SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1580 North Logan Street, Suite 660, Unit 51767,
Denver, CO 80203
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth Company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
| Class | Outstanding at July 31, 2023 | |
| Common Stock, par value $0.0001 | ||
| Documents incorporated by reference: | None |
TABLE OF CONTENTS
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in this report, in Part I. Item 1A. Risk Factors also appear in our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the Securities and Exchange Commission. Some examples of risk factors which may affect our business are as follows:
| ● | our lack of significant revenues, positive cash flow and history of losses, | |
| ● | market acceptance of our products and competition; | |
| ● | our ability to attract and retain customers for existing and new products; |
| ● | our ability to effectively maintain and update our technology and product and service portfolio; |
| ● | our reliance on third party software and developers; |
| ● | breaches of network or IT security and presentation attacks; |
| ● | our ability to hire and retain key personnel and additional talent; | |
| ● | our ability to raise capital under acceptable terms; | |
| ● | our ability to maintain listing of our common stock on the Nasdaq Capital Market; | |
| ● | our ability to adequately protect our intellectual property, or the loss of some of our intellectual property rights through costly litigation or administrative proceedings; | |
| ● | our ability to operate in non-US markets; | |
| ● | the impact of the Covid-19 Pandemic; | |
| ● | the impact of the war in Ukraine; | |
| ● | stock price and market volatility and the risk of securities litigation; | |
| ● | legislation and government regulation; and | |
| ● | general economic conditions, inflation and access to capital. |
Other sections of this report include additional factors which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “authID” the “Company,” “we,” “our,” “us,” and similar terms refer to authID Inc., a Delaware corporation and its subsidiaries. The Company was formerly known as Ipsidy Inc.
On June 26, 2023 the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporations to effect a one-for-eight (1-for-8) reverse split which became effective on July 7, 2023 (See Note 8 “Shareholders’ Equity”).
The information which appears on our website www.authID.ai is not part of this report.
ii
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
authID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other current assets | ||||||||
| Current assets held for sale | ||||||||
| Total current assets | ||||||||
| Other Assets | ||||||||
| Intangible Assets, net | ||||||||
| Goodwill | ||||||||
| Non-current assets held for sale | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue | ||||||||
| Current liabilities held for sale | ||||||||
| Total current liabilities | ||||||||
| Non-current Liabilities: | ||||||||
| Convertible debt | ||||||||
| Accrued severance liability | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 10) | ||||||||
| Stockholders’ Equity : | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated comprehensive (loss) income | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See notes to condensed consolidated financial statements.
1
authID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Verified software license | $ | $ | $ | $ | ||||||||||||
| Legacy authentication services | ||||||||||||||||
| Total revenues, net | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expense: | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Conversion expense | ( | ) | ( | ) | ||||||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Gain on sale of discontinued operations | ||||||||||||||||
| Total gain (loss) from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Income (Loss) Per Share – Basic and Diluted | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
See notes to condensed consolidated financial statements.
2
authID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See notes to condensed consolidated financial statements.
3
authID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||
| Balances, March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Warrants issued for services | - | |||||||||||||||||||||||
| Shares issued in lieu of interest | ||||||||||||||||||||||||
| Conversion of convertible notes into common stock | ||||||||||||||||||||||||
| Conversion of credit facility borrowings into common stock | ||||||||||||||||||||||||
| Sale of common stock for cash, net of offering costs | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Shares issued in lieu of interest | ||||||||||||||||||||||||
| Warrants issued for services | - | |||||||||||||||||||||||
| Conversion of convertible notes into common stock | ||||||||||||||||||||||||
| Conversion of credit facility borrowings into common stock | ||||||||||||||||||||||||
| Sale of common stock for cash, net of offering costs | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balances, March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Shares issued in lieu of interest | ||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Sale of common stock for cash, net of offering costs | ||||||||||||||||||||||||
| Common stock issued with convertible debt | ||||||||||||||||||||||||
| Common stock issued for working capital facility | ||||||||||||||||||||||||
| Shares issued in lieu of interest | ||||||||||||||||||||||||
| Warrants for services with the issuance of convertible debt | - | |||||||||||||||||||||||
| Cashless stock option exercise | ( | ) | ||||||||||||||||||||||
| Cashless warrant exercise | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See notes to condensed consolidated financial statements.
4
authID INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss with cash flows from operations: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock-based compensation | ||||||||
| Warrants issued for services | ||||||||
| Shares issued in lieu of interest | ||||||||
| Amortization of debt discounts and issuance costs | ||||||||
| Gain from sale of discontinued operation | ( | ) | ||||||
| Loss on debt extinguishment | ||||||||
| Conversion expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other accrued liabilities | ||||||||
| Adjustments relating to discontinued operations | ||||||||
| Net cash flows from operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Purchase of property and equipment - discontinued operations | ( | ) | ||||||
| Purchase of intangible assets | ( | ) | ||||||
| Net cash flows from investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock, net of offering costs | ||||||||
| Credit facility drawdown, net of issuance costs | ||||||||
| Proceeds from issuance of convertible note payable, net of issuance costs | ||||||||
| Cash paid for working capital facility | ( | ) | ||||||
| Payments on notes payable - discontinued operations | ( | ) | ||||||
| Principal payments on capital lease obligation - discontinued operations | ( | ) | ||||||
| Net cash flows from financing activities | ||||||||
| Effect of Foreign Currencies | ( | ) | ( | ) | ||||
| Net Change in Cash | ||||||||
| Cash, Beginning of the Period | ||||||||
| Cash, Beginning of the Period - Discontinued Operations | ||||||||
| Cash, End of the Period - Discontinued Operations | ( | ) | ||||||
| Cash, End of the Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest - discontinued operations | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for income taxes - discontinued operations | $ | $ | ||||||
| Schedule of Non-cash Investing and Financing Activities: | ||||||||
| Conversion of convertible notes to common stock | $ | $ | ||||||
| Conversion of credit facility borrowings into common stock | $ | $ | ||||||
| Warrants issued for services | $ | $ | ||||||
| Cashless option and warrant exercises | $ | $ | ||||||
| Common stock issued with convertible notes | $ | $ | ||||||
| Common stock for working capital facility | $ | $ | ||||||
| Warrants for services with the issuance of convertible debt | $ | $ | ||||||
See notes to condensed consolidated financial statements.
5
authID INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for future periods or the full year.
The condensed consolidated financial statements include the accounts of authID Inc. and its wholly-owned subsidiaries MultiPay S.A.S., ID Solutions, Inc., FIN Holdings Inc., Ipsidy Enterprises Limited and authID Gaming Inc. (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Going Concern
As of June 30, 2023, the Company had an accumulated
deficit of approximately $
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 acquiring new clients to generate revenues and cash flows.
During the quarter ended June 30, 2023, the Company
has secured additional financing of approximately $
There is no assurance that the Company will ever be profitable. These unaudited condensed 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 positive) and raise sufficient capital to maintain operations, there is substantial doubt about the Company’s ability to continue as a going concern.
Reclassification
Certain prior year expenses have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the previously reported loss from continuing operations and management does not believe that this reclassification is material to the consolidated financial statements taken as a whole. Specifically, we reclassified certain expenses from general and administrative expenses to research and development expenses.
