SEC filing summary
Entity note: The supplied filing is Ipsidy Inc. (formerly ID Global Solutions Corporation), not Authid Inc. It is a Form 10-Q for the quarter and six months ended June 30, 2016, filed April 12, 2017. The 2015 comparative results were restated.
Business context and reporting period
Ipsidy described itself as a provider of biometric identity management, electronic transaction processing, payment, and card solutions. The February 2016 acquisition of FIN Holdings added fingerprint technology and Cards Plus; MultiPay and FIN acquisitions contributed to the period’s revenue and expanded the company’s assets and operations.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $490,000 | $811,000 |
| Operating loss | $4.22 million | $8.54 million |
| Net income (loss) | $(833,000) | $6.86 million |
| Operating cash flow | Not separately provided | $(2.00) million |
- Six-month revenue included about $470,000 from Cards Plus, $201,000 from ID Solutions, $139,000 from Colombian operations, and $13,000 in lease income. Revenue was $11,000 in the restated prior-year period.
- Six-month cost of sales was $233,000. Derived gross margin was approximately 71% for the first half and 77% for Q2; these percentages are calculated from reported revenue and cost of sales.
- The first-half net profit was chiefly driven by a $17.68 million noncash gain from remeasuring derivative liabilities. The company still reported an $8.54 million operating loss and $2.27 million of interest expense.
- Cash was $281,000 at June 30, down from $350,000 at year-end. Investing activities provided $307,000, largely reflecting cash acquired in acquisitions; financing activities provided $1.50 million.
- Current assets were $707,000 versus current liabilities of $12.72 million, a working-capital deficit of approximately $12.01 million. Current liabilities included a $7.72 million derivative liability. Stockholders’ deficit was $660,000.
- Notes payable, net, totaled $1.58 million and convertible notes, net, totaled $1.95 million. The company reported $2.27 million of principal outstanding on notes payable and $2.57 million on convertible notes before unamortized discounts and issuance costs.
- Stock-based compensation expense was $6.15 million for the first half. Shares outstanding at June 30 were 214.2 million, compared with 187.9 million at year-end; the filing also reported substantial options and warrants.
Material changes versus the prior comparable period
- First-half revenue rose from $11,000 to $811,000, primarily because of the MultiPay and FIN acquisitions and the start of kiosk leasing.
- Operating expenses increased to $9.36 million from $1.21 million in the restated first half of 2015, including higher compensation, acquisition-related amortization, and stock-based compensation.
- First-half net results shifted from a restated $4.13 million loss to $6.86 million of income, largely because derivative remeasurement changed from a $2.87 million expense to a $17.68 million gain. This accounting gain did not represent operating cash generation.
- Operating cash use increased to $2.00 million from $680,000. The company also issued $1.55 million of convertible notes during the period.
- The 2015 comparative statements were restated for errors involving acquisition valuations, software capitalization, derivative and option valuations, debt issuance costs, and expense classifications.
Outlook, commentary, risks, and unusual items
- Management stated that existing cash was insufficient for planned development and operations, and that the business depended on additional financing, new customers, and operating cash generation. The filing warned there was no assurance of profitability or continued operation as a going concern.
- After quarter-end, the company reported equity financings, a $3.0 million senior unsecured note, and conversion of about $6.3 million of debt and accrued interest into approximately 84.8 million shares. A March 2017 offering was for $4.0 million; $3.17 million had been received as of March 22. Management said these actions addressed near-term financing needs but anticipated further financing would be required.
- A December 2016 Colombian kiosk-services contract contemplated approximately $30 million of payments over ten years, but required equipment financing and a $6 million performance bond. Neither had been secured as of the filing; the parties were renegotiating scope and terms. The stated contract value was therefore not assured revenue.
- Management concluded disclosure controls were ineffective, citing inadequate segregation of duties, reliance on outside consultants and attorneys, and no formal audit committee. Remediation efforts were described as underway.
- The company disclosed missed filing deadlines and warned that failure to become current could lead to SEC enforcement action, including possible revocation of registration or trading suspension. It reported no material pending or threatened legal proceedings.
- Other notable items included a $226,000 write-off of an abandoned product-testing asset and a $9.0 million stock-funded FIN acquisition, which generated $6.57 million of goodwill.
Important facts for investors to verify
- Confirm the filing’s issuer identity and reporting period: this document names Ipsidy Inc., not Authid Inc.
- Assess the company’s ability to fund operations, refinance obligations, and address its large working-capital deficit; distinguish later financing from cash available at June 30, 2016.
- Review the assumptions behind the derivative-liability valuation and the resulting $17.68 million gain, and reconcile the filing’s reported basic and diluted per-share results.
- Verify the status, financing, performance bond, and final terms of the Colombian kiosk contract before relying on its stated potential value.
- Review the 2015 restatement and the disclosed ineffective controls, including whether subsequent remediation was completed.
- Evaluate dilution from stock compensation, options, warrants, debt conversions, and subsequent equity financings.