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.
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● Government regulation could negatively impact the business.
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● 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.
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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:
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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
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.
The uncertainty impacting and potential interruption
in energy and other supply chains resulting from military hostilities in Europe and the Middle East 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 multiple threat actors,
including state-sponsored organizations 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 and the Middle East 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.
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Interruptions, delays in service or defects in our systems could
impair the delivery of our services and harm our business.
We depend on the efficient and uninterrupted operation
of our computer network systems, software, telecommunications networks, and processing centers, as well as the systems and services of
third parties, in order to provide services to our customers. Almost all of our network systems are hosted “in the cloud”
by internationally recognized third party service providers such as Microsoft Azure and Amazon Web Services. Our systems and data centers
are vulnerable to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, terrorist
acts, war, unauthorized entry, human error, and computer viruses or other defects. They may also be subject to break-ins, sabotage, intentional
acts of vandalism and similar misconduct. We have security, backup and recovery systems in place, and business continuity plans that will
be designed to ensure our systems will not be inoperable. However, there is still a risk that a system outage or data loss may occur which
would not only damage our reputation but could also require the payment of penalties or damages to our clients if our systems do not meet
certain operating standards. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of sabotage
or terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result
in lengthy interruptions in our service. Our property and business interruption insurance may not be applicable or adequate to compensate
us for all losses or failures that may occur.
Any damage to, failure of, or defects, bugs or
errors in our systems or those of third parties, errors or delays in the processing of payment or other transactions, telecommunications
failures or other difficulties could result in loss of revenue, loss of customers, loss of customer and consumer data, harm to our business
or reputation, exposure to fraud losses or other liabilities, negative publicity, additional operating and development costs, and diversion
of technical and other resources.
Third parties could obtain access to our proprietary
information or could independently develop similar technologies.
Our success depends in part on our ability to
protect our core technology and intellectual property. To date, we have relied primarily on a combination of patents, patent applications,
trade secret and copyright laws, as well as nondisclosure and other contractual restrictions on copying, reverse engineering and distribution
to protect our proprietary technology. There can be no assurance that any of our patent applications will result in the issuance of a
patent or that the examination process will not require us to narrow our claims in any application. In addition, any patents may be contested,
circumvented, found unenforceable or invalid and we may not be able to prevent third parties from infringing on them.
Despite the precautions we take, third parties
may copy or obtain and use our technologies, ideas, know-how and other proprietary information without authorization or may independently
develop technologies similar or superior to our technologies. In addition, the confidentiality and non-competition agreements between
us and most of our employees, distributors and clients may not provide meaningful protection of our proprietary technologies or other
intellectual property in the event of unauthorized use or disclosure. If we are not able to successfully defend our industrial or intellectual
property rights, we may lose rights to technologies that we need to develop our business, which may cause us to lose potential revenues,
or we may be required to pay significant license fees for the use of such technologies.
Our current patents and any patents that we may
register in the future may provide only limited protection for our technology and may not be sufficient to provide competitive advantages
to us. For example, competitors could be successful in challenging any issued patents or, alternatively, could develop similar or more
advantageous technologies on their own or design around our patents. Any inability to protect intellectual property rights in our technology
could enable third parties to compete more effectively with us.
In
addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of
the United States. Our means of protecting our intellectual property rights in the United States or any other country in which we operate
may not be adequate to fully protect our intellectual property rights.
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Third parties may assert that we are infringing
their intellectual property rights; IP litigation could require us to incur substantial costs even when our efforts are successful.
We may face intellectual property litigation,
which could be costly, harm our reputation, limit our ability to sell our products, force us to modify our products or obtain appropriate
licenses, and divert the attention of management and technical personnel. Our products employ technology that may infringe on the proprietary
rights of others, and, as a result, we could become liable for significant damages and suffer other harm to our business.
We have not been subject to material intellectual
property litigation to date. Litigation may be necessary in the future to enforce any patents we have or may obtain and/or any other intellectual
property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity, and we may not prevail in any such future litigation. Litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and could divert the efforts and attention of our management and technical
personnel from normal business operations. In addition, adverse determinations in litigation could result in the loss of our proprietary
rights, subject us to significant liabilities, require us to seek licenses from third parties, prevent us from licensing our technology
or selling or manufacturing our products, or require us to expend significant resources to modify our products or attempt to develop non-infringing
technology, any of which could seriously harm our business.