6
Net Loss per Common Share
The Company computes net loss per share in accordance
with FASB ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”)
on the face of the statement of operations. Basic EPS is computed by dividing net loss available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted
method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased
from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares
if their effect is anti-dilutive.
| Security | 2023 | 2022 | ||||||
| Convertible notes payable | ||||||||
| Warrants | ||||||||
| Stock options | ||||||||
Revenue Recognition
Verified Software License – The Company recognizes revenue based on the identified performance obligations over the performance period for fixed consideration and / or variable fees generated that are earned on a usage fee based over time based on user monthly user or transaction volumes or on a monthly flat fee rate. We allocate the selling price in a contract which has multiple performance obligations based on the contract selling price that we believe represents a fair market price for the service rendered based on estimated standalone selling price.
The Company had contract liabilities of approximately
$
As of June 30, 2023, and December 31, 2022, the Company did not have any deferred contract costs for fees payable.
Legacy Authentication Services – The Company historically has sold certain legacy software licenses to customers and revenue is recognized when delivery occurs, and all other revenue recognition criteria have been met. During both quarters ended June 30, 2023 and 2022, the Company provided annual software maintenance support services relating to previously licensed software on a stand-ready basis. These fees were billed in advance and recognized ratably over the requisite service period as revenue.
Revenue Accounting Pronouncement – In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses (Topic),” which replaces the current incurred loss impairment methodology for most financial assets with the current expected credit lost, or CECL, methodology. The series of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The Company adopted the new standard effective January 1, 2023, which did not have a material impact to the consolidated financial statements.
7
NOTE 2 – OTHER CURRENT ASSETS AND OTHER ASSETS
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid third party services | ||||||||
| Unamortized credit facility fees | ||||||||
| Other | ||||||||
| $ | $ | |||||||
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Unamortized working capital facility fees | $ | $ | ||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 3 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)
The Company’s intangible assets primarily
consist of acquired and developed software that is being amortized over their estimated useful lives as indicated below.
| Acquired and | ||||||||||||
| Developed | ||||||||||||
| Software | Patents | Total | ||||||||||
| Useful Lives | ||||||||||||
| Carrying Value at December 31, 2022 | $ | $ | $ | |||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ||||||
| Carrying Value at June 30, 2023 | $ | $ | $ | |||||||||
The following is a summary of intangible assets as of June 30, 2023 (unaudited):
| Acquired and | ||||||||||||
| Developed | ||||||||||||
| Software | Patents | Total | ||||||||||
| Cost | $ | $ | ||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||
| Carrying Value at June 30, 2023 | $ | $ | $ | |||||||||
8
Amortization expense totaled approximately $
| 2023 (Remainder of the Year) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ |
There is no impairment indicator identified for impairment of the Company’s intangible assets and goodwill as of June 30, 2023.
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Trade payables | $ | $ | ||||||
| Accrued payroll and related obligations | ||||||||
| Other accrued expenses | ||||||||
| Carrying Value at June 30, 2023 | $ | $ | ||||||
On February 14, 2023, the Company’s Board
of Directors resolved to implement a revised budget for 2023 in order to reduce expenses and cash requirements and as part of such revised
budget decided to re-balance staffing levels to better align with the evolving needs of the Company (the “Labor Reduction Plan”).
Under the Labor Reduction Plan, 12 employees and 6 contractors have left the Company. The Company has also given termination notice to
certain vendors and contractors that provide services to the Company. For the six months ended June 30, 2023, the Company incurred approximately
$
NOTE 5 – WORKING CAPITAL FACILTIY
On March 21, 2022, the Company entered into a
Credit Facility Agreement (the “Original Facility Agreement”) with Stephen J. Garchik (“Garchik”), who is a shareholder
of the Company, pursuant to which Garchik agreed to provide to the Company a $
9
On March 8, 2023, the Company entered into an
Amended and Restated Facility Agreement (“A&R Facility Agreement”) with Garchik, pursuant to which the Company and Garchik
amended and restated the Original Facility Agreement in its entirety, to replace the credit facility contemplated by the Original Facility
Agreement with (i) an initial credit facility to the Company in an amount of $
On March 9, 2023, pursuant to the A&R Facility
Agreement, the Company entered into a promissory note (the “Initial Promissory Note”) in favor of Garchik, pursuant to which
Garchik loaned the amount of $
The Company wrote-off approximately $
On May 25, 2023, the Company and Garchik agreed to
cancel the Initial Promissory Note, terminate the A&R Facility Agreement and Guaranty and satisfy and offset the outstanding balance
of the Initial Promissory Note, plus accrued and unpaid interest in the aggregate amount of $
NOTE 6 – CONVERTIBLE NOTES PAYABLE
On March 21, 2022, the Company entered into a
Securities Purchase Agreement (“SPA”) with certain accredited investors, including certain directors of the Company or their
affiliates (the “Note Investors”), and, pursuant to the SPA, sold to the Note Investors Senior Secured Convertible Notes (the
“Convertible Notes”) with an aggregate initial principal amount of approximately $
During the quarter ended June 30, 2023 and 2022,
the Company issued
During the six months ended June 30, 2023 and
2022, the Company issued
In connection with the issuance of the Convertible
Notes, the Company issued
On May 23, 2023, the
Company entered into an exchange agreement with certain holders (“Holders”) of the Convertible Notes of the Company, pursuant
to which the Company agreed to issue
10
On May 23, 2023, the Company solicited the consent
of the Convertible Notes Holders to eliminate substantially all of the restrictive covenants and a related event of default in the Convertible
Notes. The Company received consent from Holders representing over the necessary
See Note 8 “Shareholders’ Equity”.
| $ | ||||
| less: | ||||
| Unamortized debt issuance and discount costs | ( |
) | ||
| $ |
| 2025 | $ | |||
| $ |
NOTE 7 – RELATED PARTY TRANSACTIONS
Convertible Notes Payable
During the six months ended June 30, 2022, two
Directors, an affiliate of one of such Directors and one Executive Officer invested in $
One Convertible Note holder, Mr. Ken Jisser, joined
our Board of Directors on March 9, 2023. Mr. Jisser is the Founder and Chief Executive Officer of The Pipeline Group, Inc. (“TPG”),
a technology-enabled services company that assists the Company with pipeline generation. On June 6, 2023, the Company entered into a services
agreement with TPG. The agreement provides that TPG 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. In consideration
of the services, the Company will pay TPG $
On May 23, 2023, pursuant to an Exchange Agreement,
Mr. Jisser converted $
On May 23, 2023, pursuant to an Exchange Agreement,
Mr. Stephen J. Garchik, who is a shareholder of the Company, converted $
See Note 6 “Convertible Notes Payable” and Note 8 “Shareholders’ Equity”.
11
Issuance of Common Stock
One Director and two Executive Officers invested
$
On May 23, 2023, Messrs. Rhoniel Daguro, Ken Jisser,
Michael Thompson, members of the Company’s Board of Directors and Joseph Trelin, the Chairman of the Board, each purchased
Credit Facility
On March 21, 2022 the Company entered into the
Original Facility Agreement with an accredited investor Mr. Stephen Garchik, who is both a current shareholder of the Company and a Note
Investor, pursuant to which the accredited investor agreed to provide a $
As described in Note 5 “Working Capital
Facility”, the Original Facility Agreement was amended and restated effective March 6, 2023 pursuant to which amendment the amount
of the facility was reduced to $
On May 25, 2023, the Company and Mr. Garchik agreed
to cancel the Initial Promissory Note, terminated the A&R Facility Agreement and Guaranty and satisfied and offset the outstanding
balance of the Note in the principal amount of $
Executive Officers’ Agreements
Effective March 23, 2023, Mr. Thomas Thimot resigned as the Company’s Chief Executive Officer.
On March 23, 2023, the Company and Rhoniel A.
