Attached files

file filename
EX-32 - EXHIBIT 32.1 - Ipsidy Inc.s107054_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Ipsidy Inc.s107054_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Ipsidy Inc.s107054_ex31-1.htm

 

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

 

Commission file number 000-54545

 

(IPSIDY LOGO) 

 

Ipsidy Inc.

(Exact name of registrant as specified in its charter)

 

(Former Name of Registrant as Specified in its Charter)

 

Delaware   46-2069547
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

780 Long Beach Boulevard

Long Beach, New York
11561

(Address of principal executive offices) (zip code)

 

407-951-8640

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒     Yes    ☐   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.

 

☒    Yes    ☐   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer          ☐   Accelerated filer             ☐
Non-accelerated filer           ☐   Smaller reporting company   ☒
(do not check if smaller reporting company)   Emerging growth Company  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. 

 

Class Outstanding at July 31, 2017  
Common Stock, par value $0.0001 344,214,142 shares  
Documents incorporated by reference: None Yes ☐      No ☒

No

 

 

 

 

TABLE OF CONTENTS

 

      Page No.
PART I - FINANCIAL INFORMATION
       
Item 1.  Financial Statements.   4 - 7
       
Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 4
       
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 (unaudited) and 2016 (unaudited) 5
       
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited) 6
       
Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2017 (unaudited) 7
       
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2017 (unaudited) and 2016 (unaudited) 8
   
Notes to Unaudited Condensed Consolidated Financial Statements 9-20
       
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations. 21-25
       
Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 26
       
Item 4.  Controls and Procedures.   26
       
PART II - OTHER INFORMATION
 
Item 1.   Legal Proceedings.   27
       
Item 1A.   Risk Factors.   27
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds. 27
       
Item 3.   Defaults Upon Senior Securities. 28
       
Item 4.  Mine Safety Disclosures.   28
       
Item 5.   Other Information.   28
       
Item 6.   Exhibits.   28-33

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

our lack of significant revenues and history of losses,
our ability to continue as a going concern,
our ability to raise additional working capital as necessary,
our ability to satisfy our obligations as they become due,
the failure to successfully commercialize our product or sustain market acceptance,
the reliance on third party agreements and relationships for development of our business,
the control exercised by our management,
the impact of government regulation on our business,
our ability to effectively compete,
the possible inability to effectively protect our intellectual property,
the lack of a public market for our securities and the impact of the penny stock rules on trading in our common stock should a public market ever be established.

 

You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in this report, in Part I. Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2016 and our other filings with the Securities and Exchange Commission. Other sections of this report include additional factors which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, when used in this report the terms “ID Global,” the “Company,” “we,” “our,” “us,” and similar terms refers to Ipsidy Inc., a Delaware corporation formerly known as ID Global Solutions Corporation and its subsidiaries. As of February 1, 2017, the Company formally changed its name to Ipsidy Inc.

 

The information which appears on our website www.ipsidy.com is not part of this report.

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS
Current Assets:          
Cash  $2,376,197   $689,105 
Accounts receivable, net   158,028    138,359 
Current portion of net investment in direct financing lease   50,050    44,990 
Inventory   854,900    150,679 
Other current assets   188,242    166,479 
Total current assets   3,627,417    1,189,612 
           
Property and equipment, net   251,363    115,682 
Other assets   876,395    358,343 
Intangible assets, net   3,281,809    3,474,291 
Goodwill   6,736,043    6,736,043 
Net investment in direct financing lease, net of current portion   645,861    674,015 
Total assets  $15,418,888   $12,547,986 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:          
Accounts payable and accrued expenses  $1,602,924   $1,687,900 
Convertible notes payable, net       250,000 
Derivative liability       8,388,355 
Notes payable, net, current portion   15,220    109,819 
Capital lease obligation, current portion   28,126     
Deferred revenue   120,690    398,680 
Total current liabilities   1,766,960    10,834,754 
           
Convertible notes payable, net, less current maturities       2,245,596 
Notes payable, net, less current maturities   2,087,583    3,051,603 
Capital lease obligation, net of current portion   127,334     
Derivative liability, net of current portion       9,668,276 
Total liabilities   3,981,877    25,800,229 
           
Commitments and contingencies (Note 11 and 12)          
           
Stockholders’ Equity (Deficit):          
Common stock, $0.0001 par value, 500,000,000 shares authorized; 344,214,144 and 234,704,655 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively   34,421    23,470 
Additional paid in capital   72,944,964    35,341,669 
Stock subscription receivable   (430,000)    
Accumulated deficit   (61,397,665)   (48,925,993)
Accumulated comprehensive income   285,291    308,611 
Total stockholders’ equity (deficit)   11,437,011    (13,252,243)
Total liabilities and stockholders’ equity (deficit)  $15,418,888   $12,547,986 

 

See notes to condensed consolidated financial statements.

 

4 

 

 

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
Revenues:                    
Products and services  $540,616   $476,680   $1,106,161   $797,426 
Lease income   18,836    13,315    37,980    13,315 
Total revenues, net   559,452    489,995    1,144,141    810,741 
                     
Operating Expenses:                    
Cost of sales   155,141    114,548    304,270    232,658 
General and administrative   2,750,955    4,147,408    8,006,337    8,540,314 
Research and development   27,766    292,592    56,838    321,664 
Depreciation and amortization   137,000    157,702    246,534    260,761 
Total operating expenses   3,070,862    4,712,250    8,613,979    9,355,397 
                     
Loss from operations   (2,511,410)   (4,222,255)   (7,469,838)   (8,544,656)
                     
Other Income (Expense):                    
Gain (loss) on derivative liability       4,735,589    (452,146)   17,677,252 
Gain on extinguishment of notes payable           2,802,234     
Loss on modification of derivatives           (319,770)    
Loss on modification of warrants           (158,327)    
Loss on settlement of notes payable           (5,978,643)    
Interest expense   (291,168)   (1,346,025)   (895,182)   (2,272,777)
Other income (expense), net   (291,168)   3,389,564    (5,001,834)   15,404,475 
                     
(Loss) income before income taxes   (2,802,578)   (832,691)   (12,471,672)   6,859,819 
                     
Income Taxes                
                     
Net (loss) income  $(2,802,578)  $(832,691)  $(12,471,672)  $6,859,819 
                     
Net (loss) income Per Share - Basic  $(0.01)  $(0.00)  $(0.04)  $0.03 
                     
Net Loss Per Share - Diluted  $(0.01)  $(0.00)  $(0.04)  $(0.04)
                     
Weighted Average Shares Outstanding - Basic   344,140,554    213,860,870    319,868,353    207,537,833 
                     
Weighted Average Shares Outstanding - Diluted   344,140,554    213,860,870    319,868,353    275,753,226 

 

See notes to condensed consolidated financial statements.

 

5 

 

 

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016
             
Net income (loss)  $(2,802,578)  $(832,691)  $(12,471,672)  $6,859,819
Foreign currency translation gains   (46,772)   216,670    (23,320)  121,043
Comprehensive income (loss)  $(2,849,350)  $(616,021)  $(12,494,992)  $6,980,862

 

See notes to condensed consolidated financial statements.

