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,” “authID” or “the Company,” refers to
the business of authID Inc.
Overview
authID Inc. is a leading provider
of secure, authentication solutions delivered by our easy to integrate Verified platform. Our Verified
platform that delivers Human Factor AuthenticationTM, binds strong passwordless authentication with biometric identity, which
offers our customers a streamlined path to zero trust architecture. Verified FIDO2 passwordless authentication is certified by the
FIDO Alliance to be compliant and interoperable with FIDO specifications.
The
explosive growth in online and mobile commerce, telemedicine, remote working and digital activities of all descriptions is self-evident
to everyone who lived through the Covid 19 pandemic since 2020. Identity theft, phishing attacks, spear-phishing, password vulnerabilities,
account takeovers, benefits fraud - it seems like these words have entered our daily lexicon overnight. These are significant impediments
to the operations and growth of any business or organization, and dealing with the risks and consequences of these criminal activities
has created significant friction in both time, cost and lost opportunity. Consider all the outdated methods that organizations have implemented
in order to prevent fraud. The requests to receive and enter one-time passwords, that can be easily hijacked. The vulnerable security
questions you get asked – whether on-line or when reaching out to a call center – what was your first pet’s name? who
was your best friend in high school? These steps all add up to friction, making it difficult for consumers to login, transact and execute
daily tasks, with little added protection from fraud. Surely there is a better way to address these challenges? authID believes there
is.
authID provides secure, facial
biometric, identity verification, and strong customer authentication. We maintain a global, cloud-based Verified platform for our enterprise
customers or employees to enable their users to easily verify and authenticate their identity through a mobile device or desktop (with
camera) of their choosing (without requiring dedicated hardware, or authentication apps). We can help our customers establish a proven
identity, creating a root of trust that ensures the highest level of assurance for our passwordless login and step-up verification products.
Our system enables participants to consent to transactions using their biometric information with a digitally signed authentication response,
embedding the underlying transaction data and each user’s identity attributes within every electronic transaction message processed
through our platform.
Digital transformation across
all market segments requires trusted identity. Our identity platform offers innovative solutions that are flexible, fast and easy to integrate
and offer seamless user experiences. authID’s products help advance digital transformation efforts without the fear of identity
fraud, while delivering frictionless user experiences. We believe that it is also essential that electronic transactions have an audit
trail, proving that the identity of the individual was duly authenticated. Our platform provides biometric and multi-factor identity software,
which are intended to establish, authenticate and verify identity across a wide range of use cases and electronic transactions.
authID’s products focus
on the broad requirement for enabling frictionless commerce by allowing an entity to instantly “Recognise their Customer”,
their Employee or their Member. Organizations of all descriptions require cost-effective and secure means of growing their business while
mitigating identity fraud. We aim to offer our enterprise customers products that can be integrated easily into each of their business
and organizational operations, in order to facilitate their adoption and enhance the end user customer experience.
Our management believes that
some of the advantages of our Verified Platform approach are the ability to leverage the platform to support a variety of vertical markets
and the adaptability of the platform to the requirements of new markets and new products requiring cost-effective, secure, and configurable
mobile solutions. Our target markets include cybersecurity, workforce, banking, fintech and other disrupters of traditional commerce,
small and medium sized businesses, and system integrators working with government and Fortune 1000 enterprises. At its core, the Company’s
offering, combining its proprietary and acquired biometric and artificial intelligence technologies (or AI), is intended to facilitate
frictionless commerce, whether in the physical or digital world. The Company intends to increase its investment in developing, patenting
and acquiring the various elements necessary to enhance the platform, which are intended to allow us to achieve our goals. One of the
principal intended areas of investment is to enhance and expand our use of artificial intelligence in proprietary software, that we believe
will increase our value to enterprise customers and stockholders alike.
authID is dedicated to developing
advanced methods of protecting consumer privacy and deploying ethical and socially responsible AI. authID is developing a culture that
proactively encourages and rewards our employees for considering the ethical implications of our products. We believe that a proactive
commitment to ethical AI presents a strong business opportunity for authID and will enable us to bring more accurate products to market
more quickly and with less risk to better serve our global user base. Our methods to achieve ethical AI include engaging the users of
our products with informed consent, prioritizing the security of our user’s personal information, considering and avoiding potential
bias in our algorithms, and monitoring of algorithm performance in our applications.