Daguro, a director of the Company, entered an Offer Letter pursuant to which Mr. Daguro agreed to serve as Chief Executive Officer of
the Company in consideration of an initial annual salary of $
12
The employment of Mr. Daguro is at will and may
be terminated at any time, with or without formal cause. The Company also entered an Executive Retention Agreement with Mr. Daguro, pursuant
to which the Company agreed to provide specified severance and bonus amounts and to accelerate the vesting on his equity awards upon termination
upon a change of control or an involuntary termination, as each term is defined in the agreement. In the event of a termination upon a
change of control or an involuntary termination, Mr. Daguro is entitled to receive an amount equal to
Effective June 17, 2022 Stuart Stoller resigned
as Chief Financial Officer of the Company. In connection with his retirement, the Board of Directors approved the vesting of approximately
On April 25, 2022, Hang Pham and the Company entered
an Offer Letter pursuant to which Ms. Pham agreed to serve as Chief Financial Officer with a planned employment date commencing June 20,
2022. Ms. Pham receives an annual salary of $
On April 12, 2023, the Company entered an Offer
Letter with Thomas R. Szoke, a director of the Company, pursuant to which Mr. Szoke agreed to serve as Chief Technology Officer in consideration
of an initial annual salary of $
The employment of Mr. Szoke is at will and may
be terminated at any time, with or without formal cause. The Company also entered an Executive Retention Agreement with Mr. Szoke, pursuant
to which the Company agreed to provide specified severance and bonus amounts and to accelerate the vesting on his equity awards upon termination
upon a change of control or an involuntary termination, as each term is defined in the agreement. In the event of a termination upon a
change of control or an involuntary termination, Mr. Szoke is entitled to receive an amount equal to
13
Board of Directors
Messrs. Thomas Thimot, Phillip L. Kumnick, Philip
R. Broenniman, Michael A. Gorriz and Ms. Neepa Patel tendered their resignations from the Board of Directors of the Company on March 9,
2023. The Board of Directors appointed Joseph Trelin to the Company’s Compensation and Audit Committees. On March 9, 2023, the Board
of Directors appointed Rhon Daguro, Ken Jisser, Michael Thompson and Thomas Szoke as additional directors of the Company and reduced the
size of the Board of Directors from 8 directors to 7 directors. The Company granted Messrs. Jisser, Thompson and Szoke
On March 16, 2023, the Company appointed Joseph Trelin as the Chairman of the Board, Michael Koehneman as Chairman of the Governance Committee and appointed Michael Thompson to the Company’s Compensation and Governance Committees.
On June 28, 2023, the Company granted
NOTE 8 – STOCKHOLDERS’ EQUITY
On June 26, 2023, the Company filed a Certificate
of Amendment to its Amended and Restated Certificate of Incorporation to effect a one-for-eight (1-for-8) reverse split (the “Reverse
Split”) of the shares of the Company’s common stock. The Reverse Split became effective on July 7, 2023 (see Note 11 “Subsequent
Event”). As a result of the Reverse Split, every eight shares of the Company’s issued and outstanding common stock automatically
converted into one share of common stock, without any change in the par value per share, and began trading on a post-split basis under
the Company’s existing trading symbol, “AUID”, when the market opened on July 10, 2023. The Reverse Split affected all
holders of common stock uniformly and did not affect any common stockholder’s percentage ownership interest in the Company, except
for de minimis changes as a result of the elimination of fractional shares. A total of
14
Common Stock
During the six months ended June 30, 2023, shares of common stock were issued as a result of the following transactions:
| ● | On May 26, 2023, pursuant to Securities Purchase
Agreements, the Company issued |
| ● | On May 26, 2023, pursuant to a Securities Purchase Agreement, Mr. Garchik capitalized the outstanding principal balance of $ |
| ● | On May 26, 2023, pursuant to an exchange agreement with Holders of Convertible Notes payable, the Company issued |
| ● | The Company issued |
During the six months ended June 30, 2022, shares of common stock were issued as a result of the following transactions:
| ● | On March 18 and March 21, 2022, the Company entered into Subscription Agreements with an accredited investor and certain members of authID’s management team (the “PIPE Investors”), and, pursuant to the Subscription Agreements, sold to the PIPE Investors a total of |
| ● | The Company issued a total of |
| ● | On March 21, 2022, the Company entered into a Facility Agreement with a current shareholder and noteholder of the Company, pursuant to which the shareholder agreed to provide to the Company a $ |
| ● | Certain warrant and stock option holders exercised their respective warrants and stock options by means of the cashless exercise feature and were issued approximately |
Warrants
| ● | On May 12, 2023, in connection with certain recruitment services, the Company issued |
| ● | On May 26, 2023, in connection with their placement agent services, the Company issued |
15
| Weighted | Weighted | |||||||||
| Average | Average | |||||||||
| Number of | Exercise | Remaining | ||||||||
| Shares | Price | Life | ||||||||
| Outstanding at December 31, 2022 | $ | |||||||||
| Granted | $ | |||||||||
| Exercised/cancelled | ||||||||||
| $ | ||||||||||
Stock Options
During the six months ended June 30, 2023 the
Company granted directors a total of
| Expected volatility | ||
| Expected term | ||
| Risk free rate | ||
| Dividend rate |
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Shares | Price | Term (Yrs.) | Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | $ | ||||||||||||||
| Exercised | $ | - | $ | |||||||||||||
| Forfeited/cancelled | ( | ) | $ | - | $ | |||||||||||
| Outstanding as of June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable as of June 30, 2023 | $ | $ | ||||||||||||||
| Weighted | ||||||||||||
| Average | ||||||||||||
| Contractual | ||||||||||||
| Exercise Price | Outstanding | Term (Yrs.) | Exercisable | |||||||||
| Less than or equal $32.00 | ||||||||||||
| $32.01 - $56.00 | ||||||||||||
| $56.01 - $80.00 | ||||||||||||
| $80.01 - $128.00 | ||||||||||||
During the six months ended June 30, 2023, the
Company recognized approximately $
16
NOTE 9 – DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
The Board of Directors of authID considered 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
The financial statements of Cards Plus are classified as a discontinued operation and an asset held for sale, as all required classification criteria under appropriate accounting standards were met as of June 30, 2022.
On August 29, 2022, the Company completed the
sale of Cards Plus for a price of $
17
MultiPay business in Colombia
The Company exited the MultiPay business in Colombia in an orderly fashion, honoring our obligations to employees, customers and under applicable laws and regulations. We maintain our customer support and operations team in Bogota, which performs essential functions to support the global operations of our Verified product.