 

6 

 

 

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

                       Accumulated     
           Stock   Additional       Other     
   Common Stock       Subscription   Paid-in   Accumulated   Comprehensive     
   Shares   Amount   Receivable   Capital   Deficit   Income   Total 
Balances, December 31, 2016   234,704,655   $23,470   $   $35,341,669   $(48,925,993)  $308,611   $(13,252,243)
Reclassification of derivatives removal of price protection in warrants               7,614,974            7,614,974 
Issuance of common stock upon conversion of debt and related interest   84,822,006    8,482        21,601,191            21,609,673 
Stock-based compensation               4,266,670            4,266,670 
Common stock issued for services   487,483    49        62,756            62,805 
Common stock issued with note payable   4,500,000    450        841,277            841,727 
Common stock issued for debt issuance costs   1,200,000    120        224,340            224,460 
Common stock issued for cash   20,000,000    2,000    (430,000)   3,998,000            3,570,000 
Cash and common stock issued for equity issuance costs   1,000,000    100        (289,490)           (289,390)
Common stock returned as part of extinguishment of notes payable   (2,500,000)   (250)       (874,750)           (875,000)
Loss on modification of warrants               158,327              158,327 
Net loss                   (12,471,672)       (12,471,672)
Foreign currency translation                       (23,320)   (23,320)
Balances, June 30, 2017   344,214,144   $34,421   $(430,000)  $72,944,964   $(61,397,665)  $285,291   $11,437,011 

 

See notes to condensed consolidated financial statements.

 

7 

 

 

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended 
   June 30, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss) income  $(12,471,672)  $6,859,819 
Adjustments to reconcile net (loss) income with cash flows from operations:          
Depreciation and amortization expense   246,534    260,761 
Stock-based compensation   4,266,670    6,152,490 
Common stock issued for services   62,805    270,000 
Amortization of debt discount and debt issuance costs   648,996    1,899,726 
Loss (gain) on derivative liability   452,146    (17,677,252)
Gain on settlement of notes payable   (2,802,234)    
Loss on modification of derivatives   319,770     
Loss on modification of warrants   158,327     
Loss on settlement of debt   5,978,643     
Write off of abandoned product       225,862 
Changes in operating assets and liabilities:          
Accounts receivable   (16,913)   5,606 
Net investment in direct financing lease   23,094    7,043 
Other current assets   (21,763)   75,577 
Inventory   (705,579)   (162,232)
Accounts payable and accrued expenses   240,218    281,846 
Deferred revenue   (277,992)   (194,690)
Net cash flows from operating activities   (3,898,950)   (1,995,444)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (8,194)   (10,518)
Investment in other assets   (536,184)   (101,753)
Cash acquired in acquisition       419,042 
Net cash flows from investing activities   (544,378)   306,771 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of notes payable and common stock   3,000,000    1,650,000 
Proceeds from the sale of common stock   3,570,100     
Payment of debt and equity issuance costs   (375,821)   (133,400)
Principal payments on notes payable   (44,599)   (17,655)
Principal payments on capital lease obligation   (9,904)    
Net cash flows from financing activities   6,139,776    1,498,945 
           
Effect of Foreign Currencies   (9,356)   121,043 
           
Net Change in Cash   1,687,092    (68,685)
Cash, Beginning of the Period   689,105    349,873 
Cash, End of the Period  $2,376,197   $281,188 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid for interest  $   $ 
Cash paid for income taxes  $   $ 
           
Non-cash Investing and Financing Activities:          
Issuance of common stock for conversion of debt and accrued interest  $21,609,673   $21,222 
Issuance of warrants for inventory costs  $   $79,081 
Reclassification of derivative liabilities upon removal of price protection in warrants  $7,614,974   $692,850 
Issuance of common stock for debt issuance costs  $224,460   $169,125 
Reclassification of inventory to net investment in direct financing lease  $   $747,944 
Acquisition of equipment pursuant to a capital lease  $163,407   $ 
Acquisition of FIN Holdings:          
Issuance of common stock as consideration  $   $9,000,000 
Assumed liabilities       914,218 
Inventory       (112,408)
Accounts receivable       (311,867)
Property and equipment       (100,339)
Intangible assets       (8,970,562)
Cash acquired  $   $419,042 

 

See notes to condensed consolidated financial statements.

 

8 

 

 

IPSIDY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included (US GAAP) in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for future periods or the full year.

 

The condensed consolidated financial statements include the accounts of Ipsidy Inc. and its wholly-owned subsidiaries MultiPay S.A.S., ID Global LATAM S.A.S., IDGS S.A.S., ID Solutions, Inc., Innovation in Motion Inc., FIN Holdings Inc., and Cards Plus Pty Ltd. (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.

 

Net Loss per Common Share

 

The Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. For the three and six months ended June 30, 2017, and the three months ended June 30, 2016, all potentially diluted shares were excluded from the calculation of diluted EPS because their impact was anti-dilutive. The following table illustrates the computation of basic and diluted EPS for the six months ended June 30, 2016:

 

  

Net Income

  

Shares

   Per Share Amount 
Basic EPS               
Income (loss) available to stockholders  $6,859,819    207,538,833   $0.03 
                
Effect of Dilutive Securities               
Stock Options       10,714,189      
Warrants       25,634,957      
Convertible Debt   (17,712,426)   31,465,287      
Dilute EPS               
Income available to stockholders plus assumed conversions  $(10,852,597)   275,353,266   $(0.04)

 

9 

 

 

Going concern

 

As of June 30, 2017, the Company had an accumulated deficit of approximately $61.4 million. For the six months ended June 30, 2017, the Company earned revenue of approximately $1.1 million and incurred a loss from operations of approximately $7.5 million.

 

The reports of our independent registered public accounting firms on our consolidated financial statements for the years ended December 31, 2016 and 2015 contained an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses and accumulated deficits.

 

These condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial support from the Company’s current shareholders, the ability of the Company to obtain additional equity financing to continue operations, the Company’s ability to generate sufficient cash flows from operations, successfully locating and negotiating with other business entities for potential acquisition and /or acquiring new clients to generate revenues and cash flows. As there can be no assurance that the Company will be able to achieve positive cash flows (become profitable) and raise sufficient capital to maintain operations there is substantial doubt about the Company’s ability to continue as a going concern.

 

These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

Inventories

 

Inventories of kiosks held by IDGS S.A.S are stated at the lower of cost (using the first-in, first-out method) or market. The kiosks will provide electronic ticketing for transit systems. Inventory of plastic/ID cards, digital printing material, which are held by Cards Plus Pty Ltd., are at the lower of cost (using the average method) or market. The Plastic/ID cards and digital printing material are used to provide plastic loyal ID and other types of cards. Inventories as of June 30, 2017 consist of cards inventory and kiosks that have not been placed into service and inventory as of December 31,2016 consist solely of cards inventory. The Company, in 2017, acquired approximately $707,000 of additional kiosks and components.

 

Leases

 

All leases are classified at the inception as direct finance leases or operating leases based on whether the lease transfers substantially all the risks and rewards of ownership.

 

Leases that transfer to the lessee substantially all of the risks and rewards incidental to ownership of the asset are classified as direct finance leases.

 

Other Assets

 

The increase in other assets is principally due to its continuing investments in its technology platform prior to the respective assets being placed into service.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Revenue is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.

 

Revenue from the sale of unique secure credential products and solutions to customers is recorded at the completion of the project unless the solution benefits to the end user in which additional resources or services are required to be provided.

 

Revenue from club-based services arrangements that allow for the use of hosted software product that are provided on a consumption basis (for example, the number of transactions processed over a period of time) is recognized commensurate with the customer utilization of such resources. Generally, the contract calls for a minimum number of transactions to be charged by the Company monthly. Accordingly, the Company records the minimum transactional fee based on the passage of a month’s time as revenues. Amounts in excess of the monthly minimum, are charged to customers based on the actual number of transactions.

 

10 

 

 

Consulting services revenue is recognized as services are rendered, generally based on the negotiated hourly rate in the consulting arrangement and the number of hours worked during the period. Consulting revenue for fixed price services arrangements is recognized as services are provided.

 

Revenue related to direct financing leases is recognized over the term of the lease using the effective interest method.

 

Income Taxes

 

The Company accounts for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Taxes.” Under the asset and liability method of FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. For the three and six months ended June 30, 2017 and 2016, there is no provision for income tax as the Company had a tax loss for United States and foreign activities and all of the Company’s carryforwards are reserved for. The Company’s gain or loss on derivative liability during the six months ending June 30, 2017 and 2016 is not subject to tax.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04 – Simplifying the Test for Goodwill Impairment, which modified the goodwill impairment test and required an entity to write down the carrying value of goodwill up to the amount by which carrying amount of a reporting unit exceeded its fair value. We have not early adopted this ASU and are currently evaluating the impact on our financial statements.

