Ipsidy Inc. (formerly ID Global Solutions) — Q1 2017 Form 10-Q
Issuer note: The supplied filing identifies the registrant as Ipsidy Inc., not Authid Inc. Ipsidy changed its name on February 1, 2017. The quarter ended March 31, 2017; the report was signed August 4, 2017. Financial statements are unaudited.
Business context
Ipsidy describes itself as a provider of biometric identification, identity management and electronic transaction-processing services. Its activities also include secure credential and card products, payment processing, and electronic transit-ticketing kiosks in Colombia. Management’s stated strategy is to develop an identity-transaction platform and grow through existing and new customers, new markets and product development.
Financial results and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Revenue | $584,689 | $320,746 in Q1 2016 |
| Gross profit and margin | Approximately $435,560; 74.5% | Approximately $202,636; 63.2% in Q1 2016 |
| Operating expenses | $4.543 million | $4.643 million in Q1 2016 |
| Operating loss | $3.958 million | $4.322 million loss in Q1 2016 |
| Net result | $8.669 million loss | $7.693 million income in Q1 2016 |
| Operating cash flow | $1.204 million used | $568,275 used in Q1 2016 |
| Cash | $4.946 million | $689,105 at December 31, 2016 |
| Working capital | Approximately $3.228 million | Current liabilities exceeded current assets at December 31, 2016 |
| Total liabilities | $4.495 million | $25.800 million at December 31, 2016 |
| Notes payable | $1.989 million net carrying value; $3.046 million principal | $3.161 million net carrying value at December 31, 2016 |
| Stockholders’ equity | $12.893 million | $13.252 million deficit at December 31, 2016 |
Revenue increased about 82%, with management attributing much of the increase to Cards Plus and ID Solutions, including the effect of the 2016 acquisition. Cost of sales rose with revenue. General and administrative expense declined about $137,000; stock-based compensation fell to $2.294 million from $3.215 million, while staffing and consulting costs increased. No income tax provision was recorded. Basic loss per share was $0.03, versus basic income per share of $0.04 in Q1 2016.
Cash and liquidity improved substantially following financing, but operating cash use increased year over year. The $3.0 million senior unsecured note bears 10% interest and matures in January 2019. The company also had a $161,450 capital lease obligation at quarter-end. The filing reports no cash interest or income-tax payments in either comparative quarter.
Material changes and unusual items
- In January, investors converted approximately $6.331 million of debt and accrued interest into 84.822 million shares. The transaction eliminated convertible-note balances but materially diluted existing shareholders.
- Ipsidy issued a $3.0 million senior unsecured note and 4.5 million shares to the lender. A March equity offering covered 20 million shares for $4.0 million; $3.17 million had been received by quarter-end. The filing says an additional $830,000 was expected, with $400,000 received by the filing date.
- Net loss included a $5.979 million loss on debt conversion, a $2.802 million gain on extinguishment of notes, a $452,000 derivative-liability loss, and losses on derivative and warrant modifications. By March 31, the company reported no remaining derivative liability. These items contributed to the swing from prior-year net income to a loss.
- Shares outstanding rose from 234.7 million at December 31 to 344.1 million at March 31; the filing reports 344.2 million outstanding on July 15. It also reports 106.1 million options and 47.5 million warrants outstanding at quarter-end.
- Management and director-related arrangements include substantial stock options and other equity compensation. Stock-based compensation expense was $2.294 million in the quarter, with $4.830 million of unrecognized option compensation costs.
Outlook, risks and controls
Management gave no quantified revenue or earnings guidance. It expects revenue could grow if customer expansion, new markets and electronic-payment trends support adoption, but says additional financing will be required beyond the transactions completed or initiated in the quarter. The company reported an accumulated deficit of approximately $57.6 million and a $4.0 million quarterly operating loss. Management stated that substantial doubt exists about the company’s ability to continue as a going concern, citing dependence on shareholder support, further equity financing, operating cash generation and new customers or business opportunities. There is no assurance that the company will become profitable or obtain financing on acceptable terms.
Disclosure controls and procedures were deemed ineffective because of continuing material weaknesses, including inadequate segregation of duties, limited subsidiary financial-reporting resources, reliance on outside consultants and attorneys, and the absence of a formal audit committee. Management described remediation efforts, including additional finance support and policy and governance improvements. The filing reports no material pending or threatened legal proceedings and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Ipsidy Inc.; the request metadata names Authid Inc.
- Check collection of the remaining March offering proceeds and the timing and terms of any subsequent financing.
- Assess cash burn and funding needs against the going-concern warning and the January 2019 note maturity.
- Review the debt-conversion and extinguishment accounting, including the large noncash charges and gain driving reported net loss.
- Evaluate dilution from new shares, options and warrants, and verify the status of management equity awards and related-party arrangements.
- Monitor remediation of the disclosed material weaknesses and whether disclosure controls become effective.