As of June 30, 2023, all impacted employees had left
the Company. MultiPay finalized the sale of the Company’s proprietary software to its major customer on June 30, 2023 for approximately
$
| Amount | ||||
| Carrying value of net assets sold: | ||||
| Property and equipment write-off | $ | |||
| Net assets write-off | $ | |||
| Sale consideration on disposition of net assets: | ||||
| Sale consideration | $ | |||
| Less: Value added tax | ( |
) | ||
| Net Consideration | $ | |||
| Foreign currency translation: | $ | |||
| Net gain on sale of a discontinued operation | $ | |||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Discontinued Operations | ||||||||||||||||
| Total Revenues, net | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Cost of Sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
Income (Loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense): | ||||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Interest expense, net | ( | ) | ||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Gain from sale of discontinued operations | - | - | ||||||||||||||
| Total income (loss) from discontinued operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
18
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cards Plus | ||||||||||||||||
| Total Revenues, net | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Cost of Sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense): | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ||||||||||||||
| Other income, net | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ( | ) | ||||||||||||||
| Loss from discontinued operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| MultiPay | ||||||||||||||||
| Total Revenues, net | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (Loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense): | ||||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Gain from sale of discontinued operations | ||||||||||||||||
| Income (loss) from discontinued operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
19
| June 30, 2023 | December 31, | |||||||
| (Unaudited) | 2022 | |||||||
| Discontinued Operations | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other current assets | ||||||||
| Current assets held for sale | ||||||||
| Noncurrent Assets: | ||||||||
| Property and equipment, net | ||||||||
| Noncurrent assets held for sale | ||||||||
| Total assets held for sale | $ | $ | ||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Total liabilities held for sale | $ | $ | ||||||
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss with cash flows from operations: | ||||||||
| Depreciation and amortization expense | ||||||||
| Impairment of intangible assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ) | |||||||
| Net investment in direct financing lease | ( | |||||||
| Other current assets | ) | |||||||
| Inventory | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | |||||
| Deferred revenue | ||||||||
| Adjustments relating to discontinued operations | ||||||||
| Cashflows from discontinued operations | $ | $ | ||||||
Notes to Financial Statements – Discontinued Operations
Revenue Recognition
Cards Plus – The Company recognized revenue for the design and production of cards at the point in time when products are shipped, or services have been performed due to the short-term nature of the contracts. Additionally, the cards produced by the Company have no alternative use and the Company has an enforceable right to payment for work performed should the contract be cancelled.
MultiPay recognized revenue for variable fees generated for payment processing solutions that are earned on a usage fee over time based on monthly transaction volumes or on a monthly flat fee rate. Additionally, MultiPay also sells certain equipment from time to time for which revenue is recognized upon delivery to the customer.
20
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company is a party to various legal or administrative proceedings arising in the ordinary course of our business. While any litigation contains an element of uncertainty, we have no reason to believe the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company.
Leases
The Company rented office space in Long Beach,
New York at a monthly cost of $
In July 2022, the Company signed a new lease agreement
for one year and moved its headquarters to Denver, Colorado. The office monthly lease cost is approximately $
Rent expense included in general and administrative
on the Consolidated Statements of Operations for the six months ended June 30, 2023 was approximately $
NOTE 11 – SUBSEQUENT EVENT
On June 26, 2023 the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporations to effect a one-for-eight (1-for-8) reverse split which became effective on July 7, 2023 (See Note 8 “Shareholders’ Equity”).
As a result of the Reverse Split, the Company received notice on July 24, 2023 from the Nasdaq Stock Market that the Company is now in compliance with the minimum bid price requirement under Nasdaq Listing Rule 5550(a)(2) and the matter raised by their letter of January 25, 2023 is now closed.
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
authID Inc. is a leading provider of secure, authentication solutions delivered by our easy to integrate Verified platform. Our Verified platform binds strong passwordless authentication with biometric identity, which offers our customers a streamlined path to zero trust architecture. Verified FIDO2 passwordless authentication is certified by the FIDO Alliance to be compliant and interoperable with FIDO specifications.
The explosive growth in online and mobile commerce, telemedicine, remote working and digital activities of all descriptions is self-evident to everyone who lived through the Covid 19 pandemic since 2020. Identity theft, phishing attacks, spear-phishing, password vulnerabilities, account takeovers, benefits fraud - it seems like these words have entered our daily lexicon overnight. These are significant impediments to the operations and growth of any business or organization, and dealing with the risks and consequences of these criminal activities has created significant friction in both time, cost and lost opportunity. Consider all the outdated methods that organizations have implemented in order to prevent fraud. The requests to receive and enter one-time passwords, that can be easily hijacked. The vulnerable security questions you get asked – whether on-line or when reaching out to a call center – what was your first pet’s name? who was your best friend in high school? These steps all add up to friction, making it difficult for consumers to login, transact and execute daily tasks, with little added protection from fraud. Surely there is a better way to address these challenges? authID believes there is.
authID provides secure, facial biometric, identity verification, and strong customer authentication. We maintain a global, cloud-based Verified platform for our enterprise customers or employees to enable their users to easily verify and authenticate their identity through a mobile device or desktop (with camera) of their choosing (without requiring dedicated hardware, or authentication apps). We can help our customers establish a proven identity, creating a root of trust that ensures the highest level of assurance for our passwordless login and step-up verification products. Our system enables participants to consent to transactions using their biometric information with a digitally signed authentication response, embedding the underlying transaction data and each user’s identity attributes within every electronic transaction message processed through our platform.
Digital transformation across all market segments requires trusted identity. Our identity platform offers innovative solutions that are flexible, fast and easy to integrate and offer seamless user experiences. authID’s products help advance digital transformation efforts without the fear of identity fraud, while delivering frictionless user experiences. We believe that it is also essential that electronic transactions have an audit trail, proving that the identity of the individual was duly authenticated. Our platform provides biometric and multi-factor identity software, which are intended to establish, authenticate and verify identity across a wide range of use cases and electronic transactions.
authID’s products focus on the broad requirement for enabling frictionless commerce by allowing an entity to instantly “Recognise their Customer”, their Employee or their Member. Organizations of all descriptions require cost-effective and secure means of growing their business while mitigating identity fraud. We aim to offer our enterprise customers products that can be integrated easily into each of their business and organizational operations, in order to facilitate their adoption and enhance the end user customer experience.
Our management believes that some of the advantages of our Verified Platform approach are the ability to leverage the platform to support a variety of vertical markets and the adaptability of the platform to the requirements of new markets and new products requiring cost-effective, secure, and configurable mobile solutions. Our target markets include cybersecurity, workforce, banking, fintech and other disrupters of traditional commerce, small and medium sized businesses, and system integrators working with government and Fortune 1000 enterprises. At its core, the Company’s offering, combining its proprietary and acquired biometric and artificial intelligence technologies (or AI), is intended to facilitate frictionless commerce, whether in the physical or digital world. The Company intends to increase its investment in developing, patenting and acquiring the various elements necessary to enhance the platform, which are intended to allow us to achieve our goals. One of the principal intended areas of investment is to enhance and expand our use of artificial intelligence in proprietary software, that we believe will increase our value to enterprise customers and stockholders alike.
22
authID is dedicated to developing advanced methods of protecting consumer privacy and deploying ethical and socially responsible AI. authID is developing a culture that proactively encourages and rewards our employees for considering the ethical implications of our products. We believe that a proactive commitment to ethical AI presents a strong business opportunity for authID and will enable us to bring more accurate products to market more quickly and with less risk to better serve our global user base. Our methods to achieve ethical AI include engaging the users of our products with informed consent, prioritizing the security of our user’s personal information, considering and avoiding potential bias in our algorithms, and monitoring of algorithm performance in our applications.
The Company also owns an entity in Colombia, MultiPay. On May 4, 2022, the Board approved a plan to exit from certain non-core activities comprising the MultiPay correspondent bank, payments services in Colombia and the Cards Plus cards manufacturing and printing business in South Africa. On August 29, 2022 the Company completed the sale of Cards Plus business. On June 30, 2023, the Company completed the exit of the MultiPay business. See Discontinued Operations.
The Company was incorporated in the State of Delaware on September 21, 2011 and changed our name to authID Inc. on July 18, 2022.
Our Common Stock is traded on the Nasdaq Capital Market under the trading symbol “AUID”. Our main address is 1580 North Logan Street, Suite 660, Unit 51767, Denver, CO 80203 and our main phone number is (516) 274-8700. We maintain a website at www.authID.ai. The information contained on, or that can be accessed through, our websites is not incorporated by reference into this prospectus and is intended for informational purposes only.
