UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
☐TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-40747
authID Inc.
(Exact name of registrant as specified in its charter)
1580 North Logan Street, Suite 660, Unit 51767
Denver, CO80203
(Address of principal executive offices)
Registrant’s telephone number, including
area code: 516-274-8700
Title of each class Trading Symbol: Name of each exchange on which registered
Common Stock par value $0.0001 per share AUID The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g)
of the Exchange Act:
Common Stock, $.0001 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐ Yes ☒ No
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐ Yes ☒ No
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Yes ☒ No
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of June 30, 2023, the last business day of
the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates was
$40,795,215 which is based on the average bid and ask price of such common equity, as of the last practical business day of the registrant’s
most recently completed second fiscal quarter of $7.12.
Indicate the number of shares outstanding of each
of the registrant’s classes of common stock as of the latest practicable date.
Class Outstanding at March15, 2024
Documents incorporated by reference: None
TABLE OF CONTENTS
GENERAL INFORMATION
PART I
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 21
Item 1C. Cybersecurity 22
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24
PART II
Item 6. Reserved 28
Item 8. Financial Statements and Supplementary Data 40
Item 9A. Controls and Procedures 40
Item 9B. Other Information 41
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection 41
PART III
Item 10. Directors, Executive Officers and Corporate Governance 42
Item 11. Executive Compensation 47
Item 14. Principal Accounting Fees and Services 59
PART IV
Item 15. Exhibits and Financial Statement Schedules 60
SIGNATURES 62
i
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 1 (Business),
Item 1A (Risk Factors), Item 3 (Legal Proceedings), Item 7 (Management’s Discussion and Analysis of Financial Condition and Results
of Operations), Item 7A (Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in this Annual Report on Form 10-K
as well as in other materials and oral statements that the Company releases from time to time to the public constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concerning
management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and
other similar matters involve significant known and unknown risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of results to differ materially from any future results, performance or achievements discussed or
implied by such forward-looking statements. Such risks, uncertainties and other important factors are discussed in Item 1A (Risk Factors)
and Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, these statements
constitute the Company’s cautionary statements under the Private Securities Litigation Reform Act of 1995. It should be understood
that it is not possible to predict or identify all such factors. Consequently, the following should not be considered to be a complete
discussion of all potential risks or uncertainties. The words “anticipate,” “estimate,” “expect,”
“project,” “intend,” “believe,” “plan,” “target,” “forecast” and
similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date of the document
in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking
statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which the
forward-looking statement is based. It is advisable, however, to consult any further disclosures the Company makes on related subjects
in its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission.
Emerging Growth Company Status
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an “emerging
growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We will remain an “emerging growth company” until the earliest of (i) the last day of the
fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth
anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement; (iii) the date
on which we have issued more than $1 billion in non-convertible debt during the prior three year period; and (iv) the date on which we
are deemed to be a “large accelerated filer.” We may take advantage of the extended transition period until the first to occur
of the date we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of the extended
transition period. Consequently, our financial statements may not be comparable to companies that comply with public company effective
dates.
Reverse Stock Split
On June 26, 2023, the Company filed a Certificate
of Amendment to its Amended and Restated Certificate of Incorporation to effect a one-for-eight (1-for-8 reverse split (the “Reverse
Split”) of the shares of the Company’s common stock. The Reverse Split became effective on July 7, 2023. As a result of the
Reverse Split, every eight shares of the Company’s issued and outstanding common stock automatically converted into one share of
common stock, without any change in the par value per share, and began trading on a post-split basis under the Company’s existing
trading symbol, “AUID”, when the market opened on July 10, 2023. The Reverse Split uthIDted all holders of common stock uniformly.
