Authid Inc. annual report, FY2021

Business context and reporting period

Ipsidy Inc., doing business as authID.ai, filed this Form 10-K for the fiscal year ended December 31, 2021. The company provides cloud-based biometric identity verification and authentication software, alongside payment-processing and South African identity-card businesses. Its common stock trades on Nasdaq under AUID.

Financial performance and condition

Revenue rose about 7%, primarily from Cards Plus; identity and Colombian revenue were broadly level. Operating expenses increased sharply, led by general and administrative costs, including $6.70 million in stock-based compensation, and higher investment in personnel, technology, and marketing. The company recorded an $831,000 impairment of customer relationships and intellectual property related to a lost customer. The 2020 impairment charge was approximately $1.33 million.

At year-end, cash was $6.04 million, current assets were $6.93 million, and current liabilities were $2.93 million, yielding working capital of approximately $3.99 million. Total liabilities were $2.93 million, versus $9.29 million a year earlier. Remaining year-end debt included $662,000 of convertible debt, extended to December 31, 2022, plus small equipment and lease obligations. Operating cash burn exceeded year-end cash.

Financing activities provided $11.09 million in 2021, including net proceeds from the August stock offering. The company reported accumulated deficit of $115.9 million. It expects continued operating losses in 2022 and negative operating cash flow at least through late 2023; it estimated needing $17.5–$22.5 million to execute its plan through 2023.

Material changes versus the prior period

• Revenue increased by approximately $152,000, while operating loss widened by approximately $9.05 million and net loss by approximately $6.37 million.
• General and administrative expense rose approximately $9.2 million; stock-based compensation increased to $6.70 million from $824,000.
• Operating cash use increased to $8.76 million from $4.67 million.
• Convertible debt was substantially reduced through conversion of approximately $6.2 million of notes and accrued amounts into shares. Year-end convertible debt was $662,000.
• The company rebranded as authID.ai in June 2021, changed senior leadership, and listed on Nasdaq in 2021.

Outlook, risks, contingencies, and unusual items

Management said March 2022 financing was expected to support operations through December 31, 2023, while acknowledging possible future capital needs. The financing included approximately $9.2 million principal of senior secured convertible notes, a $10 million unsecured standby credit facility subject to conditions, and a $3.3 million gross PIPE. The facility commitment fee included 100,000 common shares. The filing gives differing totals for proceeds received and expected as of March 21, 2022; the exact amounts should be checked against the financing agreements and subsequent filings.

A significant customer representing 27% of 2021 consolidated revenue notified the company in March 2022 that it would stop using the service after April 1, 2022. This is a material prospective revenue risk. Revenue was also concentrated geographically: Africa represented $1.32 million, North America $614,000, and South America $361,000.

The auditor issued an unmodified opinion but emphasized recurring operating losses and negative operating cash flows, identifying going-concern assessment as a critical audit matter. Management concluded financing and its plans would fund operations for at least one year from issuance; the financial-statement note states it believed funds would cover operations through December 31, 2023. The company remains dependent on financing, revenue growth, and successful execution of its business plan.

• Key risks include continued losses, reliance on additional financing and possible shareholder dilution, customer and revenue concentration, execution and adoption of new products, intense competition, and dependence on key personnel.
• Biometric privacy laws and other data-protection, export-control, and payment-processing rules may increase compliance costs or restrict activity. Cybersecurity incidents, service interruptions, and third-party cloud or software dependencies could harm customers and operations.
• The company cited possible disruption to contractors in Eastern Europe from the war in Ukraine, as well as COVID-related operating and sales delays.
• The company recorded a $422,000 reserve against its Colombian kiosk lease after the lessee removed equipment from service and raised doubts about future payments; it is seeking collection and discussing termination.
• It reported no legal proceedings expected to have a material adverse effect. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to audit internal controls.
• Unusual items included a $972,000 gain from forgiveness of two PPP loans, a $349,000 stock-based settlement of accrued expenses, and substantial executive and employee stock awards. Adjusted EBITDA is non-GAAP and should not be treated as cash available for investment.

Important facts for investors to verify

• Expected financial and customer impact of the loss of the customer that contributed 27% of 2021 revenue, including whether replacement business has been secured.
• Actual cash proceeds, draw conditions, maturity, security, conversion terms, and dilution from the March 2022 notes, PIPE, and standby facility; reconcile the differing proceeds figures in the filing.
• Cash runway and financing requirements against the reported $8.76 million annual operating cash burn and management’s through-2023 funding estimate.
• Progress in converting product launches and channel partnerships into recurring revenue, given modest revenue growth and sharply higher operating costs.
• Collection prospects for the kiosk lease and the status of the $662,000 Stern Trust note, related-party arrangements, and outstanding equity awards.