Our products may contain technology provided to
us by third parties. Because we did not develop such technology ourselves, we may have little or no ability to determine in advance whether
such technology infringes the intellectual property rights of any other party. Our suppliers and licensors may not be required to indemnify
us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only with respect to intellectual
property infringement claims in certain jurisdictions, and/or only up to a maximum amount, above which we would be responsible for any
further costs or damages. In addition, we have indemnification obligations to certain parties with respect to any infringement of third-party
patents and intellectual property rights by our products. If litigation were to be filed against these parties in connection with our
technology, we would be required to defend and indemnify such parties.
Our officers, directors and holders of 5% of
outstanding shares together beneficially own a significant portion of our Common Stock and, as a result, can exercise control over stockholder
and corporate actions.
Our officers and directors and the holders of
at least 5% of the outstanding shares of the Company currently beneficially own approximately 19.6% of our outstanding Common Stock, and
24.4% on a fully diluted basis assuming the exercise of both vested and unvested options and warrants. As such, they have a significant
influence over most matters requiring approval by stockholders, including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could
have a material adverse effect on the market price of the Company’s Common Stock or prevent stockholders from realizing a premium
over the market price for their Shares.
We face competition. Some of our competitors
have greater financial or other resources, longer operating histories and greater name recognition than we do and one or more of these
competitors could use their greater resources and/or name recognition to gain market share at our expense or could make it very difficult
for us to establish market share.
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.
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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.
The resources available to our competitors to
develop new products and introduce them into the marketplace exceed the resources currently available to us. Some of our competitors have
longer operating histories and greater name recognition than we do and one or more of these competitors could use their greater resources
and/or name recognition to gain market share at our expense or could make it very difficult for us to establish market share. As a result,
our competitors may be able to compete more aggressively and sustain that competition over a longer period of time that we can. This intense
competitive environment may require us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop
a market position. Each of these competitors has the potential to capture market share in our target markets, which could have an adverse
effect on our position in our industry and on our business and operating results.
Government regulation could negatively impact the business.
We do not have or require any approval from government
authorities or agencies in order to operate our regular business and operations. However, data protection legislation in various countries
in which the Company does business (including Colombia and the United Kingdom) may require it to register its databases with governmental
authorities in those countries and to comply with additional disclosure and consent requirements with regard to the collection, storage
and use of personal information of individuals resident in those countries. To the extent that our business is based on Governmental Contracts,
the relevant government authorities will need to approve us as a supplier and the terms of those contracts. However, it is possible that
any proposed expansion to our business and operations in the future would require government approvals. Due to the security applications
and biometric technology associated with our products and platforms the activities and operations of our company are or could become subject
to license restrictions and other regulations, such as (without limitation) export controls and other security regulation by government
agencies. As indicated in, “We are exposed to risks in operating in foreign markets” above, the imposition of sanctions on
particular countries, entities or individuals would prevent us from doing business with such countries, entities or individuals. If our
existing and proposed products become subject to licensing, export control and other regulations, we may incur increased costs necessary
to comply with existing and newly adopted or amended laws and regulations or penalties for any failure to comply. Our operations could
be adversely affected, directly or indirectly, by existing or future laws and regulations (and amendments thereto) relating to our business
or industry.
Some states in the United States have adopted
legislation governing the collection, use of, and storage of biometric information and other states are considering such legislation.
Specifically, several states are considering adopting a Biometric Information Privacy Act, or BIPA modelled on the Illinois statute, which
governs the collection, processing, storage and distribution of biometric information such as facial biometric templates and fingerprints.
Several of these new statutes give individuals rights of action to sue violators, which have resulted in a number of class action lawsuits.
The widespread adoption of such legislation could result in restrictions on our current or proposed business activities, or we may incur
increased costs to comply with such regulations.
We are required to comply with stringent, complex,
and evolving laws, rules, regulations, and standards in many jurisdictions, as well as contractual obligations, relating to cybersecurity
and data privacy. Our compliance efforts are complicated by the fact that these requirements and obligations may be subject to uncertain
or inconsistent interpretations and enforcement, and may conflict among various jurisdictions. Any failure or perceived failure by us
to comply with applicable laws, rules, regulations, standards, certifications, or contractual obligations, or any compromise of security
that results in unauthorized access to, or unauthorized loss, destruction, use, modification, acquisition, disclosure, release, or transfer
of personal information, may result in outcomes such as: requirements to modify or cease certain operations or practices; the expenditure
of substantial costs, time, and other resources; proceedings or actions against us; legal liability; governmental investigations; enforcement
actions; claims; fines; judgments; awards; penalties; sanctions; and potentially costly litigation (including class actions).
Our business is subject to changing regulations
regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance areas that will increase
both our costs and the risk of noncompliance. If we fail to comply with these regulations, we could face difficulties in preparing and
filing timely and accurate financial reports.