In addition, effective as of the Reverse Split, proportionate adjustments were made to all then-outstanding options and warrants with
respect to the number of shares of common stock subject to such options or warrants and the exercise prices thereof, as well as to the
conversion price under the remaining Convertible Notes. The impact of this change in capital structure has been retroactively applied
to all periods presented herein.
ii
PART I
Item 1. Business
Overview
authID Inc. (together with its subsidiaries, the
“Company”, “authID”, “we” or “our”) ensures cyber-savvy enterprises “Know Who’s
Behind the Device”TM for every customer or employee login and transaction. Through its easy-to-integrate, patented,
biometric identity platform, authID quickly and accurately verifies a user’s identity, eliminating any assumption of ‘who’
is behind a device and preventing cybercriminals from taking over accounts. authID combines digital onboarding, biometric passwordless
authentication and account recovery, with a fast, accurate, user-friendly experience – delivering identity verification in 700ms. Establishing
a biometric root of trust for each user that is bound to their accounts, or provisioned devices, authID stops fraud at onboarding,
eliminates password risks and costs, and provides the faster, frictionless, and more accurate user identity experience demanded
by operators of today’s digital ecosystems.
Our Platform
Our
VerifiedTM cloud-based platform was developed with internally developed software as well as acquired and licensed technology
and provides the following core services:
● Biometric Identity Verification
● Biometric Identity Authentication
● Account / Access Recovery
● FIDO Passkey binding
Biometric
Identity Verification
Biometric
identity verification establishes the trusted identity of a user based on a variety of ground truth sources, including government-issued
identity documents such as national IDs, driver’s licenses and passports or electronic machine-readable travel documents (or eMRTDs).
Our VerifiedTM platform detects presentation attack and spoofing threats, evaluates the authenticity of security features
present on a government-issued identity document, and biometrically matches the reference picture of the document with a live user’s
selfie (a photograph that the user has taken of themselves). Usually occurring at account opening or onboarding, identity verification
ensures that the enterprise knows that the person interacting with the enterprise is who they say they are, in real time. authID’s
ProofTM identity verification product eliminates the need for costly and less accurate face-to-face, in-person ID checks and
instead provides a verified identity in seconds. In a digital, online world of increasing fraud and security threats, Proof speeds up
onboarding and offers our customers confidence in the identities of consumers, employees or third-party vendors.
Biometric Identity Authentication
Biometric identity authentication provides any
organization with a secure, convenient solution to validate that an individual is the verified account owner for various purposes including
passwordless login and performing specific transactions, or functions. The authID Verified product allows users to confirm their identity
with their facial biometric by simply taking a selfie on a mobile phone or device of their choosing (as opposed to dedicated hardware).
The solution includes a patented audit trail created for each transaction, containing the digitally signed transaction details, with proof
of identity authentication and consent.
1
Account Access and Recovery
authID’s Verified biometric identity authentication
solution allows users to recover, via a facial biometric, account access that is lost or blocked due to expired credentials, lockouts,
lost or stolen devices, or compromised accounts. Because the account owner’s root of trust is established in the cloud, recovery
is independent of any device or hardware. In this way, account recovery is instant, portable, and does not require the presence of or
access to a previously provisioned device in order to secure access from a different device.
FIDO Passkey Binding
FIDO Passkey Binding enables enterprises and their
users to bind biometrically verified user identities to FIDO2 passkeys, enabling strong authentication for device-based passwordless login
and transaction authentication that is tied to a trusted identity. This solution establishes a digital chain of trust between biometrically
verified individuals, their accounts, and their devices, thus eliminating passwords and protecting users and systems against fraud attacks.
Key Customer Benefits
Our solution allows
our enterprise customers to:
Discontinued
Operations
On May 4, 2022, the Board of Directors of authID
(the “Board” or the “Board of Directors”) 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
(“Cards Plus business”). On August 29, 2022 the Company executed and completed the sale of the Cards Plus business. On June
30, 2023, the Company completed the sale of its legacy payments software by MultiPay. As of December 31, 2022, MultiPay S.A.S., and IDGS
S.A.S assets are presented as assets held for sale on the Company’s Consolidated Balance Sheets and their operations together with
those of Cards Plus Pty Ltd., presented as discontinued operations in the Consolidated Statements of Operations during the years ended
December 31, 2023 and 2022, as they met the criteria for discontinued operations under applicable accounting guidance.
