Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The discussion and analysis of our financial condition
and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis,
we evaluate estimates and judgments, including those described in greater detail below. We base our estimates on historical experience
and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
As used in this “Management’s Discussion
and Analysis of Financial Condition and Results of Operation,” except where the context otherwise requires, the term “we,”
“us,” “our,” “authID” or “the Company,” refers to the business of authID Inc.
Overview
authID Inc. (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
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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.
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.
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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.
Key Trends
We believe that our financial results will be
impacted by several market trends in the identity verification and authentication markets, as well as expanding digital transformation
efforts across a wide range of market segments. These trends include:
● the growth in the sharing economy; and
Our results are also impacted by the changes in
levels of spending on identity verification, management and security methods, and thus, negative trends in the global economy and other
factors which negatively impact such spending may negatively impact the growth in our revenue from those products. The global economy
has been undergoing a period of political and economic uncertainty and stock markets are experiencing high levels of volatility, and it
is difficult to predict how long this uncertainty and volatility will continue.
We plan to grow our business by increasing the
use of our services by our existing customers, by adding new customers through our direct salesforce, channel partners and by expanding
into new markets and innovation. If we are successful in these efforts, we would expect our revenue to continue to grow.
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Going Concern
The Company’s consolidated financial statements
included in this Annual Report have been prepared in accordance with U.S. GAAP assuming the Company will continue on a going concern basis,
which implies the Company will continue to meet its obligations and continue its operations for the next year following the issuance date
of these financial statements.
As of December 31, 2023, the Company had an accumulated
deficit of approximately $159.5 million. For the year ended December 31, 2023, the Company earned revenue of approximately $0.19 million,
used $8.4 million to fund its operations, and incurred a net loss from continuing operations of approximately $19.6 million. The continuation
of the Company as a going concern is dependent upon financial support from the Company’s stockholders and noteholders, the ability
of the Company to obtain additional debt or equity financing to continue operations, the Company’s ability to generate sufficient
cash flows from operations, successfully locating and negotiating with other business entities for potential acquisition and /or acquiring
new clients to generate revenues and cash flows.
As discussed in “Liquidity and Capital Resources”
below, the Company secured additional financing during 2023 which provides funding for its current operations as it continues to invest
in its product, people, and technology. The Company projects that the investments will lead to revenue expansion thereby reducing liquidity
needs. However, in order to further implement its business plan and satisfy its working capital requirements, the Company will need to
raise additional capital. There is no guarantee that the Company will be able to raise additional equity or debt financing at acceptable
terms, if at all.
There is no assurance that the Company will ever
be profitable. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue
as a going concern. As there can be no assurance that the Company will be able to achieve positive cash flows (become cash flow profitable)
and raise sufficient capital to maintain operations, there is substantial doubt about the Company’s ability to continue as a going
concern.
Subsequent Events
On February 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.
Pursuant to Rule 5605(b)(1) of the Rules of the
Nasdaq Stock Market, (“Nasdaq”), a majority of the Board must be comprised of Independent Directors as defined in Rule 5605(a)(2).
As a result of Mr. Trelin’s resignation, the Board currently consists of six directors of which three are considered Independent
Directors. 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. Pursuant to Rule 5605(b)(1)(A), the Company has a cure period,
within which to restore the majority of Independent Directors, expiring on the earlier of the date of the next Annual Meeting or one year
from the date of the vacancy (subject to a minimum period of 180 days from the date of the vacancy).
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.
