Ipsidy Inc. (formerly ID Global Solutions Corporation) — Q2 2017 Form 10-Q
Filing identity: The supplied filing is for Ipsidy Inc., renamed February 1, 2017; it does not identify Authid Inc. as the registrant. Period ended June 30, 2017; financial statements are unaudited. Ipsidy provides biometric identification, identity management and electronic transaction processing services.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $559,452 | $489,995 | $1,144,141 | $810,741 |
| Operating loss | $(2,511,410) | $(4,222,255) | $(7,469,838) | $(8,544,656) |
| Net income (loss) | $(2,802,578) | $(832,691) | $(12,471,672) | $6,859,819 |
| Adjusted EBITDA loss, non-GAAP | $(1,401,900) | $(838,854) | $(2,956,634) | $(1,905,543) |
Revenue increased about 14% for the quarter and 41% for the half year. Management attributed much of the half-year increase to Cards Plus and ID Solutions, acquired in February 2016. Gross margin, calculated from reported revenue less cost of sales, was approximately 72% in Q2 2017 versus 77% in Q2 2016, and approximately 73% for the first half versus 71% in the prior-year period.
Cash was $2.38 million at June 30, up from $689,105 at year-end. First-half operating cash outflow was $3.90 million, compared with $2.00 million a year earlier; investing outflow was $544,378 and financing inflow was $6.14 million. Management reported working capital of approximately $1.9 million and stockholders’ equity of $11.4 million. Total assets were $15.42 million and total liabilities $3.98 million.
Net notes payable were approximately $2.10 million, including a $3.0 million senior unsecured note due January 2019, bearing 10% interest. The remaining $15,220 MultiPay note was due September 2017. Capital lease obligations were approximately $155,460. The company reported no cash interest paid in the first half.
Material changes and unusual items
- In January, approximately $6.33 million of debt and accrued interest converted into 84.8 million common shares. Common shares outstanding rose from 234.7 million at year-end to 344.2 million at June 30.
- The company raised $3.0 million through the senior note and received $3.57 million from a March equity offering; $430,000 remained recorded as a stock subscription receivable, with funding expected by the end of Q3, according to the filing.
- Debt conversion and settlement removed derivative liabilities that had totaled approximately $18.1 million at year-end. First-half results also included a $2.8 million gain on extinguishment of debt and substantial conversion/settlement and modification losses. Prior-year earnings included large derivative fair-value gains. These items make reported net income comparisons unusually volatile.
- Stock-based compensation was $4.27 million in the first half of 2017. Management said lower stock-compensation expense helped reduce G&A, while added staffing and consulting resources supported higher operating costs. Inventory increased to $854,900, principally reflecting about $707,000 of kiosks and components acquired during 2017.
Outlook, risks and controls
The filing provides no quantified revenue, earnings or cash-flow guidance. Management said it aims to grow through existing customers, new customers, market expansion and product innovation, and expects additional financing will be required beyond the financing completed in the first half. It cautioned that future financing is not assured.
The company disclosed substantial doubt about its ability to continue as a going concern, citing its accumulated deficit of approximately $61.4 million, operating losses and dependence on shareholder support, additional equity financing, cash generation and new customers or business opportunities. It stated there is no assurance it will become profitable.
Disclosure controls and procedures were deemed ineffective because of continuing material weaknesses, including limited segregation of duties, reliance on external consultants and attorneys, and the absence of a formal audit committee. The company described remediation steps, including hiring an additional finance resource on August 1, 2017 and considering governance and control enhancements. It reported no material change in internal control during Q2. No material pending or threatened legal proceedings were reported; the filing stated there was no material change to previously disclosed risk factors.
Investor verification priorities
- Confirm the registrant and security being analyzed: the supplied 10-Q is for Ipsidy Inc., not Authid Inc.
- Track cash burn, funding availability and collection of the $430,000 subscription receivable against the going-concern warning.
- Review the terms, repayment capacity and January 2019 maturity of the $3.0 million note, as well as any subsequent financing or repayment events.
- Assess dilution from the debt conversion, equity sales, warrants and substantial outstanding stock options; verify share counts against subsequent filings.
- Monitor remediation of the disclosed material weaknesses and whether financial reporting controls become effective.
- Separate operating performance from stock compensation and one-time debt and derivative accounting effects when evaluating losses and Adjusted EBITDA.