2
Corporate Information
The Company was incorporated in the State of Delaware
on September 21, 2011, and changed our name from Ipsidy Inc. to authID Inc. on July 18, 2022. Our corporate headquarters is located at
1580 North Logan Street, Suite 660, Unit 51767, Denver, CO 80203 and our main phone number is (516) 274-8700. Our website address is www.authid.ai.
The information contained on, or that can be accessed through, our website is not incorporated by reference into this Form 10-K and you
should not consider information on our website to be part of this Form 10-K.
Global Market Opportunity
The momentum towards a digital economy in recent
years, accompanied by a massive growth in cyberattacks, fraud, and account takeovers are driving the demand for more streamlined and more
secure identity verification and authentication. The World Economic Forum estimates digitally enabled platform business models will drive
70% of new economic value created over the next ten years. Yet vast amounts of data have been compromised, and ransomware attacks have
cost businesses hundreds of millions in remediation costs, lost revenue and brand equity. MGM Resorts estimated that the cyber-attack
reported in September 2023, cost them over $100 million alone. Passwords and device authentication alone no longer provide the security
needed to fight today’s rampant cyber-attacks and account takeover schemes.
According to Statista, approximately 480,000 incidents
of cyberattacks were reported in the United States in 2022, nearly a 100% increase since 2016. In the 2023 Verizon Data Breach Investigation
Report, 83% of 4,000 data breaches studied involved external actors, while 74% of all breaches were attributed to some form of social
engineering, stolen credentials, or human error. Verizon also found that Business Email Compromise (BEC) attacks now represent more than
50% of social engineering incidents, having almost doubled in recent years. Further it is predicted that Artificial Intelligence (AI)
will almost certainly increase the volume and heighten the impact of cyberattacks over the next two years (NCSC Assessment, Jan 1, 2024).
Financial services, ecommerce, the sharing economy,
and healthcare businesses, among other industry verticals, are confronted by the challenges of identifying their customers, patients and
beneficiaries with ease and certainty in the digital world. Organizations across all sectors need to control access to their data and
applications by their employees. Governments around the world are enacting new data privacy regulations and pushing for stronger authentication
methods in commerce, which impose a “call to action” for many of these entities.
These factors have created a hyper-growth market for the identity verification
and authentication industry as well as increased buyer demand for integrated identity platforms that can provide a range of identity solutions
to address the full authentication lifecycle of the user journey. The demand for Integrated Identity Platforms is estimated to reach a
market size of $48 billion in 2023, increasing at a 24.6% CAGR to reach almost $116 billion by 2027 (Forbes Tech Council, June 6, 2023).
Growth Strategy
We orient our business
strategy and invest for future growth by focusing on the following key priorities:
3
Sales
and Marketing
authID
provides its Verified platform based on a subscription and usage-based model, with fees per transaction, enrolled or active users.
We sell our platform primarily through our direct
sales team, which consists of inside sales and field sales professionals based in the United States. To power our efforts, we have built
a team of subject matter experts in the identity space, and applied a regimented sales execution strategy, allowing us to win against
competitors with comparable products but a sub-optimal approach to the market. In the last six months of 2023, our new leadership team
significantly expanded our sales force and technical sales support. We also use a premier lead generation service and digital marketing
in order to carefully target potential customers and provide qualified leads for our sales representatives to develop.
We also work with channel partners, such as banking
infrastructure or cybersecurity providers who provide our services to their customers through reseller arrangements and allow us to broaden
our customer reach.
Competition
The market for our service
offerings is highly competitive and rapidly evolving. We face competition from a broad range of providers with solutions across the identity
management lifecycle, including:
● New entrants seeking to develop and market competing technologies.
It
is also possible that, as the digital identity market continues to grow and evolve, larger companies with significant resources may increase
their presence in the market and develop competing solutions through internal efforts or partnerships with existing players.
Due
to our ability to serve both identity verification and authentication needs, as well as the tendency for enterprises to acquire
multiple digital identity solutions, we can and often do co-exist with competing products within our customer base.