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. The effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt -Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. We are currently reviewing the potential impact to the financial statements.

 

11 

 

 

NOTE 2 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)

 

The Company’s intangible assets consist of intellectual property acquired from MultiPay and FIN and are amortized over their estimated useful lives as indicated below. The following is a summary of activity related to intangible assets for the six months ended June 30, 2017:

 

   Customer Relationships   Intellectual Property   Non-Compete  

Patents

Pending

     
Useful Lives  10 Years   10 Years   10 Years   n/a   Total 
Carrying Value at December 31, 2016  $1,446,166   $2,000,858   $8,067   $19,200   $3,474,291 
Additions               18,132    18,132 
Amortization   (67,953)   (141,251)   (1,410)       (210,614)
Carrying Value at June 30, 2017  $1,378,213   $1,859,607   $6,657   $37,332   $3,281,809 

 

The following is a summary of intangible assets as of June 30, 2017:

 

   Customer Relationships   Intellectual Property   Non-Compete   Patent Pending  

Total

 
Cost  $1,587,159   $2,444,646   $14,087   $37,332   $4,083,224 
Accumulated amortization   (208,946)   (585,039)   (7,430)       (801,415)
Carrying Value at June 30, 2017  $1,378,213   $1,859,607   $6,657   $37,332   $3,281,809 

 

Future expected amortization of intangible assets is as follows for the six-month period remaining in 2017 and the calender years ending from 2018-2022 and thereafter: 

     
2017    222,017 
2018    423,203 
2019    423,203 
2020    423,203 
2021    423,203 
2022    423,203 
Thereafter    943,777 
    $3,281,809 

 

NOTE 3 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following as of June 30, 2017 and December 31, 2016:

 

   2017   2016 
Computers and equipment  $197,491   $192,928 
Equipment under capital lease (see note 12)   163,407     
Furniture and fixtures   109,200    109,200 
    470,098   $302,128 
Less Accumulated depreciation   218,735    186,446 
Property and equipment, net  $251,363   $115,682 

 

Depreciation expense totaled $35,920 and $24,029 for the Six Months ended June 30, 2017 and 2016, respectively.

 

See Note 11 for equipment amounting to $163,407 acquired pursuant to a capital lease.

 

12 

 

 

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following as of June 30, 2017 and December 31, 2016:

 

   2017   2016 
Trade payables  $428,858   $341,002 
Accrued interest   125,000    600,624 
Accrued payroll and related   710,848    421,771 
Other accrued expenses   338,218    324,503 
Total  $1,602,924   $1,687,900 

 

NOTE 5 - NOTES PAYABLE, NET

 

On January 31, 2017, the Company entered into Conversion Agreements with several accredited investors (the “Investors”) pursuant to which substantially all Investors agreed to convert all amounts of notes payable and convertible notes payable (Note 6) due and payable to such persons including interest under the terms of their respective financing or loan agreement as of January 31, 2017 into shares of Company common stock at $0.10 per share. Certain Investors that had a conversion price less than $0.10 converted at such applicable conversion price. The Conversion Agreements resulted in the conversion of notes and convertible notes amounting to approximately $6,331,000 into 84,822,006 shares of Company common stock with a fair value of approximately $21,610,000. The Investors also agreed to waive any existing rights with respect to certain anti-dilution rights contained in their Stock Purchase Warrants. The Company agreed to reduce the exercise of all outstanding Stock Purchase Warrants acquired as part of a financing or loan that had an exercise price in excess of $0.10 per share to $0.10 per share.

 

As a result of the above agreements associated with the conversion Agreements, the Company recorded a loss on the conversion of debt of approximately $6.0 million (including the effect of the elimination of related conversion feature derivative liabilities – see Note 7), a loss on the modification of warrants of approximately $0.2 million, and a loss on the modification of the derivatives of approximately $0.3 million.

 

On February 22, 2017, the Company entered into an Agreement and Release the (“February 22, 2017 Agreement”) with a holder of certain debentures that will represent final and full payment of all amounts owed under these debentures which include debt with a face value of $300,000, accrued interest of approximately $31,000, cancellation of 3,600,000 warrants previously accounted for as derivative liabilities as well as certain pledged shares (2,500,000 shares) in exchange for $300,000 in cash which was paid in May 2017. As a result of the February 22, 2017 Agreement, the Company recorded a gain on the extinguishment of notes payable of approximately $2.8 million.

 

See notes 6 and 7. 

 

The following is a summary of notes payable as of June 30, 2017 and December 31, 2016:

 

 

 

2017

  

2016

 
In connection with the acquisition of MultiPay in 2015, the Company assumed three promissory notes. At June 30, 2017, the remaining outstanding note carried an outstanding balance of $15,220. Payments of $6,300 including principal and interest are due monthly. The interest rate is 15.47% per annum. Total outstanding principal and interest is due on September 16, 2017.  $15,220   $46,210 
           

The below section of notes payable were all converted to common stock at $0.10 per share. in connection with the January 2017, conversion agreements described above.

          
           
In September 2015, the Company issued 12% notes totaling $973,000. The notes were secured by the assets of the Company, matured in September 2016, and accrued interest was convertible into common stock of the Company at a rate of $0.10 per share.  In connection with the issuance of these notes, the Company also issued warrants for the purchase of 6,486,667 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years.  The Company also incurred debt issuance costs of $77,480, which were presented as a discount against the notes and amortized into interest expense over the terms of the notes.       963,000 

 

13 

 

 

In October 2015, the Company issued 12% notes in the amount of $225,000. The notes were secured by the assets of the Company, matured in October 2016, and accrued interest was convertible into common stock of the Company at a rate of $0.10 per share.  In connection with the issuance of these notes, the Company also issued warrants for the purchase of 1,500,000 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years.  The Company also incurred debt issuance costs of $36,400, which were presented as a discount against the note and amortized into interest expense over the terms of the notes.       225,000 
           
In November 2015, the Company issued a 12% note in the amount of $25,000. The note was secured by the assets of the Company, matured in October 2016, and accrued interest was convertible into common stock of the Company at a rate of $0.10 per share.  In connection with the issuance of this note, the Company also issued warrants for the purchase of 166,667 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years.  The Company also incurred debt issuance costs of $94,400, which was presented as a discount against the note and amortized into interest expense over the term of the note       25,000 
           
In December 2015, the Company issued 12% notes totaling $850,000. The notes are secured by the assets of the Company and matured in December 2016.  Any unpaid accrued interest on the note is convertible into common stock of the Company at a rate of $0.48 per share.  In connection with the issuance of these notes, the Company also issued warrants for the purchase of 1,770,834 shares of the Company’s common stock at an exercise price of $0.48 per share for a period of five years.  The conversion rate on the accrued interest and the exercise price on the warrants provide the holders with anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values.  See Note 8.       850,000 
           

In January 2016, the Company issued 12% notes in the amount of $100,000. The note was secured by the assets of the Company, matured in January 2017, and accrued interest was convertible into common stock of the Company at a rate of $0.48 per share. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 208,332 shares of the Company’s common stock at an exercise price of $0.48 per share for a period of five years. The conversion rate on the accrued interest and the warrants provide the holders with anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values. See Note 8.