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The Company also owns an entity
in Colombia, MultiPay. On May 4, 2022, the Board approved a plan to exit from certain non-core activities comprising the MultiPay correspondent
bank, payments services in Colombia and the Cards Plus cards manufacturing and printing business in South Africa. On August 29, 2022 the
Company completed the sale of Cards Plus business. See Discontinued Operations.
The Company was incorporated
in the State of Delaware on September 21, 2011 and changed our name to authID Inc. on July 18, 2022.
Our Common Stock is traded
on the Nasdaq Capital Market under the trading symbol “AUID”. Our corporate headquarters have been relocated to 1385 S. Colorado
Blvd., Building A Suite 322, Denver, CO 80222 and our main phone number remains as is (516) 274-8700. We maintain a website at www.authID.ai.
The information contained on, or that can be accessed through, our websites is not incorporated by reference into this prospectus and
is intended for informational purposes only.
Key Trends
We believe that
our financial results will be impacted by several market trends in the identity verification and authentication markets, as well as expanding
digital transformation efforts across a wide range of market segments. These trends include growing concerns over identity theft and fraud,
in part resulting from the impact of the Coronavirus pandemic on the acceleration of digital transformation, for example online shopping
and remote working; the growth in the sharing economy; and the increase in electronic payments and alternative money transfer solutions
provided by both bank and 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 verification,
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 direct salesforce, 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.
Going Concern
The Company’s
consolidated financial statements included in this Annual Report have been prepared in accordance with United States GAAP assuming the
Company will continue on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations
for the next year following the issuance date of these financial statements.
As of December
31, 2022, the Company had an accumulated deficit of approximately $140.1 million. For the year ended December 31, 2022, the Company earned
revenue of approximately $0.53 million, used $12.8 million to fund its operations, and incurred a net loss from continuing operations
of approximately $23.7 million. The continuation of the Company as a going concern is dependent upon financial support from the Company’s
stockholders and noteholders, the ability of the Company to obtain additional debt or equity financing to continue operations, the Company’s
ability to generate sufficient cash flows from operations, successfully locating and negotiating with other business entities for potential
acquisition and /or acquiring new clients to generate revenues and cash flows.
As discussed in the Subsequent Events below, the Company has secured
additional financing which provides funding for its current operations as it continues to invest in its product, people, and technology.
The Company projects that the investments will lead to revenue expansion thereby reducing liquidity needs. However, 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.
Subsequent Events
On February 14, 2023, the Board
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. The Company estimates that it will be incurring costs (in consideration of releases) in the range of
$0.5 million to $1.1 million in connection with the Labor Reduction Plan, which are primarily one-time termination benefits and
which will result in cash expenditures by the Company in that range of amounts over the coming months. Certain employees have Retention
Agreements, which provide for specific benefits upon involuntary termination and the Company is negotiating with those employees over
the final amounts and benefits due under those Agreements.
32
On
March 21, 2022, the Company entered into a Facility Agreement with Stephen J. Garchik, who was and is a shareholder of the Company, pursuant
to which Garchik agreed to provide to the Company a $10.0 million unsecured standby line of credit facility that could be drawn down in
several tranches, subject to certain conditions described in the Original Facility Agreement. Pursuant to the Original Facility Agreement,
the Company paid Garchik the Facility Commitment Fee of 100,000 shares of our common stock upon the effective date of the Original Facility
Agreement.
On
March 8, 2023, the Company entered into an Amended and Restated Facility Agreement with Garchik, pursuant to which the Company and Garchik
amended and restated the Original Facility Agreement in its entirety, to replace the credit facility contemplated by the Original Facility
Agreement with (i) an initial credit facility to the Company in an amount of $900,000 and (ii) the parties to use their reasonable best
efforts after the Initial Funding to negotiate the terms of a subsequent credit facility in the aggregate amount of $2,700,000.