We are subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act. We are also subject
to the corporate governance and other listing rules of the Nasdaq Stock Market LLC (“Nasdaq”). Maintaining compliance with
these rules and regulations, particularly after we cease to be an emerging growth company, will increase our legal, accounting and financial
compliance costs, will make some activities more difficult, time-consuming and costly and may also place increased strain on our personnel,
systems and resources.
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The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures and at the time we cease to be an emerging growth company and a smaller
reporting company, we will be required to provide attestation that we maintain effective disclosure controls and procedures by our registered
public accounting firm. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation
or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain
effective internal control also could adversely affect the results of periodic management evaluations regarding the effectiveness of our
internal control over financial reporting that are required to include in our periodic reports filed with the SEC, under Section 404(a)
of the Sarbanes-Oxley Act or the annual auditor attestation reports regarding effectiveness of our internal controls over financial reporting
that we will be required to include in our periodic reports filed with the SEC upon our ceasing to be an emerging growth company and a
smaller reporting company, unless, under the JOBS Act, we meet certain criteria that would require such reports to be included prior to
then, under Section 404(b) of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial
reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative
effect on the trading price of shares of our Common Stock.
In
order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting going forward,
we will need to expend significant resources and provide significant management oversight. There is a substantial effort involved in continuing
to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any
deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns,
which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related
costs. We may experience difficulty in meeting these reporting requirements in a timely manner.
As disclosed in our previous filings, we had a
material weakness in our control over financial reporting starting with the quarter ended June 30, 2023. Management has taken action
to remediate the various elements of this material weakness, with immediate effect in relation to the financial statements for the year
ending December 31, 2023. We remediated this material weakness and put in place a process to undertake an ongoing review of the Company’s
activities during each quarter to identify the potential complex accounting matters and if necessary to engage a professional CPA advisory
firm to review the proposed accounting treatment on these complex accounting matters that may arise in the future.
If we are unable to maintain key controls currently
in place or that we implement in the future and pending such implementation, or if any difficulties are encountered in their implementation
or improvement, (1) our management might not be able to certify, and our independent registered public accounting firm might not be able
to report on, the adequacy of our internal control over financial reporting, which would cause us to fail to meet our reporting obligations,
(2) misstatements in our financial statements may occur that may not be prevented or detected on a timely basis and (3) we may be deemed
to have significant deficiencies or material weaknesses, any of which could adversely affect our business, financial condition and results
of operations.
Implementing any appropriate changes to our internal
controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify
our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining
the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial
statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the
event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, our internal controls
are perceived as inadequate or that we are unable to produce timely or accurate financial statements, our stock price could decline and
we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial
and management resources.
Our amended and restated bylaws designate certain
courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could
limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated bylaws provide that,
unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for:
(i) any derivative action or proceeding brought on behalf of the Company; (ii) any action asserting a claim for breach of a fiduciary
duty owed by any director, officer, employee, or agent of ours to us or our stockholders; (iii) any action asserting a claim arising pursuant
to any provision of the Delaware General Corporation Law, the Certificate of Incorporation, or the bylaws; and (iv) any action asserting
a claim governed by the internal affairs doctrine (the “Delaware Forum Provision”). In addition, our amended and restated
bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have
notice of and consented to the Delaware Forum Provision.
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Section 27 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability
created by the Exchange Act or the rules and regulations thereunder. As a result, the Delaware Forum Provision will not apply to suits
brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
We note, however, that there is uncertainty as to whether a court would enforce this provision and that investors cannot waive compliance
with the federal securities laws and the rules and regulations thereunder.
We recognize that the Delaware Forum Provision
in our amended and restated bylaws may impose additional litigation costs on stockholders in pursuing any such claims, particularly if
the stockholders do not reside in or near the State of Delaware. Additionally, the Delaware Forum Provision may limit our stockholders’
ability to bring a claim in a forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage
such lawsuits against us and our directors, officers and employees even though an action, if successful, might benefit our stockholders.
The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts
where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more
or less favorable to us than our stockholders.
We are an “emerging growth company”
and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our Common
Stock less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act, and we expect to take advantage of certain exemptions and relief
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”
In particular, while we are an “emerging growth company” (1) we will not be required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, (2) we will be exempt from any rules that may be adopted by the Public Company
Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements,
(3) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements
and (4) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute
payments not previously approved.
In addition, we are eligible to delay the adoption
of new or revised accounting standards applicable to public companies until those standards apply to private companies, and as a result,
we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging
growth companies. The Company has adopted and will be adopting all standards as they become effective for public companies.