       100,000 
           
In December 2016, the Company issued promissory notes with an aggregate face value of $1,275,000 which were payable one year from the date of issuance and accrued interest of 10% per annum for the initial six months of the term of the Notes and 15% per annum for the remaining six months of the term of the Notes.  The notes holders also received 1,912,500 shares of common stock, with a fair value of $191,250.  The Company allocated the proceeds to the notes and common stock based on their relative fair values, resulting in a discount against the notes for the common stock of $166,304, which was amortized into expense through the date of conversion.  In connection with the issuance of the notes and common stock, the Company also incurred debt issuance costs of $212,427, of which $184,719 was recorded as debt issuance costs against the notes to be amortized over the one-year terms of the notes.       1,275,000 
           
In November 2016,, the Company issued a 12% promissory note due in January 2017 to an officer and principal stockholder in the amount of $13,609.  In connection with the issuance of this note, the company also issued warrants for the purchase of 1,146,667 shares of the Company’s common stock at an exercise price of $0.15 per share.   This loan was repaid in April 2017.  The note holder also received 20,414, shares of the Company’s common stock with a fair value of $2,041.       13,609 
           
In January 2017, the Company issued a Senior Unsecured Note with a face value of $3,000,000, payable two years form issuance, along with an aggregate of 4,500,000 shares of Common Stock, with a fair value of $1,147,500.  The Company allocated the proceeds to the common stock based on their relative fair value and recorded a discount of $391,304 to be amortized into interest expense over the two-year term of the note.  The Company also paid debt issuance costs consisting of a cash fee of $120,000 and 1,020,000 shares of common stock of the Company with a fair value of $306,000, of which $208,696 was recorded as debt issuance costs to be amortized into interest expense over the two-year term of the note.   3,000,000     
           
Total Principal Outstanding  $3,015,220   $3,497,819 
Unamortized Deferred Debt Discounts   (666,375)   (159,375)
Unamortized Deferred Debt Issuance Costs   (246,042)   (177,022)
Notes Payable, Net  $2,102,803   $3,161,422 

 

14 

 

 

The following is a roll-forward of the Company’s notes payable and related discounts for the six Months ended June 30, 2017:

 

  

Principal Balance

   Debt Issuance Costs  

Debt Discounts

  

Total

 
Balance at December 31, 2016  $3,497,819   $(177,022)  $(159,375)  $3,161,422 
New issuances   3,000,000    (310,790)   (841,727)   1,847,483 
Payments   (44,599)           (44,599)
Conversions   (3,438,000)           (3,438,000)
Amortization       241,770    334,727    576,497 
Balance at June 30, 2017  $3,015,220   $(246,042)  $(666,375)  $2,102,803 

 

Future maturities of notes payable are as follows for the six-month period remaining in 2017 and the calender years ending from 2018-2019:

 

2017   $15,220 
2018     
2019    3,000,000 
Net investment in lease   $3,015,220 

 

NOTE 6 - CONVERTIBLE NOTES PAYABLE, NET

 

See Note 5 for transactions associated with the reduction in convertible notes payable on January 31, 2017.

 

Convertible notes consisted of the following as of June 30, 2017 and December 31, 2016:

 

   2017   2016 
The below section of convertible notes payable were all converted to common stock at $0.10 per share in connection with the January 2017, conversion agreements described above.
 
In June 2015, the Company issued 10% convertible notes in the aggregate principal amount of $700,000. The notes were secured by the assets of the Company, matured in June 2016, and were convertible into common stock of the Company at a conversion rate of $0.03 per share, subject to adjustment. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 15,400,000 shares of the Company’s common stock at an exercise price of $0.05 per share for a period of five years. The conversion rate on the notes and exercise price of the warrants are subject to adjustment to anti-dilution protection that required these features to be bifurcated and presented as derivative liabilities at their fair values. See Note 7. The Company also incurred debt issuance costs of $124,000, which were presented as a discount against the note and amortized into interest expense over the term of the note.
      $680,000 

 

15 

 

 

           
In July 2015, the Company issued 10% convertible notes with in the aggregate principal amount of $190,000.  The notes are secured by the assets of the Company, matured in July 2016, and are convertible into common stock of the Company at a conversion rate of $0.03 per share, subject to adjustment.  In connection with the issuance of these notes, the Company also issued warrants for the purchase of 4,180,000 shares of the Company’s common stock at an exercise price of $0.05 per share for a period of five years.  The conversion rate on the notes and exercise price of the warrants are subject for adjustment to anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values.  See Note 7. The Company also incurred debt issuance costs of $16,200, which are presented as a discount against the note and amortized into interest expense over the term of the note       166,000 
           
In February 2016, the Company re-issued a 12% convertible note in the amount of $172,095. The note is secured by the assets of the Company, originally maturing in September 2016, and is convertible into common stock of the Company at a rate of $0.10 per share. In connection with the issuance of this note, the Company issued warrants for the purchase of 1,146,667 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years.       172,095 
           
In April 2016, the Company issued 12% convertible notes in the amount of $1,550,000. The note is secured by the assets of the Company, matures in October 2016, and is convertible into common stock of the Company at a rate of $0.25 per share.  In connection with the issuance of these notes, the Company also issued warrants for the purchase of 6,200,000 shares of the Company’s common stock at an exercise price of $0.25 per share for a period of five years.  The Company also issued 1,033,337 shares of common stock to the noteholders. The Company also incurred debt issuance costs of $226,400, which are presented as a discount against the note and amortized into interest expense over the term of the note.  In August 2016, the Company entered into an agreement with the April 2016 Investors to reduce the exercise price on the embedded conversion feature and warrants to $0.10 and increase the number of warrants to 15,500,000.  The August 2016 change in the terms of these convertible notes has been determined to be a debt extinguishment in accordance with ASC 470.  The reported amounts under the debt extinguishment are not significantly different than that of the Company’s reported amounts.       1,550,000 
           
Total Principal Outstanding  $   $2,568,095 
Unamortized Discounts – Derivatives       (6,466)
Unamortized Discounts – Debt issuance costs       (66,033)
Convertible Notes, Net  $   $2,495,596 

 

The following is a roll-forward of the Company’s convertible notes and related discounts for the six months ended June 30, 2017:

 

   

Principal Balance

   Debt Issuance Costs  

Debt

Discounts

  

Total

 
Balance at December 31, 2016   $2,568,095   $(66,033)  $(6,466)  $2,495,596 
Conversions    (2,568,095)           (2,568,095)
Amortization        66,033    6,466    72,499 
Balance at June 30, 2017   $   $   $   $ 

 

NOTE 7 –DERIVATIVE LIABILITY

 

Due to the potential adjustment in the conversion price associated with certain of the convertible debentures and the potential adjustment in the exercise price of certain of the warrants, the Company had determined that certain conversion features and warrants are derivative liabilities.

 

As described in Note 5 above, the Company on January 31, 2017 entered into Conversion Agreements with Investors pursuant to which each Investors agreed to convert all amounts of debt accrued and payable to such persons including interest under the terms of their respective financing or loan agreement into shares of Company common stock at $0.10 per share. Certain Investors that had a conversion price less than $0.10 converted at such applicable conversion price. The investors at the time of conversion also agreed to waive any existing rights with respect to certain price protection and anti-dilution rights contained in their Stock Purchase Warrants.

 

Additionally, on February 22, 2017, the Company entered into an Agreement and Release with a holder of certain debentures that will represent final and full payment of all amounts owed under such which include debt with a face value of $300,000, accrued interest of approximately $31,000, cancellation of 3,600,000 warrants (previously accounted for as derivative liabilities) as well as certain pledged shares (2,500,000 shares) in exchange for $300,000 in cash. These debentures also had potential price adjustments on these debentures that have also been eliminated.

 

16 

 

 

Therefore, as a result of the conversion and repayment of the outstanding indebtedness and related accrued interest as well as the elimination of anti-dilution rights of Stock Purchase Warrants, the Company no longer holds liabilities with derivatives requiring fair value as of June 30, 2017.