On
March 9, 2023, pursuant to the A&R Facility Agreement, the Company entered into the Initial Promissory Note in favor of Garchik, pursuant
to which Garchik loaned the Principal Amount of $900,000 to the Company. At the same time, as a condition to Garchik providing the Principal
Amount, certain of the Company’s subsidiaries, ID Solutions, Inc., FIN Holdings, Inc. and Innovation in Motion, Inc. entered into
the Guaranty of the Initial Promissory Note with Garchik.
A&R Facility Agreement
Under
the A&R Facility Agreement, Garchik agreed to provide the Initial Funding to the Company upon receipt of a fully executed Initial
Promissory Note and an executed Release Agreement relating to the Original Facility Agreement. The Company and Garchik agreed to use reasonable
best efforts to negotiate the terms of the Subsequent Funding and negotiations continue, but the A&R Facility Agreement will terminate
if definitive documentation for the Subsequent Funding is not entered into before July 1, 2023, for any reason other than breach of a
party’s obligations.
While
the terms of the Subsequent Funding are subject to due diligence and final documentation, a summary of selected terms of the
proposed financing is as follows and attached to the A&R Facility Agreement as Exhibit B thereto. The Subsequent Funding would
be a $2,700,000 secured note facility with a 12% per annum interest rate, paid in kind, capitalized and added to the balance of the
loan on a quarterly basis, calculated on a 360-day year basis, on the outstanding aggregate balance of the Subsequent Facility. The
Subsequent Facility will mature twenty-four (24) months after effectiveness. Garchik will be granted a fully perfected,
non-avoidable, first-priority security interest and lien on all assets of the Company. The Subsequent Facility would be the senior
obligation of the Company and will rank senior in right to payment of the obligations under the existing Convertible Notes
and the liens granted in connection with the Subsequent Facility shall rank pari passu with the liens granted to
holders of the Convertible Notes. Pursuant to this, the Company will use reasonable best efforts to obtain the consent of two-thirds
of the holders of Convertible Notes.
In
satisfaction of a condition precedent to the Initial Funding under the A&R Facility Agreement, Thomas L. Thimot, Phillip L. Kumnick,
Philip R. Broenniman, Michael A. Gorriz and Neepa Patel, comprising all directors of the Company’s Board of Directors other than
Joseph Trelin, Michael L. Koehneman and Jacqueline L. White, delivered to the Company executed Board Resignation Letters in escrow that
became effective as of the Initial Funding. Also in satisfaction of a condition precedent to the Initial Funding under the A&R Facility
Agreement, on March 9, 2023, the Board of Directors appointed Joseph Trelin to the Company’s Compensation and Audit Committees,
effective as of the Initial Funding. On March 16, 2023, the Board of Directors appointed Joseph Trelin to the Company’s Chairman
of the Board effective immediately.
The A&R Facility Agreement also provided Garchik with the right
to nominate four (4) New Designees (not counting any Remaining Directors) to be considered for election to the Board of Directors. In
satisfaction of a condition precedent to the Initial Funding under the A&R Facility Agreement, as described in greater detail in Item
5.02 of this Current Report, the Board of Directors appointed four (4) New Designees to the Board, effective as of the Initial Funding.
The Company also agreed that the Board of Directors would, promptly following the closing of the Initial Funding, evaluate candidates
for appointment as replacement of Mr. Thimot as Chief Executive Officer and that, upon the earlier of appointment of a new Chief Executive
Officer or April 3, 2023, Mr. Thimot’s resignation letter as Chief Executive Officer will be declared effective. The Company
appointed Mr. Daguro as Chief Executive Officer, and Mr. Thimot’s resignation became effective on March 23, 2023.
Initial Promissory
Note
Interest
accrues on the Principal Amount until paid in full at a per annum rate equal to 15%, computed on the basis of a 360-day year and twelve
30-day months, payable in arrears on March 31, June 30, September 30 and December 31 of each year commencing March 31, 2023 or the first
business day following each such date if any such date falls on a day which is not a business day, in cash. The Principal Amount shall
mature on March 31, 2025.