32
Related Party Transactions
On June 6, 2023,
the Company entered into a services agreement with The Pipeline Group, Inc. (“TPG”). Ken Jisser, a director of the Company, is
the founder and CEO of TPG, a technology-enabled services company that aims to deliver business results for companies looking to build
a predictable and profitable pipeline. The agreement provides that TPG will assist in providing outsourced sales including business
development resources for outbound calling, provide support for automated dialing technology, classify customer data and other sales related
services for an initial term of one year. These services and their contracted pricing has been evaluated by Management based on historical
experience with similar providers and determined to be priced at fair, market rates. On October 25, 2023, and on December 19, 2023, the
Company entered into amendments to the above services agreement, pursuant to which TPG will provide certain additional services to the
Company. In consideration of the services, the Company will pay TPG $98,000 per month during the remainder of the initial one-year term
ending in June 2024. The foregoing is only a summary of the material terms of the agreements entered with TPG and does not purport
to be a complete description of the rights and obligations of the parties thereunder. The summary of the agreement entered with TPG is
qualified in its entirety by reference to the forms of such agreements, which were filed as exhibits to the Company’s Current Report
and are incorporated by reference herein (See “Exhibits”).
The
Company has entered into various investment, credit and funding agreements with Mr. Stephen Garchik, which are summarized in the following
paragraphs. Mr. Garchik is now a holder of more than 10% of the issued and outstanding common stock of the Company. Mr. Garchik’s
financial support for the Company has been a material factor in the continued operation of the Company over the period covered by this
Annual Report and its current financial position. Full details of these transactions are set forth in Item 13 “Certain Relationships
and Related Transactions and Director Independence” and in Note 8 “Related Party Transactions” to the Audited
Consolidated Financial Statements of the Company as of and for the years ended December 31, 2022 and 2023, which are exhibited hereto
(the “Consolidated Financial Statements”).
On March 21, 2022 the Company entered into the
Original Facility Agreement with Mr. Garchik, pursuant to which Mr. Garchik agreed to provide a $10.0 million unsecured standby line
of credit facility. On April 18, 2022, Joseph Trelin, as Garchik’s designee under the Original Facility Agreement, was appointed
as a member of the Board of Directors of the Company. By virtue of such right of nomination Mr. Garchik considered himself a “director
by deputization”.
As described in Note 6 “Working Capital
Facility”, to the Consolidated Financial Statements, the Original Facility Agreement was amended and restated effective March 8,
2023 pursuant to which amendment the amount of the facility was reduced to $3.6 million, and an initial advance of $900,000 was
made. Under the A&R Facility Agreement Garchik had a one-time right for the nomination of four designees specified in writing by Garchik
for appointment to our board of directors. On March 9, 2023 Rhoniel Daguro, Ken Jisser, Michael Thompson and Thomas Szoke as Garchik’s
designees under the A&R Facility Agreement, were appointed as members of the Board of Directors of the Company. On May 25, 2023, the
Company and Mr. Garchik agreed to terminate the A&R Facility Agreement and satisfied and offset the outstanding balance of the Note
and accrued interest in the amount of $929,250 with the purchase price of 253,617 shares of common stock. In addition, Mr. Garchik
invested a further $1,000,000 on the same date. The purchase price of the shares issued in these two transactions was the same as the
purchase price paid by all other investors (who were not directors) in the same round and was the Nasdaq Official Closing Price in effect
on the date of the transaction.
Further, On May 23, 2023, pursuant to an Exchange
Agreement, Mr. Garchik, exchanged a Convertible Note and accrued interest in the amount of $1,014,625 for 268,705 shares of
common stock. The price of the shares issued to Mr. Garchik under the Exchange Agreement was the same as the purchase price paid by all
other investors (who were not directors) pursuant to the Exchange Agreement and was the Nasdaq Official Closing Price in effect on the
date of the transaction. As a result of such exchange, the issuance of shares in satisfaction of the Credit Facility and the purchase
of additional shares of common stock as referenced above (See Note 9 “Shareholders’ Equity” to the Consolidated Financial
Statements), Mr. Garchik is now a holder of more than 10% of the outstanding shares of the Company’s common stock.
On November 20, 2023, Mr. Garchik, purchased 166,667
shares of Company’s common stock at a price of $1,000,000. The purchase price of the shares issued in this transaction was the same
as the purchase price paid by all other investors in the same round and was higher than the Nasdaq Official Closing Price in effect on
the date of the transaction.