Research and Development
Our research and development team is responsible for the design, development,
testing and quality of our platform as well as any new technologies, features, integrations and improvements. The team includes specialists
in software engineering, user experience, quality assurance, product management, infrastructure, and technical writing. Our employees
are located primarily in the United States, with additional sub-contractors based in Europe, India and the Caribbean. We intend to continue
to invest in our technology to strengthen and expand our platform to stay ahead of our competition and meet the evolving needs of our
current and prospective customers.
4
Intellectual Property
We rely on a combination of patents, trademarks, copyrights, trade
secrets and contractual provisions to protect our proprietary technology. For example, we enter into confidentiality and invention assignment
agreements with our employees, consultants and other third parties, and control access to software, services, documentation and other
proprietary information. We believe the duration of our patents is adequate relative to the expected lives of our service offerings. We
also purchase or license technology that we incorporate into our products or services. While it may be necessary in the future to seek
or renew licenses relating to various aspects of our products, we believe, based upon past experience and industry practice, such licenses
generally could be obtained on commercially reasonable terms.
Governmental Regulations
Due to the security applications and biometric
technology associated with the Company’s products and platforms, the activities and operations of the Company are subject to license
restrictions and other regulations, such as (without limitation) export controls and other security regulation by government agencies.
Expansion of the Company’s activities in areas such as financial services may require government licensing in different jurisdictions
and may subject it to additional regulation and oversight.
Data protection legislation in various countries
in which the Company does business 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. Several US 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 several
class action lawsuits. These regulations could have a significant impact on our business.
Human Capital
As
of December 31, 2023, the Company had a total of approximately 22 employees who are located in the United States and Colombia as well
as outsourced service providers. There are 17 employees in the United States who provide overall Company strategic, business and technological
leadership. Employees in the U.S. receive health benefits on a cost-sharing basis and employees in Colombia are provided the respective
Government required benefits.
Subsidiaries
Currently, the Company has four U.S. subsidiaries:
Innovation in Motion Inc., Fin Holdings, Inc., ID Solutions Inc. and authID Gaming Inc. The Company has one subsidiary in Colombia: MultiPay
S.A.S. The Company has one subsidiary in the United Kingdom: Ipsidy Enterprises Limited. The Company is the sole shareholder of all its
subsidiaries.
Available Information
Our Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and any amendment to these reports are filed with the SEC. Such reports and other information filed by us
with the SEC are available free of charge on our website at investors.authid.ai as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The SEC maintains an internet site that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The information
contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing.
5
Recent Developments
On February 15, 2024, Mr. Joe Trelin tendered
his resignation as Chairman and a Director of the Company, effective immediately. On February 20, 2024, the board of directors of the
Company (the “Board”) accepted his resignation and agreed to vest the unvested portion of an option granted to Mr. Trelin
June 28, 2023, amounting to 6,511 shares. The Company is currently in discussions with one or more candidates to be appointed as an additional
Independent Director, but no agreement has been reached regarding such appointment at this time. On February 20, 2024, the Board appointed
Michael Thompson to the Audit Committee in compliance with Rule 5605(c)(2)(A) of the Nasdaq Rules. See “Subsequent Events”
for further information.
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 may have to seek business through a competitive bidding process.
● We rely in part on third-party software to develop and provide our solutions.
6
● Government regulation could negatively impact the business.
7
● 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 $159.5 million as of December 31, 2023 and incurred an operating loss of approximately $19.4
million for the year ended December 31, 2023. We have had net losses in most of our quarters since our inception. We expect that we will
continue to incur net losses in 2024. 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 $8.4 million and approximately $12.8 million for the years ended
December 31, 2023 and 2022, respectively. We anticipate that we will continue to have negative cash flows from operating activities through
March 31, 2025 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.
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.
As a result of these factors, there is substantial doubt about the Company’s ability to continue as a going concern.
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 $15.4 million and $9.6 million net proceeds after expenses in 2023 and 2022, respectively, through equity and
debt financing at varying terms.
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 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 additional 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 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 and internally developed 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.
8
We depend upon key personnel and need additional
personnel.