 

A summary of derivative activity for the six months ended June 30, 2017 is as follows:

 

Balance at December 31, 2016

  $18,056,631 
Modification of derivatives   319,770 
Cancellation of warrants previously accounted for as derivative liabilities and elimination of derivative conversion features resulting from conversion of related party debt to equity   (11,213,573)
Reclassification of derivatives to equity upon removal of price protection in warrants   (7,614,974)
Change in fair value   452,146 
Balance at June 30, 2017  $ 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

Amount Due Officer and Director

 

In November 2016, the Company issued a note payable for $13,609 to one if its Board of Directors and was outstanding at December 31, 2016. The note was repaid in April 2017. In November 2016, the related party also received 20,414 shares of the Company’s common stock with a fair value of $2,041.

 

Convertible Notes Payable

 

On January 31, 2017, the Company entered into Conversion Agreements with Mr. Selzer, a director of the Company and Vista Associates, a family partnership to which Mr. Selzer converted $150,000 in debt plus interest into 1,753,500 shares of common stock and $40,000 of debt plus interest into 1,537,778 shares of common stock.

 

Purchase of Common Stock

 

In March 2017, Mr. Selzer purchased an additional 500,000 shares of common stock of the latest offering as described in Note 9.

 

Other

 

In connection with securing third-party financing, the Company incurred fees to Network 1 Financial Securities, Inc. (“Network 1”), a registered broker-dealer. The Network 1 fees comprise of $360,000 payable in cash and the issuance of 2,200,000 shares of common stock of the Company. A member of the Company’s Board of Directors previously maintained a partnership with a key principal of Network 1. The agreement calls for Network 1 to receive commission, in cash and stock based on the total amount of proceeds from any financing it secures for the Company.

 

The Company leases it Corporate headquarters from Bridgeworks LLC, (“Bridgeworks”), a company providing office facilities to emerging companies, principally owned by Mr. Beck and his family. Mr. Beck is Chairman, Chief Executive Officer and President of the Company. During the first six months of 2017, the Company paid Bridgeworks $27,000.

 

The Company entered into a consulting agreement with Graham Beck, a son of Mr. Beck for digital marketing services beginning April 1, 2017 at a rate of $2,500 per month with an expected end date of September 2017. During the first six months of 2017, the expense associated with Graham Beck was $7,500.

 

17 

 

 

NOTE 9STOCKHOLDER’S EQUITY (DEFICIT)

 

Common Stock

 

As described in Note 5, on January 31, 2017, in connection with the issuance of a $3,000,000 Senior Unsecured Note, an aggregate of 4,500,000 shares of Common Stock was issued to the Investor and the Company issued Network 1 Financial Securities, Inc., a registered broker-dealer, 1,200,000 shares of common stock of the Company in conjunction with its services.

 

As described in Notes 5 and 6, on January 31, 2017, the Company entered into Conversion Agreements with Investors pursuant to which each Investors agreed to convert all amounts of debt accrued and payable to such person including interest under the terms of their respective financing or loan agreement as of January 31, 2017 into shares of Company common stock at $0.10 per shares. The Conversion Agreements resulted in the issuance of an approximately of 84,822,000 shares of Company common stock.

 

On March 22, 2017, Ipsidy Inc. (the “Company”) entered into Subscription Agreements with several accredited investors (the "March 2017 Accredited Investors") pursuant to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4,000,000. The Company has received proceeds of $3,570,000 through June 30, 2017. An individual March 2017 Accredited Investor has agreed to fund $430,000 by the balance of the offering by the end of the third quarter of 2017. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc. (“Network”), a registered broker-dealer, a cash fee of $240,000 and agreed to issue Network 1,000,000 shares of common stock of the Company upon increasing its authorized shares of common stock.

 

Additionally, the Company cancelled certificates for 2,500,000 shares of common stock acquired in conjunction with the purchase of certain debentures.

 

During the quarter ended June 30, 2017, the Company issued approximately 487,000 shares of common stock as consideration for services. The fair value of the shares, totaling approximately $63,000 was estimated based on the publicly quoted trading price and recorded as expense.

 

Warrants

 

As more fully described above the Company agreed to reduce the exercise of all outstanding Stock Purchase Warrants acquired as part of a financing or loan that had an exercise price in excess of $0.10 per share to $0.10 per share.

 

Furthermore, as more fully described above in Note 5, the Company as part of a transaction cancelled 3.6 million warrants.

 

The following is a summary of the Company’s warrant activity for the six months ended June 30, 2017:

 

   

Number of Shares 

   Weighted Average Exercise Price   Weighted Average Remaining Life 
Outstanding at December 31, 2016    51,138,697   $0.11    3.8 Years 
Cancelled    (3,600,000)  $0.08    3.9 Years 
Outstanding at June 30, 2017    47,538,697   $0.08    3.2 Years 

 

Stock Options

 

On August 10, 2016, the Company entered into an amended agreement (the “Amendment”) with Parity Labs, LLC (“Parity”) to amend the compensation section of an existing Advisory Agreement previously entered into between the Company and Parity on November 16, 2015 for the provision of strategic advisory services. The Amendment calls for the Company to issue to Parity the option (the "Parity Option") to acquire 20,000,000 shares of common stock of the Company, exercisable at $0.05 per share for a period of ten years. The Parity Option vests as to 10,000,000 shares of common stock immediately and then in 12 equal tranches of 833,333 shares per month commencing on September 1, 2016. Parity options vested in entirety when Mr. Beck became Chief Executive Officer (“CEO”) of Ipsidy, Inc. in January 2017. Mr. Beck is the manager of Parity.

 

 18

 

 

In connection with the engagement of the CEO and Chief Financial Officer (“CFO”) on January 31, 2017, the Company granted the CEO and CFO stock options to acquire 15,000,000 shares and 5,000,000 shares of common stock of the Company respectively at an exercise price of $0.10 per share for a period of ten years. Further, upon the Company being legally entitled to do so, the Company has agreed to enter a Restricted Stock Purchase Agreements with the CEO and CFO in which they will be provided 15,000,000 shares and 5,000,000 shares of common stock at a per share price of $0.0001, which shares of common stock vest upon achieving a performance threshold which has not been achieved at June 30, 2017.

 

The Company determined the grant date fair value of the options granted during the Six Months ended June 30, 2017 using the Black Scholes Method and the following assumptions:

 

Expected Volatility – 85% 

Expected Term – 5.0 Years 

Risk Free Rate – 1.92% 

Dividend Rate – 0.00%

 

Activity related to stock options for the Six Months ended June 30, 2017 is summarized as follows:

 

   

Number of Shares 

   Weighted Average Exercise Price   Weighted Average Contractual Term (Yrs.)  

Aggregate Intrinsic Value 

 
Outstanding as of December 31, 2016    86,925,000   $0.21    9.5   $10,023,400 
Granted    20,000,000   $0.10    9.8   $ 
Forfeitures                                                                           (875,000)  $0.10    8.8   $ 
Outstanding as of June 30, 2017    106,050,000   $0.19    9.1   $9,215,000 
Exercisable as of June 30, 2017    76,183,334   $0.16    8.7   $5,322,000 

 

The following table summarizes stock option information as of June 30, 2017:

 

Exercise Prices 

  

Outstanding 

   Weighted Average Contractual Life  

Exercisable 

 
$0.0001    3,500,000    8.25 Years    3,500,000 
$0.05    36,500,000    9.11 Yeas    22,625,000 
$0.10    27,250,000    9.30 Years    14,083,335 
$0.15    6,300,000    8.10 Years    4,049,999 
$0.25    500,000    8.75 Years    300,000 
$0.40    1,000,000    8.67 Years    1,000,000 
$0.45    31,000,000    8.25 Years   30,625,000 
 Total    106,050,000    9.04 Years    76,183,334 

 

Stock option expense for the three and six months ended June 30, 2017 was approximately $973,000 and $4,267,000, respectively, and for the corresponding periods ended June 30, 2016 was $2,037,000 and $6,152,000, respectively. The quarter and six months ended June 30, 2017, included approximately $93,000 and $1,767,000 of non-employee stock compensation. As of June 30, 2017, there was approximately $4,804,000 of unrecognized compensation costs related to stock options outstanding which will be expensed through 2020.