As further described in Item
13 “Certain Relationships and Related Transactions and Director Independence” and in Note 8 “Related Party Transactions”
to the Consolidated Financial Statements, the Company has entered into various equity investments and employment agreements with
Directors and Officers of the Company.
33
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully
described in the notes to our consolidated financial statements. Those material accounting estimates that we believe are the most critical
to an investor’s understanding of our financial results and condition are discussed immediately below and are particularly important
to the portrayal of our financial position and results of operations and require the application of significant judgment by our management
to determine the appropriate assumptions to be used in the determination of certain estimates.
Use of Estimates
In preparing these consolidated financial statements
in conformity with U.S. GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported
amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenue recognition policy for significant revenue generating activities
from continuing operations:
All contracts are reviewed for their respective
performance obligations and related revenue and expense recognition implications. A performance obligation under the revenue standard
is defined as a promise to provide a “distinct” good or service to a customer and is the unit of account for revenue recognition.
The Company’s revenues that are derived from the identity services could include multiple performance obligations. Additionally,
the contracts could include implementation services, or support on an “as needed” basis and we will review each contract and
determine whether such performance obligations are separate and distinct and apply the standard accordingly to the revenue and expense
derived from or related to each such service.
Goodwill
Goodwill is recorded when the purchase price paid
for an acquisition exceeds the fair value of net identified tangible and intangible assets acquired. The Company performs an annual impairment
test of goodwill and further periodic tests to the extent indicators of impairment develop between annual impairment tests. The Company’s
impairment review process compares the fair value of the reporting unit to it carrying value, including the goodwill related to the reporting
unit utilizing qualitative considerations. To determine the fair value of the reporting unit, the Company may use various approaches including
an asset or cost approach, market approach or income approach or any combination thereof. These approaches may require the Company to
make certain estimates and assumptions including future cash flows, revenue and expenses. These estimates and assumptions are reviewed
each time the Company tests goodwill for impairment and are typically developed as part of the Company’s routine business planning
and forecasting process. While the Company believes its estimates and assumptions are reasonable, variations from those estimates could
produce materially different results.
During the year ended December 31, 2023 and 2022,
the Company’s projection and assessment did not indicate that an impairment charge was required as its fair value was in excess
of carrying value.
Stock-based compensation
The Company has accounted for stock-based compensation
under the provisions of FASB ASC 718 – “Stock Compensation” which requires the use of the fair-value based method to
determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options
and common stock purchase warrants). For both employee and non-employee awards, the fair market value of each stock option award is estimated
on the date of grant using the Black-Scholes and/or Monte-Carlo valuation models as appropriate that uses assumptions for expected volatility,
expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of the Company’s
stock and other factors estimated over the expected term of the stock options. For employee awards, the expected term of options granted
is derived based on exercise history. We continually monitor exercise activity from the date of grant and consider our short history and
certain stock price growth during various periods to determine if expected term should be modified. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The Company accounts for forfeitures of
employee awards as they occur.
34
Adjusted EBITDA
This discussion includes information about Adjusted
EBITDA that is not prepared in accordance with U.S. GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by U.S.
GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is
included below.
Adjusted EBITDA is a non-GAAP financial measure
that represents U.S. GAAP net income (loss) adjusted to exclude (1) interest expense, (2) interest income, (3) provision for income taxes,
(4) depreciation and amortization, (5) stock-based compensation expense (stock options) and (6) certain other items management believes
affect the comparability of operating results. Other items included the following:
● Conversion expense of $7.5 million in 2023 and $0 in 2022
● Severance cost of $0.9 million in 2023 and $0.2 million in 2022
● Impairment loss of $0 in 2023 and $1.1 million in 2022
● Loss on debt extinguishment of $0.4 million in 2023 and $0 in 2022
Management believes that Adjusted EBITDA, when
viewed with our results under U.S. GAAP and the accompanying reconciliations, provides useful information about our period-over-period
results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of
our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the
evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance
of our company and our management, and it will be a focus as we invest in and grow the business.
Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of
these limitations are:
Because of these limitations, adjusted EBITDA
should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for
these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement to our U.S. GAAP results.
35
Reconciliation of Net Loss From Continuing Operations to Adjusted
EBITDA Continuing Operations
For the Year Ended December 31,
Addback:
Loss on debt extinguishment 380,741 -
Non-Cash recruiting fees 438,000 -
Adjusted EBITDA continuing operations (Non-GAAP) $ (8,711,601 ) $ (11,398,530 )
The decrease in Adjusted EBITDA Loss From Continuing
Operations in 2023 compared to 2022 is principally due to cost saving measures taken in 2023 resulting in lower headcount costs and lower
third-party vendors costs. Additionally, a significant reduction in stock option expense is related to the reversal of the charge associated
with unvested performance-based grants when certain senior level executives departed the organization in 2023 and was offset by one-time
expenses related to the conversion of convertible debt to equity.
Results of Operations and Financial Condition
for the Year Ended December 31, 2023 as Compared to the Year Ended December 31, 2022 – Continuing Operations
Revenues, net
During the year ended December 31, 2023, the Company
revenues from Verified software license were approximately $186,000 compared to approximately $157,000 for the year ended December 31,
2022. Verified software license revenue increased as we acquired new customers.
During
the year ended December 31, 2023, Legacy authentication services revenues were approximately $4,000 compared to approximately $371,000
for the year ended December 31, 2022. Revenue from Legacy authentication services dropped significantly due to one large customer, that
decommissioned a legacy product offering in 2022 and another large customer that had a one-off order in 2022.
General and administrative expenses
During the year ended
December 31, 2023, general and administrative expenses decreased by approximately $6.8 million compared to the year ended December 31,
2022, principally due to lower stock-based compensation expenses as well as the Company’s cost saving measures resulting in lower
headcount costs and lower third-party vendor costs.
Research and development expenses
During the year ended December 31, 2023, research
and development expenses decreased by approximately $3.5 million compared to the year ended December 31, 2022, principally due to lower
stock-based compensation expenses as well as the Company’s cost saving measures resulting in lower headcount costs and lower third-party
vendor costs.
36
Depreciation and amortization expense
During the year ended December 31, 2023, depreciation
and amortization decreased by approximately $0.5 million compared to the year ended December 31, 2022, as the Company reduced the value
of certain legacy business assets in 2022.
Interest expense
Interest
expense during the year ended December 31, 2023 compared to the year ended December 31, 2022 decreased by $0.3 million, principally
due to the exchange of Convertible Notes for common stock in May 2023.
Discontinued operations
The Board of Directors of authID considers it
in the best interests of the Company to focus its business activities on providing biometric authentication products and services by means
of our proprietary Verified platform. Accordingly, on May 4, 2022, the Board approved a plan to exit from certain non-core activities
comprising the MultiPay correspondent bank, payments services in Colombia and the Cards Plus cards manufacturing and printing business
in South Africa.
Cards Plus business in South Africa
On August 29, 2022, the Company completed the
sale of Cards Plus for a price of $300,000 of which $150,000 was received and the remaining balance of $150,000 was recorded in other
current asset, less $3,272 in costs to sell, and recognized a loss of $188,247 from the transaction. While the Company and Cards Plus
continue to actively pursue payment of the remaining balance of $150,000, which is subject to regulatory approval, management re-evaluated
the likelihood of recovery and recorded an allowance for doubtful account during the 3 months ending September 30, 2023 related to the
collection of the receivable.
MultiPay business in Colombia
The Company exited the MultiPay business in Colombia
but still maintains an authID customer support and operations team in Bogota, which performs essential functions to support the global
operations of our Verified product.
