Authid Inc. annual report, FY2019

Business context and reporting period

Issuer identification: The supplied filing is Ipsidy Inc.’s Form 10-K, not an Authid Inc. filing. It covers the fiscal year ended December 31, 2019, compares results with 2018, and was signed March 30, 2020. Ipsidy provided biometric identity verification and authentication, access-control and payment-processing products; its shares traded on OTCQB as IDTY.

Financial results and condition

Revenue fell about 33%, principally because a large AFIS and identity-management system sale in 2018 did not recur; growth in Colombia and South Africa partly offset the decline. Cost of sales fell to $670,000 from $1.26 million. General and administrative expense declined by about $2.5 million, while research and development expense rose by about $0.6 million. The operating loss widened despite lower operating expenses, reflecting lower revenue and a $1.67 million impairment charge. The filing reports basic and diluted loss per share of $0.02 in both years.

Year-end current assets were $1.69 million and current liabilities $2.68 million, a working-capital deficit of approximately $1.00 million. Total assets were $13.54 million and stockholders’ equity $8.28 million. At December 31, 2019, the balance sheet showed notes payable net of discounts of $1.98 million and $428,000 of convertible notes; cash was only $567,000. Operating-lease liabilities totaled $374,000. The company reported an accumulated deficit of $86.9 million.

Changes, outlook and material risks

• Funding and going concern: The auditor’s opinion on the financial statements was unqualified but included a going-concern paragraph; the filing states substantial doubt about Ipsidy’s ability to continue as a going concern. Management expected continued losses and negative operating cash flow and said it needed an additional $3.5–$5.0 million to fund its 2020 plan. Financing or improved operations were not assured.
• Subsequent financing and debt terms: In February 2020, Ipsidy raised $1.51 million through 15% senior secured convertible notes. The notes, the existing 8% notes and the $2.0 million Stern Note were secured pari passu by liens on company assets; the Stern Note and 8% notes were amended to align their maturities with the 2020 notes. The 2020 notes include 150% repayment or conversion provisions in specified circumstances. These post-year-end terms materially affect leverage, potential dilution and collateral claims.
• Impairments and controls: 2019 charges included $1.52 million of goodwill impairment and approximately $155,000 of developed-software write-offs. Management found disclosure controls effective and internal control over financial reporting effective overall, but identified a material weakness in controls for goodwill and intangible-asset impairment valuations.
• Commercial execution: Management’s growth strategy depended on selling newer IDaaS products, converting partners and prospects into customers, expanding recurring revenue and securing working capital. Revenue attributed to the new platform was only about $13,000 in 2019, versus $5,000 in 2018. The company warned that commercialization, customer adoption and the transition away from occasional large system sales were uncertain.
• Other risks and contingencies: The filing cites competition, dependence on financing and key personnel, international and currency exposure, privacy and biometric regulation, cybersecurity and third-party service disruptions. COVID-19’s effects were described as uncertain and potentially material. Legal proceedings were not expected to have a material adverse effect. The company disclosed related-party arrangements, including office rent from an entity principally owned by the CEO’s family and debt held by a director’s trust.

Important facts investors should verify

• Confirm issuer identity and filing period: this is Ipsidy Inc.’s FY2019 10-K, not Authid Inc.’s filing; it does not provide separate fourth-quarter results.
• Review the audited financial statements, going-concern disclosure, cash burn and management’s assumptions behind the $3.5–$5.0 million funding estimate.
• Verify the February 2020 note agreements, collateral priority, maturity extensions, repayment/conversion premiums and resulting potential share dilution.
• Assess the impairment valuation assumptions and the remediation plan for the material weakness in impairment controls.
• Track customer concentration, recurring revenue and adoption of new products against the company’s growth strategy.
• Reconcile potentially dilutive securities and share counts: 518.1 million common shares were outstanding at year-end, and 109.4 million options plus 47.5 million warrants were outstanding.