We also take advantage of reduced disclosure requirements,
including regarding executive compensation. If we remain an “emerging growth company” in the future, we may take advantage
of other exemptions, including the exemptions from the advisory vote requirements and executive compensation disclosures under the Dodd-Frank
Wall Street Reform and Customer Protection Act, and the exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act. We
may take advantage of these provisions at least until December 31, 2024. However, if certain events occur prior to such date, including
if we are deemed a “large accelerated filer” under the Exchange Act, our annual gross revenues exceed $1.07 billion or we
issue more than $1.0 billion of non- convertible debt in any three-year period, we may cease to be an emerging growth company prior to
such date.
The exact implications of the JOBS Act are still
subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take
advantage of all of the benefits of the JOBS Act. In addition, investors may find our Common Stock less attractive if we rely on the exemptions
and relief granted by the JOBS Act. If some investors find our Common Stock less attractive as a result, there may be a less active trading
market for our Common Stock and our stock price may decline and/or become more volatile.
There can be no assurance that we will be able
to comply with the continued listing standards of the Nasdaq Capital Market. Our failure to meet the continued listing requirements of
the Nasdaq Capital Market could result in a de-listing of our Common Stock.
We cannot assure you that we will be able to comply
with the continuing listing requirements that we are required to meet in order to maintain a listing of our Common Stock on the Nasdaq
Capital Market. If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the minimum bid price requirement,
or the minimum stockholder’s equity requirement, the Nasdaq Capital Market may take steps to de-list our Common Stock. Such a de-listing
would likely have a negative effect on the price of our Common Stock and would impair our stockholders’ ability to sell or purchase
our Common Stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the Nasdaq
Capital Market’s listing requirements, but we can provide no assurance that any action taken by us would result in our Common Stock
becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our Common Stock.
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Specifically,
on January 25, 2023, the Company received a notice letter from the Listing Qualifications staff of the Nasdaq that it was not in
compliance with the Nasdaq Listing Rule 5550(a)(2) that the Company maintain a bid price for the Company’s common stock above $1.00
per share (“Bid Price Requirement”). On April 4, 2023, the Company received a notice letter from the Listing Qualifications
staff of Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”)
as the Company’s stockholders’ equity was below $2.5 million, which is the minimum stockholders’ equity required for
compliance with Rule 5550(b)(1). Further, as of April 3, 2023, the Company did not meet the alternative compliance standards relating
to the market value of listed securities, or net income from continuing operations. As a result of the Company’s fund-raising activities
in May 2023, the Company’s total stockholder equity was approximately $9.6 million, as reported on the Company’s Form 10-Q
for the period ended June 30, 2023. On May 30, 2023, the Company received notice from Nasdaq, that Nasdaq Staff had determined, that the
Company complied with Rule 5550(b)(1). As a result of the 1-for-8 reverse stock split that the Company undertook in July 2023, the Company
received notice on July 24, 2023 from Nasdaq that the Company was in compliance with the Bid Price Requirement and the matter raised by
their letter of January 25, 2023 was closed.
Sales of a substantial number of shares of
our Common Stock in the public market by our existing stockholders could cause our share price to fall.
Sales
of a substantial number of shares of our Common Stock in the public market, or the perception that these sales might occur, including
sales by our executive officers, directors and significant stockholders could
depress the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities.
We are unable to predict the effect that sales may have on the prevailing market price of our Common Stock.
We may be subject to securities litigation,
which is expensive and could divert management attention.
In the past, companies that have experienced volatility
in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation
in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources,
which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.
If securities or industry analysts do not publish
or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish
negative reports regarding our business or our Common Stock, our stock price and trading volume could decline.
The trading market for our Common Stock will be
influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors.
We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage.
If any of the analysts who may cover us adversely change their recommendation regarding our shares, or provide more favorable relative
recommendations about our competitors, our stock price would likely decline. If any analysts who may cover us were to cease coverage of
the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.
The market price of our common stock has been
volatile and your investment in our stock could suffer a decline in value.
The market price of our common stock has experienced
significant price and volume fluctuations. For example, during the three year period ended December 31, 2023, the closing price of our
common stock ranged from $2.40 to $141.44. In addition, the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common stock of technology companies and that have often been unrelated
to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common
stock. You may not be able to resell your shares at or above the price you paid for them due to fluctuations in the market price of our
stock caused by changes in our operating performance or prospects and other factors.
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Some specific factors, in addition to the other
risk factors identified above, that may have a significant effect on the price of our stock,