In June 2023, MultiPay finalized the sale of the
Company’s proprietary software to its major customer for approximately $96,000. As a result, the Company recognized a gain of approximately
$216,000 which included the release of a foreign currency translation gain of approximately $155,000.
The financial statements of Cards Plus and MultiPay
had been classified as discontinued operations as of December 31, 2023 and 2022, under generally accepted accounting principles.
Ukraine & Middle East
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.
37
Macro-Economic Conditions
The global economy has been undergoing a period
of political and economic uncertainty and stock markets are experiencing high levels of volatility, and it is difficult to predict how
long this uncertainty and volatility will continue. The continuing wars in Ukraine and the Middle East, inflationary pressures, rising
energy prices and increases in interest rates have impacted the United States and other major economies and have created uncertainty regarding
a possible recession. As a result, many businesses, especially in the technology sector have made significant cut-backs in expenditure,
including reductions in force and investment freezes. Our sales and results are also impacted by the changes in levels of spending on
identity verification, management and security methods, and thus, negative trends in the global economy and other factors which negatively
impact such spending may negatively impact the growth of our revenue from those products.
Liquidity
and Capital Resources
As of December 31, 2023, current assets were $10.9
million and current liabilities outstanding amounted to $1.7 million which resulted in net working capital of $9.2 million.
Net cash used by operating activities was $8.4
million for the year ended December 31, 2023 compared to $12.8 million in 2022. Cash used in operations for 2023 and 2022 was primarily
the result of funding the business operations as the Company invested in people and product. However, the Company’s cost savings
measures reduced the year over year levels.
Net cash generated/(used) in investing activities
in 2023 and 2022 was approximately $75,000 and ($182,000) as the Company received proceeds from the sale of its discontinued businesses.
Net
cash provided by financing activities for 2023 was approximately $15.4 million, compared to $10.2 million in 2022. Cash provided by financing
activities in 2023 consisted primarily of the net proceeds from the sale of common stock in May 2023 and November 2023 and a $0.5
million initial drawdown net of debt issuance costs under the Company’s A&R Facility Agreement.
In 2024, the Company will continue to be opportunistic
and judicious in raising additional funds to support its operations and investments as it creates a sustainable organization. There is
no guarantee that such financing will be available if available on acceptable terms.
Our growth-oriented business plan to offer products
to our customers will require continued capital investment. Research and development activities and technology deployment will require
continued investment.
The Company projects that the current and past
investments in technology and systems will lead to revenue expansion thereby reducing liquidity needs. However, to further implement its
business plan and satisfy its working capital requirements, the Company will need to raise more capital. There is no guarantee that the
Company will be able to raise additional equity or debt financing at acceptable terms, if at all. We expect that we will need additional
funding in the 4th quarter of 2024.
There is no guarantee that our current business
plan will not change, and because of such change, we will need additional capital to implement such business plan. Further, assuming we
achieve our expected growth plan, of which there is no guarantee, we will need additional capital to implement growth beyond our current
business plan. As a result of these factors, there is substantial doubt about the Company’s ability to continue as a going concern.
Description of Indebtedness
As described in Item 1A, (Risk Factors) the Company
has a history of losses and may not be able to achieve profitability in the near term. The Company has not been able to achieve positive
cash flows from operations and raised additional financing in 2023 and 2022 from the sale of equity and convertible notes.
As of December 31, 2023, the Company has a series
of Senior Secured Convertible Notes outstanding for approximately $0.25 million due in March 2025.
See Notes 6 and 7 of the Consolidated Financial
Statements for additional information associated with the credit facility and convertible notes payable.
38
Equity Financing
See Note 9 of the Consolidated Financial Statements
for additional information associated with equity financing in 2023 and 2022.
2023 Common Stock Transactions
2022 Common Stock Transactions
39
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Contractual Obligations
As of December 31, 2023, the Company had the following contractual
obligations.