Going Concern
The Company’s unaudited condensed consolidated financial statements included in this Quarterly Report have been prepared in accordance with United States GAAP assuming the Company will continue on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next year following the issuance date of these financial statements.
As of June 30, 2023, the Company had an accumulated deficit of approximately $156.0 million. For the six months ended June 30, 2023, the Company earned revenue of approximately $0.07 million, used $4.2 million to fund its operations, and incurred a net loss from continuing operations of approximately $10.9 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.
During the quarter ended June 30, 2023, the Company has secured additional financing of approximately $6.4 million net, which provides funding for its current operations as it continues to invest in its product, people, and technology. Although there is no guarantee, 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.
23
Adjusted EBITDA
This discussion includes information about Adjusted EBITDA that is not prepared in accordance with GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by 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 GAAP net income (loss) adjusted to exclude (1) interest expense and debt discount and debt issuance costs amortization expense, (2) interest income, (3) provision for income taxes, (4) depreciation and amortization, (5) stock-based compensation expense (stock options) and (6) loss on debt extinguishment, and conversion expense on exchange of Convertible Notes and certain other items management believes affect the comparability of operating results. Management believes that Adjusted EBITDA, when viewed with our results under 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:
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations. |
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 GAAP results and using Adjusted EBITDA only as a supplement to our GAAP results.
Reconciliation of Loss from Continuing Operations to Adjusted EBITDA Continuing Operations:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Loss from continuing operations | $ | (10,900,320 | ) | $ | (6,366,520 | ) | $ | (16,120,559 | ) | $ | (11,466,525 | ) | ||||
| Addback: | ||||||||||||||||
| Interest expense, net | 282,109 | 459,262 | 1,082,182 | 493,904 | ||||||||||||
| Other income | (1,160 | ) | - | (1,160 | ) | (3,240 | ) | |||||||||
| Loss on debt extinguishment | 380,741 | - | 380,741 | - | ||||||||||||
| Conversion expense | 7,476,000 | - | 7,476,000 | - | ||||||||||||
| Severance cost | - | - | 811,041 | 150,000 | ||||||||||||
| Depreciation and amortization | 76,019 | 244,448 | 152,036 | 460,833 | ||||||||||||
| Taxes | 3,255 | 7,316 | 3,255 | 8,100 | ||||||||||||
| Non-cash recruiting fees | (54,000 | ) | - | 438,000 | - | |||||||||||
| Stock compensation | 1,055,690 | 2,632,118 | 1,895,711 | 4,499,107 | ||||||||||||
| Adjusted EBITDA continuing operations (Non-GAAP) | $ | (1,681,666 | ) | $ | (3,023,376 | ) | $ | (3,882,753 | ) | $ | (5,857,821 | ) | ||||
24
Three and Six Months Ended June 30, 2023 and June 30, 2022 – Continuing Operations
Revenues, net
During the three and six months ended June 30, 2023, the Company’s revenues from Verified software licenses were approximately $36,000 and $72,000 compared to approximately $51,000 and $87,000 in the three and six months ended June 30, 2022. Verified software license revenue decreased due to certain one-time revenue customers in prior year periods.
Legacy authentication services revenues were approximately $1,000 and $3,000, respectively during the three months and six months ended June 30, 2023 compared to approximately $15,000 and $145,000, respectively for the three months and six months ended June 30, 2022. Revenue from Legacy authentication services dropped significantly as the Company phased out older product offerings in 2022.
General and administrative expenses
During the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, general and administrative expense decreased by approximately $2.1 million and $2.5 million principally due to the Company’s Labor Reduction Plan and other cost saving measures resulting in lower headcount costs and lower third party vendors costs.
Research and development expenses
During the three-month and six-month periods ended June 30, 2023 compared to June 30, 2022, research and development expenses decreased by approximately $0.9 million and $1.2 million as the Company implemented the Labor Reduction Plan and decreased staffing and third party resources.
Depreciation and amortization expense
During the three and six months ended June 30, 2023 compared to June 30, 2022, depreciation and amortization expense was approximately $0.2 and $0.3 million less as the Company reduced the value of certain legacy business asset values.
Interest expense, net
Interest expense, net includes interest expense, debt issuance and discount amortization expense. Interest expense decreased by approximately $0.2 million during the three month period ended June 30, 2023 compared to June 30, 2022 principally due to the exchange of Convertible Notes for common stock in May 2023. Interest expense increased by approximately $0.6 million during the six months ended June 30, 2023 due to the issuance of $9.2 million of Convertible Notes in late March 2022.
Loss on debt extinguishment
During the three and six months ended June 30, 2023, loss on debt extinguishment increased by approximately $0.4 million due to the write-off of unamortized debt issuance costs related to the Initial Promissory Note as the note balance was capitalized and extinguished in the periods. See Note 5 to the unaudited condensed consolidated financial statements “Working Capital Facility”.
Conversion expense
During the three and six months ended June 30, 2023, conversion expense was approximately $7.5 million compared to $0 for the three and six months ended June 30, 2022 as a result of the additional shares issued by the Company in exchange for the Convertible Notes, above the number of shares that the Holders would have received upon conversion at the original conversion price under the Convertible Notes. See Note 6 to the unaudited condensed consolidated financial statements “Convertible Notes Payable”.
Three and Six Months Ended June 30, 2023 and June 30, 2022 – Discontinued Operations
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 Card Plus cards manufacturing and printing business in South Africa.
Cards Plus business in South Africa
On August 29, 2022, the Company completed the sale of Cards Plus business for a price of $300,000, less $3,272 in costs to sell, and recognized a loss of $188,247 from the transaction. Of the $300,000 gross proceeds, $150,000 was paid on closing and the remaining $150,000 is expected to be paid in a year, which is currently recorded in other current assets as of June 30, 2023.
25
MultiPay business in Colombia
On June 30, 2023, the Company completed the sale of MultiPay business software for a price of approximately $96,000 including VAT, less $20,000 in fixed assets write-off, and recognized approximately $216,000 net gain from the transaction. The gross proceeds is currently recorded in other current assets as of June 30, 2023.
Liquidity and Capital Resources
The Company has approximately $6.0 million of cash on hand and approximately $5.5 million of working capital as of June 30, 2023.
Cash used in operating activities was approximately $4.2 million and $6.5 million in the six months ended June 30, 2023 and 2022, respectively.
Cash flows from investing activities for the six months ended June 30, 2023 was $0 and cash used in investing activities for the six months ended June 30, 2022 was $30,000 for certain fixed assets and intangible assets purchases.
Cash provided by financing activities in the six months ended June 30, 2023 consisted of approximately $6.4 million in proceeds from the sale of common stock, net of offering costs, and $0.5 million initial drawdown net of debt issuance costs under the Company’s A&R Facility Agreement.
Cash provided by financing activities in the six months ended June 30, 2022 consisted of approximately $3.1 million net proceeds from sale of common stock, net of offering costs and approximately $8 million net proceeds from issuance of Convertible Notes.
There is no guarantee that our current business plan will not change, and as a result of such change, we will need additional capital to implement such business plan. Further, assuming we achieve our expected growth plan, of which there is no guarantee, we will need additional capital to implement growth beyond our current business plan.
Covid 19
Covid-19 emerged globally in December 2019, and it has been declared a pandemic. Covid-19 is still impacting customers, business, results and financial condition throughout the world. The Company’s day-to-day operations have been impacted differently depending on geographic location and services that are being performed. The Company cannot predict the potential impact of any future pandemics.