The
Company made standard (i) affirmative covenants to Garchik, including, but not limited to, in regard to its existence, payment obligations,
business activities, financial information and use of proceeds and (ii) negative covenants to Garchik, including, but not limited to,
in regard to the rank of indebtedness, incurrence of indebtedness, maintenance of insurance and properties, transactions with affiliates
and disposition of assets.
While
the Initial Promissory Note is unsecured, in the event of either (I) the conversion of the Convertible Notes of all amounts outstanding
thereunder and the release of all liens over the Company’s assets granted by and through the Transaction Documents (as defined in
the Convertible Notes) or (II) receipt of the consent of the requisite holders of the Convertible Notes, in each case, the Company will,
as collateral security for the due and punctual payment and performance of all obligations under the Initial Promissory Note, pledge and
assign to Garchik a first-priority, continuing security interest in substantially all of the assets of the Company, subject to exclusions
consistent with those contained in the Transaction Documents. The Company has agreed to use its reasonable best efforts to deliver to
Garchik an amendment to the Securities Purchase Agreement, dated as of March 21, 2022, pursuant to which the Convertible Notes were purchased,
permitting the grant of that collateral security to Garchik. Upon the grant of that collateral security, interest will accrue on the outstanding
Principal Amount under the Initial Promissory Note at a per annum rate equal to 12%, paid in kind, capitalized and added to the balance
of the loan on a quarterly basis, calculated on a 360-day year basis, on the outstanding aggregate balance.
33
The
Initial Promissory Note includes customary Events of Default, including, among other things, (i) failing to make payment of any of the
Principal Amount or interest due and such failure continues for not less than 5 business days without being cured; (ii) any representation
or warranty in the Initial Promissory note being untrue in any material respect and such failure continuing for a period of not less than
5 business days without being cured; or (iii) the Initial Promissory Note shall for any reason cease to be, or shall be asserted by the
Company or any affiliate thereof not to be, a legal, valid and binding obligation of the Company. Upon an Event of Default, Garchik can
declare all outstanding amounts under the Initial Promissory Note due, along with any accrued interest.
Guaranty
In
connection with the Company and Garchik entering into the Initial Promissory Note, each Guarantor of the Company agreed to, for the benefit
and security of Garchik, guarantee the payment and performance all of the Company’s obligations under the Initial Promissory Note
and the Guaranty.
Release Agreement
In
connection with the A&R Facility Agreement, on March 9, 2023, the Company and Garchik entered into the Release Agreement, pursuant
to which the Company and Garchik mutually agreed to release any and all rights to make a claim against the other and any existing claims
against the other arising out of or relating to the Original Facility Agreement.
Additional Information
The
foregoing is only a summary of the material terms of the A&R Facility Agreement, the Initial Promissory Note, the Guaranty, the Release
Agreement and the other transaction documents, and does not purport to be a complete description of the rights and obligations of the
parties thereunder. The summary of the A&R Facility Agreement, the Initial Promissory Note, the Guaranty, the Release Agreement is
qualified in its entirety by reference to the forms of such agreements, which are filed as exhibits to this Annual Report and are incorporated
by reference herein.
Pursuant
to the Nomination Right under the A&R Facility Agreement, Mr. Garchik nominated Rhon Daguro, Ken Jisser, Michael Thompson and Thomas
Szoke for appointment to the Board of Directors. On March 9, 2023, the Board of Directors appointed Messrs. Daguro, Jisser,
Thompson and Szoke as additional directors of the Company and reduced the size of the Board of Directors from 8 directors to 7 directors,
with effect from the resignations of the Retiring Directors. Under the terms of the A&R Facility Agreement, the Nomination Right expired
upon the appointment of the four (4) Additional Directors to the Board of Directors.
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.
Revenue Recognition
Revenue recognition policy for significant revenue generating activities
from continuing operations:
All contracts are reviewed
for their respective performance obligations and related revenue and expense recognition implications. A performance obligation under
the revenue standard is defined as a promise to provide a “distinct” good or service to a customer and is the unit of account
for revenue recognition. The Company’s revenues that are derived from the identity services could include multiple performance obligations.