Payments due by period
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and notes
thereto and the report of our independent registered public accounting firm (PCOAB ID 00677), are set forth on pages F-1 through F-31
of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual
Report, our Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15 and 15d-15(e) of the Exchange Act. Based on the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of December 31, 2023, the Company’s disclosure controls and procedures are effective
to ensure that the information required to be disclosed by the Company in the report that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide
reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with U.S. accepted accounting principles. Our management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all
errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected and such evaluation is subject to the risks discussed in item 1A – Risk Factors
of this Report.
The Company’s management assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2023, using the criteria established in Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s
assessment using the above criteria, management concluded that the Company maintained effective internal control over financial reporting
as of December 31, 2023.
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Material Weakness in Internal Control Over Financial Reporting
During the three months ended June 30, 2023, the
Company identified a material weakness in its internal control over financial reporting related to the review of accounting treatment
for the Convertible Notes exchange. The Convertible Note exchange transaction which gave rise to this issue (See Note 7 “Convertible
Notes Payable”) was a complex and infrequent transaction, which required particular accounting treatment. The correct accounting
treatment was not immediately identified by the Company, due to the Company’s limited resources available for advanced technical
analysis and advice, similar to other companies of our size. The correct accounting treatment was identified and reflected prior to filing
of the quarterly report on Form 10-Q for the quarter ended June 30, 2023 and no previously published financial statements were impacted
by this issue.
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 certified public accounting advisory firm to review the proposed accounting
treatment on these complex accounting matters that may arise in the future.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Changes in Internal Control over Financial Reporting
During the last fiscal year, there have been no
changes except as noted above in our internal control over financial reporting that occurred during our last fiscal year that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
During the quarter
ended December 31, 2023, no director or officer adopted or terminated (i) any contract, instruction or written plan
for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or (ii)
any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of item 408 of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance;
The current Directors and Officers of the Company are as follows:
Name Age Position (s) and Offices Held
Rhoniel A. Daguro 49 Director and Chief Executive Officer
Edward C. Sellitto 39 Chief Financial Officer
Thomas R. Szoke 59 Director, Chief Technology Officer
Ken Jisser 46 Director
Michael L. Koehneman*(1)(2) 63 Director
Michael C. Thompson(1)(2)(3) 63 Director
Jacqueline L. White*(1)(3) 59 Director
* denotes Committee Chair
(1) Audit Committee
(2) Governance Committee
(3) Compensation Committee
Rhoniel A. Daguro
Mr. Daguro joined our
company as a director on March 9, 2023 and was appointed CEO on March 23, 2023. He has over 20 years of sales, marketing, technology,
and venture capital experience. He has built multiple profitable software and professional services firms. Most recently, from 2018 to
2022, he served as the Chief Revenue Officer of Socure Inc. Prior to that, Mr. Daguro held various executive sales positions with Persistent
Systems, Hortonworks, and Oracle.
Edward C. Sellitto
Mr.
Sellitto joined authID as Chief Financial Officer of the Company on August 15, 2023. Mr. Sellitto has over 15 years of experience in Financial
Management and Revenue Operations roles supporting a wide range of industries and company sizes, from startups to Fortune 100 organizations.
Most recently, from December 2022 through present, he served as Vice President, Revenue
Operations at Zero Hash, a Digital Asset-as-a-Service infrastructure provider. From February 2022 through December 2022, Mr. Sellitto
served as the Head of Go-To-Market Financial Planning and Analysis for Sprinklr (NYSE: CXM) and at various roles including Director –
Sales Operations and VP – Revenue Operations with Socure from May 2019 through February 2022. Further, from 2018 to 2019, Mr. Sellitto
served as the Director – Sales Operations for SmartSource Rentals. Ed
holds an MBA in Corporate Finance and Strategy from the Stern School of Business at New York University.