Ukraine
The ongoing war in Ukraine may impact the Company and its operations in a number of different ways, which are yet to be fully assessed and are therefore causing uncertainty. The Company works with third party sub-contractors for outsourced services, including software engineering and development, some of whom are based in Eastern Europe, including Ukraine. The Company also works with outsourced engineers and developers and third-party providers in other parts of the world, including the United States, Eastern Europe and Pakistan. 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, any disruption of our ability to work with such contractors caused by this conflict could require the Company to seek alternative sub-contractors at short notice, which may give rise to additional costs and delays in delivering software and product upgrades.
26
The uncertainty impacting and potential interruption in energy and other supply chains resulting from military hostilities in Europe and the response of the United States and other countries to it by means of trade and economic sanctions, or other actions, may give rise to increases in costs of goods and services generally and may impact the market for our products as prospective customers reconsider additional capital expenditure, or other investment plans until the situation becomes clearer. On the other hand, the threat of increased cyber-attacks from Russia or other countries may prompt enterprises to adopt additional security measures such as those offered by the Company.
For so long as the hostilities continue and perhaps even thereafter as the situation in Europe unfolds, we may see increased volatility in financial markets which may 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 on 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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.
Recent Accounting Policies
The recent material accounting policies that may be the most critical to understanding of the financial results and conditions are discussed in Note 1 of the unaudited financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required to include disclosure under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly 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(e) and 15d-15(e) of the Exchange Act. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2023, as a result of a material weakness discussed below, the Company’s disclosure controls and procedures were not 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.
Material Weakness in Internal Control Over Financial Reporting
During the quarter 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 conversion transaction, which occurred during the period. The Convertible Note conversion transaction which gave rise to this issue (See Note 6 “Convertible Notes Payable”) was a complex and infrequent transaction, which requires 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.
Our plan to remediate this material weakness is to undertake a review of the Company’s activities during each quarter in order to identify any potential complex accounting matters and then to engage a CPA advisory firm to review the proposed accounting treatment on any 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
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal or administrative proceedings arising in the ordinary course of business. While any litigation contains an element of uncertainty, we have no reason to believe the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 1A. RISK FACTORS
Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2022. Except as set forth below, which discusses a material weakness in our control over financial reporting as of June 30, 2023, there has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K. We operate in a business environment that is sensitive to political, economic and regulatory uncertainty, including with respect to cybersecurity and infrastructure investment, all of which may also be compounded by any future global impact from the COVID-19 pandemic, the continuing war in Ukraine and inflationary pressures, rising energy prices and increases in interest rates (see “Covid 19” and “Ukraine” above).
Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance areas that will increase both our costs and the risk of noncompliance. If we fail to comply with these regulations, we could face difficulties in preparing and filing timely and accurate financial reports.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act. We are also subject to the corporate governance and other listing rules of the Nasdaq Stock Market. Maintaining compliance with these rules and regulations, particularly after we cease to be an emerging growth company, will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place increased strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and at the time we cease to be an emerging growth company and a smaller reporting company, we will be required to provide attestation that we maintain effective disclosure controls and procedures by our registered public accounting firm. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal control also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that are required to include in our periodic reports filed with the SEC, under Section 404(a) of the Sarbanes-Oxley Act or the annual auditor attestation reports regarding effectiveness of our internal controls over financial reporting that we will be required to include in our periodic reports filed with the SEC upon our ceasing to be an emerging growth company and a smaller reporting company, unless, under the JOBS Act, we meet certain criteria that would require such reports to be included prior to then, under Section 404(b) of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of shares of our Common Stock.
In order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting going forward, we will need to expend significant resources and provide significant management oversight. There is a substantial effort involved in continuing to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs. We may experience difficulty in meeting these reporting requirements in a timely manner.
As disclosed in Item 4 of this Quarterly Report, we had a material weakness in our control over financial reporting as of June 30, 2023. Management has taken action to implement a plan to remediate the various elements of this material weakness, with immediate effect in relation to the financial statement for the quarter ending September 30, 2023. The remediation plan is to undertake a review of the Company’s activities during each quarter in order to identify any potential complex accounting matters and then to engage a CPA advisory firm to review the proposed accounting treatment on any complex accounting matters that may arise in the future.
If we are unable to appropriately implement and maintain this remediation plan and maintain any other necessary 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.
28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Securities Purchase Agreement
On May 23, 2023, the Company entered into a securities purchase agreement with accredited investors (the “Purchase Agreement”), pursuant to which the Company agreed to issue and sell, in a public offering an aggregate of 1,113,809 shares (the “Registered Shares”) of the Company’s common stock and in a concurrent private placement 1,120,351 shares (the “PIPE Shares”) of Common Stock (the “Offering”) at a of $3.664 per share (or $4.00 if the purchaser is a director of the Company). The purchasers under the Purchase Agreement included Stephen J. Garchik (“Garchik”) and four directors of the Company, including the Chief Executive Officer and Chairman of the Board of Directors.
As previously disclosed, Garchik, who is a Holder (as defined below), the collateral agent for the Convertible Notes and a shareholder of the Company, entered into that certain Amended and Restated Facility Agreement, dated March 8, 2023 (the “A&R Facility Agreement”), with the Company and pursuant to the A&R Facility Agreement, loaned $900,000 to the Company on March 9, 2023, pursuant to a promissory note in favor of Garchik (the “Initial Promissory Note”). In the Offering, the Company and Garchik agreed that the Company would offset the purchase price of certain shares that Garchik agreed to purchase pursuant to the Purchase Agreement against the Company’s obligations under, and the cancellation of, the A&R Facility Agreement and the Initial Promissory Note and the related obligations of the Company’s subsidiaries ID Solutions, Inc., FIN Holdings, Inc. and Innovation in Motion, Inc. (the “Guarantors”) under the guaranty that that the Guarantors had entered into as a condition to Garchik lending under the Initial Promissory Note. Accordingly, Garchik agreed that upon the closing of the Offering, the A&R Facility Agreement, the Initial Promissory Note and the Guaranty terminated.
Exchange Agreement
On May 23, 2023, the Company entered into an exchange agreement with certain holders (“Holders”) of the March 2022 Senior Secured Convertible Notes (the “Convertible Notes”) of the Company (the “Exchange Agreement”), pursuant to which the Company issued 2,380,435 shares (the “Exchange Shares”) of common stock to the Holders in exchange for the Holders’ Convertible Notes principal balance and accrued interest (the “Note Exchange”) at a price of $3.776 per share or $4.12 if the Holder is a director, officer or insider of the Company.
On June 7, 2023, the Company entered into a further Securities Purchase Agreement and Exchange Agreement with an accredited investor pursuant to which the Company agreed to issue and sell 1,154 PIPE Shares at a price of $5.632 per share and issued 2,283 Exchange Shares in exchange for the Holder’s Convertible Note principal balance and accrued interest at a price of $5.80 per share.
The PIPE Shares and the Exchange Shares were offered and sold in reliance upon exemption from the registration requirements under Section 4(a)(2) under the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder.
Engagement Agreement
On April 20, 2023, the Company entered into an engagement agreement (the “Engagement Agreement”) with Madison Global Partners, LLC (“Madison”), pursuant to which Madison agreed to serve as non-exclusive exclusive placement agent for the issuance and sale of the Registered Shares and the PIPE Shares. The Company paid Madison an aggregate cash fee equal to 7.0% of the gross proceeds received by the Company from the sale of the securities in the Offering, $80,000 cash retainer fee and issued stock purchase warrants (the “Madison Warrants”) to purchase up to 156,712 shares of common stock of the Company at an exercise price of $3.664 per share, which equal to 7.0% of the aggregate number of Shares placed in the Offering. Pursuant to the Engagement Agreement, the Company reimbursed Madison $60,000 for fees and expenses of legal counsel and other out-of-pocket expenses. The Engagement Agreement has indemnity and other customary provisions for transactions of this nature. On May 12, 2023, in connection with certain recruitment services, the Company issued 187,500 common stock warrants to Madison III, LLC, an affiliate of Madison with a term of 5 years and an exercise price of $3.164 per share.