 

NOTE 10 – DIRECT FINACING LEASE

 

In September 2015, the Company and an entity in Colombia entered into a rental contract for the rental of 78 kiosks to provide cash collection and fare services at transportation stations. The lease term began in May 2016 when the kiosk were installed and operational and when the lease commenced. The term of the rental contract is ten years at an approximate monthly rental of $11,900. The lease has the option at the end of the lease term to purchase each unit for approximately $40. The term of the lease approximates the expected economic life of the kiosks. The lease was accounted for as a direct financing lease.

 

 19

 

 

The Company has recorded the transaction as it’s net investment in the lease and will receive monthly payments of $11,856 before estimated executory costs, or $142,272, annually, to reduce investment in the lease and record income associated with the related amount due. Executory costs are estimated to be $1,677 monthly and initial direct costs are not considered significant. The transaction resulted in incremental revenue in the six-months ended June 30, 2017 of approximately $38,000.

 

The equipment is subject to direct lease valued at approximately $748,000. At the inception of the lease term, the aggregate minimum future lease payments to be received is approximately $1,422,000 before executory cost. Unearned income is recorded at the inception of this lease was approximately $474,000 and will be recorded over the term of the lease using the effective income rate method. Future minimum lease payments to be received under the lease for the next five years and thereafter are as follows for the six-month period remaining in 2017 and the calender years ending from 2018-2022 and thereafter:

 

     
2017  $61,073 
2018   122,145 
2019   122,145 
2020   122,145 
2021   122,145 
2022   122,145 
Thereafter   529,322 
Sub-total   1,078,975 
Less deferred revenue   (383,064)
Net investment in lease  $695,911 

 

NOTE 11 – LEASE OBLIGATION PAYABLE

 

The Company entered into a lease in March 2017 for the rental of its printer for its secured plastic and credential card products business under an arrangement that is classified as a capital lease. The leased equipment is amortized on a straight line basis over its lease term including the last payment (61 payments) which would transfer ownership to the Company. Total amortization related to the lease equipment as of June 30, 2017 is $2,679. The following is a schedule showing the future minimum leas payments under capital lease by year and the present value of the minimum lease payments as of June 30, 2017. The interest rate related to the lease obligation is 12% and the maturity date is March 31, 2022. Future cash payment related to this capital lease are as follow for the six-month period remaining in 2017 and the calender years ending from 2018-2022 and thereafter. 

     
2017  $21,547 
2018   43,096 
2019   43,096 
2020   43,096 
2021   43,096 
2022   10,777 
Total minimum lease payments   204,708 
      
Less: Amount representing interest   49,248 
      
Present value of minimum lease payments  $155,460 

  

NOTE 12COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

From time to time, claims are made against the Company in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting the Company from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on the Company’s results of operations for that period or future periods. The Company is not presently a party to any pending or threatened legal proceedings. 

 

 20

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

As used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” except where the context otherwise requires, the term “we,” “us,” “our,” or “the Company,” refers to the business of Ipsidy Inc. and its subsidiaries.

 

Overview

 

Ipsidy Inc. together with its subsidiaries (the “Company”, “we” or “our”), is a provider of secure, biometric identification, identity management and electronic transaction processing services. In a world that is increasingly digital and mobile, our vision is to enable solutions that provide pre-transaction verification of identity as well as embed identity verification within every electronic transaction message processed through our platform or other electronic systems. We are building upon our existing capabilities in biometric identification and multi-factor identity management solutions to develop an identity transaction platform for our business customers. The platform is being designed to enable the end users of our business customers to more easily authenticate their identity to a mobile phone or portable device of their choosing (as opposed to dedicated hardware). The existing system enables participants to complete transactions with a digitally signed authentication response, including the underlying transaction data and embedded attributes of the participant’s identity.

 

The Company’s products currently focus on the broad requirement for identity, access and transaction verification and associated identity management needs and the requirement for cost-effective and secure mobile electronic payment solutions for institutions and their customers. We aim to offer our customers solutions that can be integrated into each customer’s business operations in order to facilitate their use and enhance the end user customer experience.

 

Management believes that some of the advantages of the Company’s platform approach are the ability to leverage the platform to support a variety of vertical markets including the identity management and transaction processing sectors and the adaptability of the platform to the requirements of new markets and new products requiring low cost, secure, and configurable mobile solutions. These vertical markets include but are not limited to border security, public safety, public transportation, enterprise security payment transactions and banking.

 

The company was incorporated in the State of Delaware on September 21, 2011 and changed its name to Ipsidy Inc. on February 1, 2017, and our common stock is traded on the OTC Markets under the trading symbol “IDGS”. Our corporate headquarters are located at 780 Long Beach Boulevard, Long Beach, NY 11561 and our main phone number is (407) 951-8640. We maintain our website at www.ipsidy.com. The contents of our website are not incorporated into, or otherwise to be regarded as part of this Report on this Quarterly Report on Form 10-Q.

 

Key Trends

 

We believe that our financial results will be impacted by several market trends in the identity management and transaction processing marketplace, including growing concerns over identity theft and fraud and the increase in electronic payments, solutions provided by non-bank entities. Our results are also impacted by the changes in levels of spending on identity management and security methods, and thus, negative trends in the global economy and other factors which negatively impact such spending may negatively impact the growth our revenue from those products. The global economy has been undergoing a period of political and economic uncertainty and stock markets are experiencing high levels of volatility, and it is difficult to predict how long this uncertainty and volatility will continue.

 

 21

 

 

We plan to grow our business by increasing the use of our services by our existing customers, by adding new customers by expanding into new markets and innovation. If we are successful in these efforts, we would expect our revenue to continue to grow. In addition, based on the positive trends in the international payment processing industry noted above, we anticipate that as and when more payments are made using electronic and mobile methods, such as those that we offer, our revenue would also increase. 

 

Going concern

 

As of June 30, 2017, the Company had an accumulated deficit of approximately $61.4 million. For the three and six months ended June 30, 2017 the Company earned revenue of approximately $0.6 million and $1.1 million, respectively, and incurred a loss from operations of approximately $2.5 and $7.5 million, respectively.

 

The reports of our independent registered public accounting firms on our consolidated financial statements for the years ended December 31, 2016 and 2015 contained an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses.

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial support from the Company’s current shareholders, the ability of the Company to obtain additional equity financing to continue operations, the Company’s ability to generate sufficient cash flows from operations, successfully locating and negotiating with other business entities for potential acquisition and /or acquiring new clients to generate revenues and cash flows.

 

There is no assurance that the Company will ever be profitable. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

Adjusted EBITDA

 

This discussion includes information about Adjusted EBITDA that is not prepared in accordance with GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.

 

Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income (loss) adjusted to exclude (1) interest expense, (2) interest income, (3) provision for income taxes, (4) depreciation and amortization, (5) stock-based compensation expense and (6) certain other items management believes affect the comparability of operating results.

 

Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management, and it will be a focus as we invest in and grow the business. Additionally, we will consider using Adjusted EBITDA in connection with our executive compensation in 2018.

 

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:

 

    Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

    Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations.

 

 22

 

 

Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplement to our GAAP results.

 

Reconciliation of Net Loss to Adjusted EBITDA 

 

   Three Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
                     
Net (loss) gain  $(2,802,578)  $(832,691)  $(12,471,672)  $6,859,819 
                     
Add Back:                    
                     
Interest expense   291,168    1,346,025    895,182    2,272,777 
Conversion of debt, derivative liability, and modifications        (4,735,589)   4,106,652    (17,677,252)
Depreciation and amortization   137,000    157,702    246,534    260,761 
Write-off of asset       225,862        225,862 
Taxes                
Stock compensation   972,510    2,999,837    4,266,670    6,152,490 
                     
Adjusted EBITDA (Non-GAAP)  $(1,401,900)  $(838,854)  $(2,956,634)  $(1,905,543)

 

The increase in adjusted EBITDA loss in 2017 compared to 2016 is principally due to the Company’s investment in resources required to provide the support for future operations.