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Thomas R. Szoke
Mr. Thomas Szoke is a
co-founder of authID and has over 35 years of executive management, solutions engineering, and operations management experience in Government
Security, Identity Access Management and SaaS solutions industries. He rejoined the Company as a Director on March 9, 2023 and in April
2023 became the Company’s Chief Technology Officer. Mr. Szoke previously served as a Director and the Company’s Chief Solutions
Architect and has held several other executive positions since its inception, from 2013 through 2021. He has also expanded the Company’s
market presence and product portfolio through technological innovation and global strategic partnerships. Mr. Szoke has been issued several
US and international patents focused on identity solutions and has pioneered the concept and development of different product lines for
the Company including its Multi-Factor Out-of-Band Identity and Transaction Authentication Platform. From 2021 to 2023, he was an independent
consultant for the Company and others.
Ken Jisser
Mr. Jisser joined authID
on March 9, 2023. He is the Founder & CEO of The Pipeline Group, Inc., a technology-enabled services company that aims to deliver
business results for companies looking to build predictable and profitable pipeline. Mr. Jisser founded the company in his garage in 2017,
and it reached #415 among the fastest growing private companies in America, according to Inc. Magazine rankings published in 2021. Prior
to that, Mr. Jisser served as GTM Advisor at Druva Inc., where he rebuilt the global inside sales team.
Michael L. Koehneman
Mr. Koehneman joined our company as a Director
on June 9, 2021. Mr. Koehneman previously held various positions at Pricewaterhouse Coopers, a global accounting firm, through 2020, including
the Global Advisory Chief Operating Officer and Human Capital Leader from 2016 through 2019, the U.S. Advisory Operations Leader from
2005 through 2016 responsible for the oversight of Advisory services for PwC, including business unit performance, finance, investments,
human resources, acquisitions, and administration, and the Lead Engagement Partner for Financial Statement Audits and Internal Control
and Security Reviews from 1993 through 2004 for several public and private company audits. Since 2020 he has also served as a director
and member of the Audit Committee of Aspen Group, Inc.
Michael C. Thompson
Mr. Thompson joined the
Company as a Director on March 9, 2023. He has over 38 years of domestic and international experience in publicly traded and private equity
backed consumer and commercial businesses. Since 2022, Mr. Thompson has been a partner at Hemingway Capital, an operationally focused
private equity firm. Previously, he served as Chief Executive Officer for companies in the bedding (Corsicana Mattress from 2018 to 2022),
polyurethane foam and pet products industries and was an operating executive for two leading middle-market private equity firms. Mr. Thompson
has also held executive positions with Rubbermaid Commercial Products, Merillat Industries, a division of Masco Corporation, and Black+Decker,
and began his career with Sunbeam Appliance Company.
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Jacqueline L. White
Ms. White joined our company as a Director on
June 9, 2021. Ms. White has been a leader in enterprise technology software and IT consulting for the past 25 years. Ms. White has held
global positions at SAP, Oracle, and Accenture, always leading diverse, high performing organizations around the world. In May 2023 Ms.
White became President of i2C Inc, which operates a global payments and digital banking platform. Prior to that, Ms. White joined the
Executive Management Team of Temenos AG (Six: TEMN), a company specializing in enterprise software for banks and financial services, as
the President of the Americas Region in January 2021. Ms. White led the Banking & Capital Markets line of business of DXC Technology
Co. (NYSE: DXC) as Senior Vice President and Practice Lead from September 2019 to January 2021. From January 2018 through September 2019,
Ms. White served as the Chief Revenue Officer of Saltstack, a VM Ware Company, and from January 2015 through January 2018 as Global Senior
Vice President Global FSI Consulting for SAP (NYSE: SAP). Prior to joining SAP, Ms. White held various positions with Accenture Services
Pvt. Ltd., Oracle, BearingPoint and Novell. Ms. White was named by Utah Business Magazine as “Top Executives to Watch” in
July 2020. Ms. White received a BA in Comparative Literature from Brigham Young University and a Leadership Certificate from Boston University.