Director & Executive Officer Stock Option Grants
On June 28, 2023, the Company made a grant of options to each of Messrs. Koehneman and Trelin and to Ms. White to acquire 15,625 shares of common stock and to each of Messrs. Jisser and Thompson to acquire 3,125 shares of common stock. Each such option is at the exercise price of $5.48 per share, exercisable for a period of ten years, vesting over a period of twelve months.
On June 28, 2023, the Company made an additional grant of options to Mr. Szoke to acquire 50,000 shares of common stock at the exercise price of $5.48 per share, exercisable for a period of ten years, vesting subject to achievement of performance and service conditions.
On June 28, 2023 the Company made an additional grant of options to Mr. Daguro to acquire 183,125 shares of common stock at an exercise price of $5.48 per share, exercisable for a period of ten years, vesting subject to achievement of performance and service conditions.
All the offers and sales of securities listed above were made to accredited investors. The issuance of the above securities is exempt from the registration requirements under Rule 4(a)(2) of the Securities Act of 1933, as amended, and/or Rule 506 as promulgated under Regulation D.
29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to our operations.
ITEM 5. OTHER INFORMATION
Engagement of Thomas R. Szoke
On April 12, 2023, the Company and Thomas R. Szoke, a director of the Company, entered an Offer Letter pursuant to which Mr. Szoke agreed to serve as Chief Technology Officer of the Company in consideration of an initial annual salary of $250,000. Mr. Szoke received an initial signing bonus of $20,833 and will be eligible for an annual target bonus of up to $200,000 based on performance milestones. For the period ending March 31, 2024, a bonus amount of $40,000 shall be payable upon the Company achieving increments of $1,000,000 in total contract value of all customer agreements less claw backs (“Bookings”) up to an aggregate of $5,000,000 in Bookings. For subsequent years, Mr. Szoke and the Compensation Committee of the Board will mutually agree as to the performance targets to earn for the annual bonus.
The vesting criteria of Mr. Szoke’s Stock Options to acquire 12,500 shares of common stock at $2.64 exercise price previously granted to Mr. Szoke on March 14, 2023 (the “Original Grant”) were amended pursuant to an Amended and Restated Stock Non-Statutory Option Agreement providing for vesting subject to achievement of performance and service conditions. All other terms of the Original Grant were not changed. On June 28, 2023 the Company granted additional options to Mr. Szoke to acquire 50,000 shares of common stock at exercise price of $5.48 per share for a period of ten years vesting subject to achievement of performance and service conditions.
The employment of Mr. Szoke is at will and may be terminated at any time, with or without formal cause. The Company also entered an Executive Retention Agreement with Mr. Szoke, pursuant to which the Company agreed to provide specified severance and bonus amounts and to accelerate the vesting on his equity awards upon termination upon a change of control or an involuntary termination, as each term is defined in the agreement. In the event of a termination upon a change of control or an involuntary termination, Mr. Szoke is entitled to receive an amount equal to 100% of his base salary, the actual bonus earned but unpaid for the previous year and any bonus that was earned but unpaid prior to the termination date. Further, upon termination upon a change of control or an involuntary termination, the Company will reimburse Mr. Szoke for the cost of continuation of health coverage for Mr. Szoke and his eligible dependents pursuant to COBRA until the earlier of 12 months following the termination date, the date Mr. Szoke and his dependents are eligible for health coverage from a new employer or the date Mr. Szoke and his eligible dependents are no longer eligible for COBRA.
Executive Retention Agreement – Hang Thi Bich Pham
On May 11, 2023, the Company entered a Retention Agreement with Ms. Pham, pursuant to which we agreed to provide specified retention bonus amounts subject to certain performance conditions in the aggregate amount of up to $240,625 and to accelerate the vesting on her equity awards upon termination. This Agreement replaces the previous Executive Retention Agreement dated April 25, 2022, which was terminated and a release granted in relation thereto.
Nasdaq Notices
On January 25, 2023 the Company received a notice letter from the Listing Qualifications staff of the NASDAQ Stock Market LLC (“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 (the “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 of $283,536, as reported on the Company’s Annual Report on Form 10-K for the period ended December 31, 2022, 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..
30
Aa result of the closing of the Offering and the Note Exchange in May 2023, the Company’s total stockholder equity is 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 has determined, that the Company complies with Rule 5550(b)(1), subject to its review of this quarterly report on Form 10-Q.
As a result of the Reverse Split, the Company received notice on July 24, 2023 from Nasdaq that the Company is now in compliance with the Bid Price Requirement and the matter raised by their letter of January 25, 2023 is now closed.
Engagement of Rhoniel A. Daguro
On March 23, 2023, the Company and Rhoniel A. Daguro, a director of the Company, entered an Offer Letter pursuant to which Mr. Daguro agreed to serve as Chief Executive Officer of the Company in consideration of an initial annual salary of $400,000. Mr. Daguro will be eligible for an annual target bonus of up to $375,000 based on performance milestones. For the period ending March 31, 2024, a bonus amount of $75,000 shall be payable upon the Company achieving increments of $1,000,000 in total contract value of all customer agreements less claw backs (“Bookings”) up to an aggregate of $5,000,000 in Bookings. For subsequent years, Mr. Daguro and the Compensation Committee of the Board will mutually agree as to the performance targets to earn for the annual bonus.
On April 10, 2023 the Company provided Mr. Daguro with an initial grant of options (“Initial Grant”) to purchase 306,875 shares of common stock for a period of ten years vesting subject to achievement of performance and service conditions, at an exercise price of $3.176. On June 28, 2023 the Company made an additional grant of options to Mr. Daguro to acquire 183,125 shares of common stock at an exercise price of $5.48 per share for a period of ten years vesting subject to achievement of performance and service conditions.
The employment of Mr. Daguro is at will and may be terminated at any time, with or without formal cause. The Company also entered an Executive Retention Agreement with Mr. Daguro, pursuant to which the Company agreed to provide specified severance and bonus amounts and to accelerate the vesting on his equity awards upon termination upon a change of control or an involuntary termination, as each term is defined in the agreement. In the event of a termination upon a change of control or an involuntary termination, Mr. Daguro is entitled to receive an amount equal to 100% of his base salary, the actual bonus earned but unpaid for the previous year and any bonus that was earned but unpaid prior to the termination date. Further, upon termination upon a change of control or an involuntary termination, the Company will reimburse Mr. Daguro for the cost of continuation of health coverage for Mr. Daguro and his eligible dependents pursuant to COBRA until the earlier of 12 months following the termination date, the date Mr. Daguro and his dependents are eligible for health coverage from a new employer or the date Mr. Daguro and his eligible dependents are no longer eligible for COBRA.