On March 23, 2023, Rhon Daguro was appointed as
our Chief Executive Officer. Our success depends on the continued services of Mr. Daguro 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.
Acquisitions present many risks that could
have a material adverse effect on our business and results of operations.
In the past we have closed acquisitions of various
companies. We may also pursue select acquisitions in the future. The success of our future growth strategy will depend on our ability
to integrate our existing operations, together with any future acquisition of which none are planned at this date. Integrating the operations
of our existing business with any future acquisitions, including anticipated cost savings and additional revenue opportunities, involves
a number of challenges. The failure to meet these integration challenges could seriously harm our results of operations and the market
price of our shares may decline as a result. Realizing the benefits of any future acquisition will depend in part on the integration of
intellectual property, products, operations, personnel and sales force and the completion of assignments of current and past contracts
and rights. These integration activities are complex and time-consuming, and we may encounter unexpected difficulties or incur unexpected
costs. We may not successfully integrate our existing and acquired operations, and may not realize the anticipated net reductions in costs
and expenses and other benefits and synergies of the acquisition to the extent, or in the timeframe, anticipated. In addition to the integration
risks, we could face numerous other risks, including, but not limited to, the following:
● our responsibility for the liabilities of the businesses we acquire;
● potential loss of key employees of the companies we acquire.
The occurrence of any of these risks could have
a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a larger
acquisition, or concurrent acquisitions.
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. In addition cyber attack attempts are increasing in number,
magnitude, and technical sophistication, and we expect emerging technologies to contribute to the increasing sophistication of attacks
and to lead to new threats. For example, threat actors may leverage emerging artificial intelligence (or, AI) technologies to develop
new hacking tools and attack vectors, generate deep fake images, exploit vulnerabilities, obscure their activities, and increase the difficulty
of threat attribution. Our future success will depend on our ability to enhance our existing products and to develop, or acquire and introduce,
on a timely and cost-effective basis, new products and product features that counter these new threats, keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs of our customers. In the future:
9
If
we are unable to respond promptly and effectively to new cybersecurity threats and attacks, 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.
We have in the past entered into 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 (See “We may have to seek business
through a competitive bidding process” below).
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 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.
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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 United States’, or foreign governments and their officials and political parties for the purpose of obtaining or retaining business.
Our activities in the United States and elsewhere 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.
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 may have to seek business through a competitive bidding process.
Competitive
bidding, whether for contracts with governments or with private enterprises, presents a number of risks, including:
If
we are unable to win particular contracts that are awarded through the competitive bidding process, we will incur expenses associated
with such competitive bidding and 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.
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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 up to $1,500,000 and we may 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 up to $1,500,000. We have
changed the product set of the business to eliminate system sales and have developed a new range of software as a service (SaaS) based
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. We are still endeavoring to enter into multi-year contracts for our new
products with minimum commitments ranging in price from $50,000 to $1,800,000 and we may, or may not, be successful in achieving such
sales. Accordingly, our quarterly results are difficult to predict because we cannot predict in which quarter, if any, substantial sales
(whether measured in commitment volumes, or number of contracts) 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 sales are not a good indication
of our future performance. In some future quarters, our sales may be below the expectations of securities analysts and investors, in which
case the market price of our Common Stock may decrease significantly.
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, we continue to pursue international sales, in particular
in Europe. 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;
● local Data Privacy and other regulations
● uncertain political, regulatory and economic developments;
● labor and social unrest;
● inability to protect our intellectual property rights;
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● 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;
● impact of wars and terrorism
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.
Cyber-attacks, breaches of network or information
technology security, presentation attacks, natural disasters, pandemics 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, pandemics such as Covid-19, 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, including deep fakes and other threats developed by use
of AI driven technologies, 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,
facilitated by the easy access to generative AI 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.
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For us to further penetrate the marketplace, the
marketplace must be confident that we provide effective security protection for governmental and other secured identification documents
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 and the Middle East 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 and the Middle East 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 those regions. The Company works with third party sub-contractors
for outsourced services, including software engineering and development, some of whom are based in Eastern Europe. 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 Latin 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