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.
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Legacy Authentication Services
– The Company historically has sold certain legacy software licenses to customers and revenue is recognized when delivery occurs,
and all other revenue recognition criteria have been met. During both 2022 and 2021, the Company provided annual software maintenance
support services relating to previously licensed software on a stand-ready basis. These fees were billed in advance and recognized ratably
over the requisite service period as revenue.
Revenue recognition policy
for its discontinued operations:
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.
Intangible Assets
Intangible assets
include 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, 2022 and 2021, all assets have been placed into service.
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, 2022, the Company determined that certain intangibles assets are no longer recoverable
and wrote off approximately $1.1 million. During the year ended December 31, 2021, the Company determined that certain intangibles assets
would not be recovered and an impairment expense of approximately $0.8 million was recognized. As of December 31, 2022 and 2021, the intangible
assets approximate $0.6 million and $2.4 million, respectively.
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, 2022 and 2021, the Company’s projection and assessment did not indicate that an impairment charge was required as its fair value
was in excess of carrying value.
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 both employee and non-employee awards, the fair value of each stock option award
is estimated on the date of grant using the Black-Scholes and Monte-Carlo valuation models as appropriate that uses assumptions for expected
volatility, expected dividends, expected term, and the risk-free interest rate. 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.
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.
35
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 (6) certain
other items management believes affect the comparability of operating results. Other items included the following:
● Severance cost of $0.2 million in 2022 and $0.3 million in 2021
● Impairment loss of $1.1 million in 2022 and $0.8 million in 2021
● Gain on extinguishment of debt of $0 in 2022 and $1.0 million in 2021
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:
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 From Continuing Operations
to Adjusted EBITDA Continuing Operations
For the Year Ended December 31,
Addback:
Gain on extinguishment of debt - (971,522 )
Adjusted EBITDA continuing operations (Non-GAAP) $ (11,398,530 ) $ (8,089,425 )
The increase in
Adjusted EBITDA Loss From Continuing Operations in 2022 compared to 2021 is principally due to the investment in people, technology and
marketing associated with the rebranding of the Company and the improvement of its core products.
Results of Operations and Financial Condition for the Year Ended
December 31, 2022 as Compared to the Year Ended December 31, 2021 – Continuing Operations
Revenues, net
During the year ended December
31, 2022, the Company revenues from Verified software license were approximately $157,000 compared to approximately $65,000 for the year
ended December 31, 2021. Verified software license revenue increased as we acquired new customers.
During the year ended December
31, 2022, Legacy authentication services revenues were $371,000 compared to $549,000 for the year ended December 31, 2021. Revenue from
Legacy authentication services dropped significantly due to the loss of a large customer that decommissioned a legacy product offering
as of April 1, 2022.
36
General and administrative expenses
During
the year ended December 31, 2022, general and administrative expenses increased by approximately $1.8 million compared to the year ended
December 31, 2021. General and administrative expenses increased mostly due to the higher non-cash stock-based charges, higher
compensation for the sales force and marketing expenses as the Company makes investment in people and marketing its product offering.
Research and development expenses
During the year ended December
31, 2022, research and development expenses increased by approximately $3.4 million as the Company increased staffing and third party
resources as it continues to enhance its Verified software. In addition, in the second half of fiscal year 2022 we aligned expenses with
resources and activities for fiscal year 2022 which resulted in higher research and development expenses and lower general and administrative
expenses.
Depreciation and amortization expense
During the year ended December
31, 2022, depreciation and amortization decreased by approximately $408,000 compared to the year ended December 31, 2021, as the Company
reduced the value of certain legacy business assets.
Interest expense
Interest expense increased
during the year ended December 31, 2022 compared to the year ended December 31, 2021 by $773,000 as the Company issued $9.1 million Convertible
Notes in March 2022.