 

Three and Six Months Ended June 30, 2017 and June 30, 2016

 

Revenues, net

 

During the three and six months ended June 30, 2017, the Company had revenues of approximately $0.6 million and $1.1 million compared to $0.5 million and $0.8 million in the three and six months ended June 30, 2016. The increase in the six months ended June 30, 2017 compared to the six months ended June 30, 2016 is principally related to Cards Plus and ID Solutions which were acquired on February 8, 2016.

 

Cost of sales

 

During the three and six months ended June 30, 2017, cost of sales were higher than the cost of sales in the three and six months ended June 30, 2016 due to the revenue increase at Cards Plus which was acquired in February 2016.

 

Operating Expenses

 

During the three month and six months ended June 30, 2017 compared to June 30, 2016, general and administrative expense decreased by approximately $1.4 million and $0.5 million principally due to lower stock compensation charges of approximately $2.0 million and $1.9 million offset by higher staff compensation expense and consulting services as resources were was added to support the current and future operations.

 

During the three and six months ended June 30, 2017, the Company research and development expense decreased by approximately $0.3 million as the three and six months ended June 30, 2016 included a write-off of certain costs associated with assets being tested which were no longer considered viable.

 

Depreciation and amortization expense remained largely consistent with the three and six months ended June 30, 2017 compared to June 30, 2016.

 

 23

 

 

Other Income (Expense)

 

Derivative Liability and Net Loss on Modification of Debt

 

The derivative liability is associated with potential adjustments in the conversion price associated with certain convertible debentures and warrants that were used to finance the business. As a result of the valuation of these provisions as of June 30, 2016, the Company experienced a reduction in the derivative liability and recorded a benefit of approximately $4.7 million and $17.7 million in the three and six months ended June 30, 2016. The decline in the derivative liability is associated with the lower stock price.

 

During the six months ended June 30, 2017, the Company performed valuations of the existing liability at the applicable dates as these debentures and warrant terms and conditions were modified and/or eliminated as a result of the Company’s elimination and repayment of certain existing obligations as of January 31, 2017. In the first six months of 2017, the Company recorded an expense of $0.5 million due to these valuations. Additionally, the Company recorded a gain on the extinguishment of certain notes payable (approximately $2.8 million), and a loss on the modification of derivatives (approximately $.3 million), loss on modification of warrants (approximately $0.2 million), and a loss on the conversion of debt (approximately $6.0 million) (See Notes 5, 6, and 7).

 

Interest expense

 

Interest expense decreased in the three and six months ended June 30, 2017 compared to the prior year principally due to the debt for equity conversion on January 31, 2017.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of June 30, 2017, the Company had approximately $2.4 million of cash and had $1.9 million of net working capital. Stockholders’ equity was approximately $11.4 million as of June 30, 2017.

 

Cash used in operating activities was approximately $3.9 million in the six months ended June 30, 2017 compared to $2.0 million in the six months ended June 30, 2016 as the Company invested in staff and consulting services to support current and future operations.

 

The Company raised $7.0 million of additional financing in the first six months of 2017. as the Company entered into and closed a Securities Purchase Agreement with an accredited investor pursuant to which the Company borrowed $3.0 million on January 31, 2017 in consideration of a Senior Unsecured Note and an aggregate of 4,500,000 shares of Common Stock.  The Senior Unsecured Note matures in January 2019 and bears interest at a rate of 10%. Additionally on March 22, 2017, the “Company entered into Subscription Agreements with several accredited investors (the "March 2017 Accredited Investors") pursuant to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4.0 million. The Company received proceeds of approximately $3.6 million and one individual March 2017 Accredited Investor has agreed to fund $0.4 million. by the end of the third quarter of 2017.

 

We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time other than the amounts detailed in the subsequent events. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all. Our failure to obtain financing would have a material adverse effect on the organization

 

As described in Note 6, on January 31, 2017, the Company converted approximately $6.3 million of debt and accrued interest in 84,822,006 shares of Company’s common stock. All Investors that converted their debt and accrued interest to equity also agreed to waive any existing rights with respect to certain anti-dilution rights contained in their Stock Purchase Warrants. The Company agreed to reduce the exercise price of all outstanding Stock Purchase Warrants acquired as part of a financing or loan that had an exercise pirce in excess of $0.10 per share to $0.10 per share. Additionally, on February 22, 2017, the Company entered into an Agreement and Release (“February 22, 2017 Agreement”) with a holder of certain debentures that will represent final and full payment of all amounts owed under these debentures which include debt with a face value of $300,000, accrued interest of approximately $31,000, cancellation of 3,600,000 warrants previously accounted for as derivative liabilities as well as the right to certain pledged shares in exchange (2,500,000 shares) for $300,000 in cash which was paid in May 2017.

 

The combination of the above events effectively refinanced the Company’s financial position in the first six months of 2017 and provided near-term financing requirements. The Company anticipates additional financing will be required beyond the current actions and the amounts will be dependent on current operations and investments the Company may pursue.

 

 24

 

 

Additionally, during the first six months of 2017, the Company entered into a lease that met the criteria for capitalization and resulted in a capital lease obligation of approximately $161,000 at lease inception. The payments are approximately $43,095 annually during the five year lease term.

 

 25

 

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.

 

Recent Accounting Policies

 

The recent material accounting policies that may be the most critical to understanding of the financial results and conditions are discussed in Note 2 of the audited financial statements included in our annual report on form 10-K for the year ended December 31, 2016.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a smaller reporting company, we are not required to include disclosure under this item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

 Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon the evaluation of the disclosure controls and procedures at the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as a result of continuing weaknesses in its internal control over financial reporting initially identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and as a result of the Company’s March 31, 2017 Form 10-Q amended filing, which are as follows:

 

  - The Company has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically because there are few employees and only two officers with management functions and therefore there is lack of segregation of duties.

 

  - There is a strong reliance on outside consultants to assist in the preparation of the annual and quarterly financial statements as well as provide assistance in monitoring new accounting principles, to ensure compliance with US GAAP and SEC disclosure requirements.

 

  - There is a strong reliance on the external attorneys to review and edit the annual and quarterly filings and to ensure compliance with SEC disclosure requirements.

 

  - A formal audit committee has not been formed.

 

In order to address the above material weaknesses, Philip D. Beck, the Chief Executive Officer and President of the Company, and Stuart P. Stoller, the Chief Financial Officer of the Company, which were appointed to such offices on January 31, 2017, and have initiated the following actions to remediate the material weaknesses:

 

-In addition to the engagement of Mr. Beck and Mr. Stoller. who are both experienced public company executives, the Company is evaluating its personnel resources and is considering engaging additional permanent skilled finance and accounting resources. On August 1, 2017. the Company hired one additional financial resource.

 

-The Company has engaged independent consultants to assist with certain areas of the reconciliation and accounting functions and may continue such engagement or hire additional consultants as needed.

 

-The Compared expanded significantly in 2015 and 2016 as a result of the acquisition of MultiPay and FIN Holdings. Due to the Company’s limited capital resources, it is establishing proper financial reporting of its domestic and foreign subsidiaries.

 

26

 

 

-The Company has taken certain steps to enhance its control environment to promote the adherence to appropriate internal control policies and procedures. These efforts included assessing the capabilities of the financial staff, reviewing systems and ensuring appropriate levels of analytical reviews among other appropriate steps.

 

-The Company has and is continuing to reassess and revise key policies and procedures, including the general ledger, general ledger reconciliation, capital expenditure and accounts payable, to develop and deploy effective policies and procedures and reinforced compliance in an effort to constantly improve the Company's internal control environment.