Separation – Thomas Thimot
March 23, 2023, the Company and Thomas Thimot entered into a Confidential Separation Agreement and General Release for the purposes of separation of Mr. Thimot from the Company as Chief Executive Officer and an employee by mutual consent and settling, compromising and resolving all claims between them. Mr. Thimot’s resignation was effective March 23, 2023. In addition to the Company paying all accrued but unpaid salary and providing reimbursement for all outstanding expenses, the Company has agreed to pay Mr. Thimot $325,000 which shall be deferred until the earlier of April 1, 2025 and a change of control of the Company and is subordinated to the initial advance in the amount of $900,000 made pursuant to the Amended & Restated Facility Agreement entered into as of March 8, 2023 between the Company and Stephen Garchik, as well as to all present and future secured indebtedness of the Company under the Senior Convertible Notes issued by the Company as of March 21, 2022 and pursuant to such Facility Agreement. Mr. Thimot will also be eligible for certain health benefits. The exercise period with respect to Mr. Thimot’s stock option to acquire 32,813 shares of common stock at an exercise price of $62.4 per share was extended through March 23, 2027. All unvested grants or other equity awards lapsed and are no longer exercisable as of the separation date.
31
Garchik Facility Agreement
On March 21, 2022, the Company entered into a Facility Agreement with Stephen J. Garchik, who was and is a shareholder of the Company(“Garchik”), pursuant to which Garchik agreed to provide to the Company a $10.0 million unsecured standby line of credit facility that could be drawn down in several tranches, subject to certain conditions described in the Facility Agreement (the “Original Facility Agreement”). Pursuant to the Original Facility Agreement, the Company paid Garchik a facility commitment fee of 12,500 shares of our common stock (the “Facility Commitment Fee”) upon the effective date of the Original Facility Agreement.
On March 8, 2023, the Company entered into an Amended and Restated Facility Agreement with Garchik, pursuant to which the Company and Garchik amended and restated the Original Facility Agreement in its entirety (the “A&R Facility Agreement”), to replace the credit facility contemplated by the Original Facility Agreement with (i) an initial credit facility to the Company in an amount of $900,000 (the “Initial Funding”) and (ii) the parties to use their reasonable best efforts after the Initial Funding to negotiate the terms of a subsequent credit facility in the aggregate amount of $2,700,000 (the “Subsequent Funding”).
On March 9, 2023, pursuant to the A&R Facility Agreement, the Company entered into a promissory note in favor of Garchik, pursuant to which Garchik loaned $900,000 to the Company. At the same time, as a condition to Garchik providing the Amount, certain of the Company’s subsidiaries, ID Solutions, Inc., FIN Holdings, Inc. and Innovation in Motion, Inc. entered into a guaranty of the Initial Promissory Note with Garchik. In connection with the A&R Facility Agreement, on March 9, 2023, the Company and Garchik entered into the Release Agreement, pursuant to which the Company and Garchik mutually agreed to release any and all rights to make a claim against the other and any existing claims against the other arising out of or relating to the Original Facility Agreement.
On May 25, 2023, the Company and Garchik agreed to cancel the Initial Promissory Note, terminate the A&R Facility Agreement and Guaranty and satisfy and offset the outstanding balance of the Initial Promissory Note, plus accrued and unpaid interest in the amount of $929,250 against the purchase price of certain shares of common stock of the Company. All unamortized debt issuance costs related to the Initial Promissory Note and the A&R Facility Agreement were recorded as a reduction of the additional paid in capital. See Note 8 to the unaudited Condensed Consolidated Financial Statements “Shareholders’ Equity”.
Board of Directors
On March 6, 2023, Mr. Thimot tendered his resignation as Chief Executive Officer to the Company, which became effective upon the appointment of his successor on March 23, 2023. Before the A&R Facility Agreement was entered into, Mr. Thimot, Phillip L. Kumnick, Philip R. Broenniman, Michael A. Gorriz and Neepa Patel (the “Retiring Directors”) tendered their resignations from the Board of Directors of the Company which became effective upon the Initial Funding. The Company thanks the Retiring Directors for their dedicated service to the Company.
On March 9, 2023, the Board of Directors appointed Joseph Trelin to the Company’s Compensation and Audit Committees.
Pursuant to the Nomination Right under the A&R Facility Agreement, Mr. Garchik nominated Mr. Daguro, Ken Jisser, Michael Thompson and Thomas Szoke for appointment to the Board of Directors. On March 9, 2023, the Board of Directors appointed Messrs. Daguro, Jisser, Thompson and Szoke as additional directors of the Company (the “Additional Directors”) and reduced the size of the Board of Directors from 8 directors to 7 directors, with effect from the resignations of the Retiring Directors. Under the terms of the A&R Facility Agreement, the Nomination Right expired upon the appointment of the four (4) Additional Directors to the Board of Directors.
2023 Budget – Labor Reduction Plan
On February 14, 2023, the Company’s Board of Directors resolved to implement a revised budget for 2023 in order to reduce expenses and cash requirements and as part of such revised budget decided to re-balance staffing levels to better align with the evolving needs of the Company (the “Labor Reduction Plan”). Under the Labor Reduction Plan, 12 employees and 6 contractors have left the Company. The Company has also given termination notice to certain vendors and contractors that provide services to the Company.
Cecil N. Smith III
On February 15, 2023 Cecil N. Smith III ceased to be an employee, and the President and Chief Technology Officer of the Company pursuant to the Labor Reduction Plan. The Company had entered into an Executive Retention Agreement with Mr. Smith dated as of June 14, 2021, which provides for certain benefits upon termination of Mr. Smith’s employment and Mr. Smith subsequently signed a release of all prior claims in consideration of the payments to be made by the Company under the Executive Retention Agreement.
Resignation of Annie Pham and Engagement of Edward Sellitto
Annie Pham resigned as Chief Financial Officer effective August 15, 2023. On July 31, 2023, the Company and Edward Sellitto entered an Offer Letter pursuant to which Mr. Sellitto agreed to serve as Chief Financial Officer of the Company commencing August 15, 2023 in consideration of an annual salary of $250,000. Annie Pham will continue to assist the Company during the transition on a consulting basis.
32
ITEM 6. EXHIBITS
| * | Filed herewith |
33
| ** | Certain schedules and exhibits to this agreement have been omitted pursuant to Instruction 4 to Item 1.01 of Form 8-K. A copy of any omitted schedule or exhibit will be furnished to the SEC upon request. |
| (1) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 23, 2021. |
| (2) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on January 22, 2021. |
| (3) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 15, 2021. |
| (4) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 16, 2019. |
| (5) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 18, 2020. |
| (6) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on May 13, 2020. |
| (7) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on May 6, 2021. |
| (8) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 6, 2017. |
| (9) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on May 4, 2018. |
| (10) | Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on July 12, 2017. |
| (11) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 1, 2017. |
| (12) | Incorporated by reference to the Form S-1/A Amendment No. 1 to the S-1 Registration Statement filed with the Securities Exchange Commission on July 16, 2021. |
| (13) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on November 8, 2021. |
| (14) | Incorporated by reference to the Form S-8 Registration Statement filed with the Securities Exchange Commission on February 1, 2022. |
| (15) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 21, 2022. |
| (16) | Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on March 22, 2022. |
| (17) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 18, 2022. |
| (18) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 27, 2022. |
| (19) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 19, 2022. |
| (20) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 21, 2022. |
| (21) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 10, 2023. |
| (22) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 28, 2023. |
| (23) | Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on March 30, 2023. |
| (24) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 18, 2023. |
| (25) | Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on May 11, 2023. |
| (26) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on May 16, 2023. |
| (27) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on May 26, 2023. |
| (28) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 13, 2023. |
| (29) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 27, 2023. |
| (30) | Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on August 3, 2023. |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| authID Inc. |
| By: | /s/ Rhoniel Daguro | |
| Rhoniel A. Daguro | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Hang Thi Bich Pham | |
| Hang Thi Bich Pham | ||
| Chief Financial Officer, | ||
| (Principal Financial and Accounting Officer) | ||
| Dated: August 10, 2023 |
35