Discontinued operations
The Board of Directors of
authID considers it in the best interests of the Company to focus its business activities on providing biometric identity verification
products and services by means of our proprietary Verified platform. Accordingly, on May 4, 2022, the Board approved a plan to exit from
certain non-core activities comprising the MultiPay correspondent bank, payment services in Columbia and the Cards Plus cards manufacturing
and printing business in South Africa.
Cards Plus business in South Africa
On August 29, 2022, the Company
completed the sale of Cards Plus business for a price of $300,000, less $3,272 in costs to sell, and recognized a loss of $188,247 from
the transaction. Of the $300,000 gross proceeds, $150,000 was paid on closing and the remaining $150,000 is expected to be paid in a year
which is currently recorded in other current assets as of December 31, 2022.
MultiPay business in Colombia
The Company is exiting the
MultiPay business in Colombia in an orderly fashion, honoring our obligations to employees, customers and under applicable laws and regulations.
We plan to maintain our customer support and operations team in Bogota, which performs essential functions to support the global operations
of our Verified product.
As of December 31, 2022 all
impacted employees left the Company and the Company also paid each employee their compensation entitlements and severance packages under
the MultiPay retention plan and obligations under the appropriate statutes.
As of December 31, 2022, the
Company is leasing certain MultiPay proprietary software to its one customer. All remaining employees in MultiPay are working for our
US operation.
During the year December 31,
2022, Cards Plus revenue was approximately $1,264,000 compared to approximately $1,318,000 during the year ended December 31, 2021. MultiPay
revenue in the same periods was approximately $240,000 and $361,000, respectively. Cards Plus had net income from discontinued operations
during the year ended December 31, 2022 of approximately $22,000 compared to losses from discontinued operations of approximately $21,000
during the year ended December 31, 2021. MultiPay had losses of approximately $389,000 and $933,000 during the years ended December 31,
2022 and 2021, respectively.
The financial statements of
Cards Plus and MultiPay have been classified as discontinued operations as of December 31, 2022, as all required classification criteria
under appropriate accounting guidance were met.
Ukraine
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 us 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 Latvia and 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.
37
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 or 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.
Macro-Economic Conditions
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. The continuing war in Ukraine, inflationary pressures,
rising energy prices and increases in interest rates have impacted the United States and other major economies and have created uncertainty
regarding a possible recession. As a result, many businesses, especially in the technology sector have made significant cut-backs in expenditure,
including reductions in force and investment freezes. Our sales and results are also impacted by the changes in levels of spending on
identity verification, 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 of our revenue from those products.
Covid-19
Covid-19 emerged
globally in December 2019, and it has been declared a pandemic. Covid-19 is still impacting customers, business, results and financial
condition throughout the world. The Company’s day-to-day operations have been impacted differently depending on geographic location
and services that are being performed. Our operations in the United States and Colombia have not been impacted this year 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 include Covid-19 considerations.
Furthermore, working remotely can cause a delay in decision
making and finalization of negotiations and agreements.
Liquidity and Capital Resources
As of December
31, 2022, current assets were $4.3 million and current liabilities outstanding amounted to $1.2 million which resulted in net working
capital of $ 3.1 million.
Net cash used by
operating activities was $12.8 million for the year ended December 31, 2022 compared to $8.8 million in 2021. Cash used in operations
for 2022 and 2021 was the primarily result of funding the business operations as the Company invested in people, product and marketing
as we are developing and expanding the business.
Net cash used in
investing activities in 2022 and 2021 was approximately $183,000 and $117,000 as the Company invested in software development expenditures
which were capitalized.
Net cash provided
by financing activities for 2022 was approximately $10.2 million, which consisted primarily of the net proceeds from the sale of convertible
notes and of common stock in March 2022. The Company also paid the short-term convertible note of $662,000 in full. Net cash provided
by financing activities for 2021 was approximately $11.1 million, which consisted primarily of the net proceeds from the sale of common
stock and the exercise of stock options and warrants in 2021.
In 2023, 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 and technology deployment will require continued investment.
We raised approximately $10.3 million and $11.1 million in 2022 and 2021, respectively, through equity and debt financing at varying terms.