Board & Committees
Board meetings during calendar year ended 2023
During 2023, the Board of Directors held fourteen
meetings as well as committee meetings, as outlined below and meetings of the Special Committee and Pricing Committee that were formed
for the purposes of approval of the separate funding transactions in May and November 2023. Each director attended all of the meetings
of the Board and all of the meetings held by all committees on which such director served, apart from one meeting which one director was
not able to attend. The Board also approved certain actions by unanimous written consent.
Committees established by the Board
The Board of Directors has standing Audit, Compensation,
and Governance Committees. Information concerning the function of each Board committee follows.
Audit Committee
The Audit Committee is responsible for overseeing
management’s implementation of effective internal accounting and financial controls, supervising matters relating to audit functions,
reviewing and setting internal policies and procedures regarding audits, accounting and other financial controls, reviewing the results
of our audit performed by the independent public accountants, and evaluating and selecting the independent public accountants. The Audit
Committee has adopted an Audit Committee Charter which is posted on the Corporate Governance page under the tab labeled “Board Committees”
on our Investor Relations website at https://investors.authid.ai. The Board has designated the Chair of the Committee as the “audit
committee financial expert” as defined by the SEC. During 2023, the Audit Committee held five meetings. The Committee also approved
certain actions by unanimous written consent.
Compensation Committee
The Compensation Committee determines matters
pertaining to the compensation of our named executive officers and administers our stock option and incentive compensation plans. The
Compensation Committee has adopted a Compensation Committee Charter which is posted on our which is posted on the Corporate Governance
page under the tab labeled “Board Committees” on our Investor Relations website at https://investors.authid.ai. During 2023,
the Compensation Committee held three meetings and also approved certain actions by unanimous written consent.
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Governance Committee
The Governance Committee is responsible for considering
potential Board members, nominating Directors for election to the Board, implementing the Company’s corporate governance policies,
recommending compensation for the Board and for all other purposes outlined in the Governance Committee Charter, which is posted on the
Corporate Governance page under the tab labeled “Board Committees” on our Investor Relations website at https://investors.authid.ai.
During 2023, the Governance Committee held one meeting.
Nomination of Directors
As provided in its charter, the Governance Committee
is responsible for identifying individuals qualified to become directors. The Governance Committee seeks to identify director candidates
based on input provided by a number of sources including (1) the Governance Committee members, (2) our other directors, (3) our stockholders,
(4) our Chief Executive Officer or Chair of the Board, and (5) third parties such as service providers. In evaluating potential candidates
for director, the Governance Committee considers the entirety of each candidate’s credentials.
Qualifications for consideration as a director
nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board
of Directors. However, at a minimum, candidates for director must possess:
● high personal and professional ethics and integrity;
● the ability to exercise sound judgment;
● the ability to make independent analytical inquiries;
● the appropriate and relevant business experience and acumen.
Except as set forth below, during the year ended December 31, 2023,
there have been no material changes to the procedures by which security holders may recommend
nominees to our board of directors.
Effective March 8, 2023 the Original Facility Agreement with Mr. Garchik
was amended and restated by virtue of the A&R Facility Agreement. Pursuant to that amendment Garchik’s right to designate a
person for nomination as a director under the Original Facility Agreement was terminated. Under the A&R Facility Agreement Garchik
had a one-time right for the nomination of four designees specified in writing by Garchik for appointment to our board of directors. On
March 9, 2023 Rhoniel Daguro, Ken Jisser, Michael Thompson and Thomas Szoke as Garchik’s designees under the A&R Facility Agreement,
were appointed as members of the Board of Directors of the Company. Thereafter, no security holder had or has any contractual right to
recommend or designate nominees to our board of directors.
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Legal Proceedings
There are currently no legal proceedings, and
during the past 10 years there have been no legal proceedings, that are material to the evaluation of the ability or integrity of any
of our directors.