicable rules, the Nasdaq Capital Market may
take steps to de-list our Common Stock.
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