As discussed in the Subsequent Events below, the Company has secured additional financing of $3.6 million which provides funding for its
current operations as it continues to invest in its product, people, and technology. The Company projects that the investments will lead
to revenue expansion thereby reducing liquidity needs. However, 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 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.
38
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 2022 and 2021 from the sale of equity
and convertible notes.
As of December 31, 2022, the Company
has a series of Senior Secured Convertible Notes outstanding for approximately $9.1 million due in March 2025.
See Notes 6, 7 and 8 of the Consolidated
Financial Statements for additional information associated with the credit facility, notes payable and convertible notes payable.
See “Subsequent Events”
for additional information regarding the Facility Agreement with Garchik.
Equity Financing
See Note 9 of the Consolidated
Financial Statements for additional information associated with equity financing in 2022 and 2021.
2022 Common Stock Transactions
2021 Common Stock Transactions
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Contractual Obligations
As of December 31, 2022, the Company had the following contractual
obligations.
Payments due by period
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
39
Item 8. Financial Statements and Supplementary Data
Our consolidated
financial statements and notes thereto and the report of our independent registered public accounting firm (PCOAB ID 00677), are set forth
on pages F-1 through F-29 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 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, 2022, 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, 2022, 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, 2022.
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.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions
that Prevent Inspections.
Not applicable.
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
Rhoniel A. Daguro 48 Director and Chief Executive Officer
Joseph Trelin (1)(3) 62 Chairman of the Board of Directors
Hang Thi Bich Pham 47 Chief Financial Officer
Ken Jisser 45 Director
Michael L. Koehneman* (1)(2) 62 Director
Thomas R. Szoke 58 Director
Michael C. Thompson (2)(3) 62 Director
Jacqueline L. White* (1)(3) 58 Director
* denotes Committee Chair
(1) Audit Committee
(2) Governance Committee
(3) Compensation Committee
Rhoniel
A. Daguro
Mr.
Daguro joined our company as a director on March 9 2023 and was appointed CEO on March 23, 2023. He has over 20 years of sales, marketing,
technology, and venture capital experience. He has built multiple profitable software and professional services firms. Most recently,
from 2018 to 2022, he served as the Chief Revenue Officer of Socure Inc. Prior to that, Mr. Daguro held various executive sales positions
with Persistent Systems, Hortonworks, and Oracle.
Joseph Trelin
Mr. Trelin joined
our company as a Director on April 18, 2022 and became Chairman of the Board on March 16, 2023. Mr. Trelin, is a senior, creative business
and product leader, technologist and entrepreneur. Since June 2021, Mr. Trelin has served in a consultant capacity advising start-ups
to mid-size companies on operations, product strategy and growth. From January 2016 to July 2019, Mr. Trelin served as the Chief Platform
Officer of Clear Secure Inc. Mr. Trelin served as the VP Product, Digital Products at NBCUniversal, Inc. from January 2015 through January
2016 and in various roles including as Product Management & Technology Business Leader and General Manager for Amazon.com, Inc. from
January 2009 to January 2015. Mr. Trelin also previously served as the Vice President, Product Development and IT for Standard and Poor’s.
Mr. Trelin received a Masters Equivalent in Computer Science from Hofstra University and a BA in Sociology from the State University of
New York Albany.
Annie Pham
Mrs. Hang Thi Bich Pham (“Annie”) serves as Chief Financial
Officer of the Company on June 21, 2022. Mrs. Pham has served in senior finance leadership roles in the technology sector, most recently
at SonicWall, Inc, where she served as Chief Accounting Officer from 2017 to the present. From 2014 to 2017, Mrs. Pham served as Vice
President of Finance at Applied Micro Circuits Corporation (acquired by MACOM Technology Solutions Holding and from 2008 to 2014 as Director,
Assistant Corporate Controller at Broadcom (formerly Avago), where she scaled Avago’s global financial function to meet the requirements
of a publicly traded and high-growth company with revenues growing from $1+billion to $2+billion over a three-year period. Mrs. Pham earned
her MBA at the University of Sydney, Australia. She is a Licensed Certified Public Accountant (active) in the state of California.