 

-The Company has taken steps to enhance its internal governance and compliance function. The Company intends to form appropriate committees during the next six months and periodic and regular meetings will be held with the internal governance and compliance functions to discuss and coordinate operational, compliance and financial matters as well as the progress of the Company's plan to remediate its material weaknesses.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

We are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material legal or administrative proceedings arising in the ordinary course of business.  We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

 

ITEM 1A. RISK FACTORS

 

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2016. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On January 31, 2017, Mr. Stoller and the Company entered into an Executive Retention Agreement pursuant to which Mr. Stoller agreed to serve as Chief Financial Officer pursuant to which the Company granted Mr. Stoller a Stock Option to acquire 5 million shares of common stock of the Company at an exercise price of $0.10 per share for a period of ten years. Further, upon the Company being legally entitled to do so, the Company has agreed to enter a Restricted Stock Purchase Agreement with Mr. Stoller pursuant to which Mr. Stoller will purchase 5 million shares of common stock at a per share price of $0.0001, which shares of common stock vest upon achieving various milestones. The Stock Options vest with respect to (i) one-third of the shares of common stock upon the one year anniversary of the grant date and (ii) in 24 equal tranches commencing on the one-year anniversary of the grant date.

 

On January 31, 2017, Mr. Beck and the Company entered into an Executive Retention Agreement pursuant to which the Company granted Mr. Beck a Stock Option to acquire 15 million shares of common stock of the Company at an exercise price of $0.10 per share for a period of ten years. Further, upon the Company being legally entitled to do so, the Company has agreed to enter a Restricted Stock Purchase Agreement with Mr. Beck pursuant to which Mr. Beck will purchase 15 million shares of common stock at a per share price of $0.0001, which shares of common stock vest upon achieving various milestones. The Stock Options vest with respect to (i) one-third of the shares of common stock upon January 31, 2017 and (ii) in 24 equal monthly tranches commencing on the grant date. 

 

On January 31, 2017, the Company entered into Conversion Agreements with several accredited investors (the “Investors”) pursuant to which each of the Investors agreed to convert all amounts of debt accrued and payable to such person including interest under the terms of their respective financing or loan agreement as of January 31, 2017 into shares of Company common stock at $0.10 per share provided that certain Investors that had a conversion price less than $0.10 converted at such applicable conversion price. The Conversion Agreements resulted in the conversion of an aggregate of approximately $6,331,000 into 84,822,006 shares of Company common stock. Certain Investors also agreed to waive any existing rights with respect to certain anti-dilution rights contained in their Stock Purchase Warrants. The Company agreed to reduce the exercise of all outstanding Stock Purchase Warrants acquired as part of a financing or loan that had an exercise price more than $0.10 per share to $0.10 per share.

 

27

 

 

On January 31, 2017, the Company entered and closed a Securities Purchase Agreement with the Theodore Stern Revocable Trust (the “Stern Trust”) pursuant to which the Stern Trust invested an aggregate of $3 million into the Company in consideration of a Promissory Note (the “Stern Note”) and 4.5 million shares of common stock. The Stern Note is payable two years from the date of issuance and bears interest of 10% per annum, which compounds annually. The Stern Note may be prepaid in whole or in part by the Company at any time without penalty; provided, that any partial payment of principal must be accompanied by payment of accrued interest to the date of prepayment. The Stern Trust may convert interest payable under the Stern Note into shares of common stock of the Company at a conversion price of $0.20 per share. The Company is required to prepay all outstanding principal and accrued but unpaid interest on this Note upon the Company (including any of its subsidiaries) closing on financing that, individually or collectively, generates gross proceeds equal to or more than $15 million.

 

 On March 22, 2017, the Company entered into Subscription Agreements with several accredited investors (the “March 2017 Accredited Investors”) pursuant to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4,000,000 or a per share price of $0.20. The Company has received proceeds of $3,170,000 as of March 22, 2017. One individual March 2017 Accredited Investor has agreed to fund $830,000, of which $400,000 was received the second quarter of 2017 and the balance will be received in the third quarter of 2017. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc. (“Network”), a registered broker-dealer, a cash fee of $240,000 and agreed to issue Network 1,000,000 shares of common stock of the Company upon increasing its authorized shares of common stock.

 

The above offers and sales of the securities were made to accredited investors and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regards to the sales. No advertising or general solicitation was employed in offerings the securities. The offers and sales were made to accredited investors and transfer of the securities was restricted by the Company in accordance with the requirements of the Securities Act of 1933.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable to our operations. 

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit

Number

Description
2.1 (2) Agreement and Plan of Reorganization
     
3.1 (1) Certificate of Incorporation
     
3.2 (1) By-laws
     
3.3 (7) Certificate of Ownership and Merger
     
3.4 (58) Certificate of Amendment to the Certificate of Incorporation dated February 1, 2017
     
4.1 (13) Stock Option dated May 28, 2015 issued to Ricky Solomon
     
4.2 (14) Stock Option dated May 28, 2015 issued to Charles D. Albanese
     
4.3 (17) Form of Securities Purchase Agreement by and between ID Global Solutions Corporation and the June 2015 Investors

 

28

 

  

4.4 (18) Form of Security Agreement by and between ID Global Solutions Corporation and the June 2015 Investors
     
4.5 (19) Form of Secured Convertible Debenture issued to the June 2015 Investors
     
4.6 (20) Form of Common Stock Purchase Warrant issued to the June 2015 Investors
     
4.7 (21) Securities Purchase Agreement by and between ID Global Solutions Corporation and Ricky Solomon
     
4.8 (22) Security Agreement by and between ID Global Solutions Corporation and Ricky Solomon
     
4.9 (23) Secured 10% Secured Promissory Note issued to Ricky Solomon
     
4.10 (24) Common Stock Purchase Warrant issued to Ricky Solomon
     
4.11 (25) Form of Securities Purchase Agreement by and between ID Global Solutions Corporation and the 2015 Accredited Investors
     
4.12 (26) Form of Security Agreement by and between ID Global Solutions Corporation and the 2015 Accredited Investors
     
4.13 (27) Form of Secured 12% Secured Promissory Note issued to the 2015 Accredited Investors
     
4.14 (28) Form of Common Stock Purchase Warrant issued to the 2015 Accredited Investors
     
4.15 (29) Stock Option dated September 25, 2015 issued to Herbert M. Seltzer
     
4.16 (30) Letter Agreement by and between ID Global Solutions Corporation and ID Solutions Inc.
     
4.17 (31) Secured 12% Convertible Promissory Note issued to ID Solutions Inc.
     
4.18 (32) Common Stock Purchase Warrant issued to ID Solutions Inc.
     
4.19 (33) Stock Option issued to Thomas Szoke dated September 25, 2015
     
4.20 (34) Stock Option issued to Douglas Solomon dated September 25, 2015
     
4.21 (35) Stock Option issued to Maksim Umarov dated September 25, 2015
     
4.22 (43) Form of Securities Purchase Agreement by and between ID Global Solutions Corporation and the 2015 Accredited Investors
     
4.23 (44) Form of Stock Pledge Agreement by and between ID Global Solutions Corporation and the 2015 Accredited Investors
     
4.24 (45) Form of 12% Promissory Note issued to the 2015 Accredited Investors
     
4.25 (46) Form of Common Stock Purchase Warrant issued to the 2015 Accredited Investors
     
4.26 (49) Form of Securities Purchase Agreement by and between ID Global Solutions Corporation and the April 2016 Accredited Investors
     
4.27 (50) Form of Stock Pledge Agreement by and between the Affiliates and the April 2016 Accredited Investors
     
4.28 (51) Form of Secured Convertible Debenture issued to the April 2016 Accredited Investors
     
4.29 (52) Form of Common Stock Purchase Warrant issued to the April 2016 Accredited Investors
     
4.30 (53) Form of Securities Purchase Agreement by and between ID Global Solutions Corporation and the December 2016 Accredited Investors
     
4.31 (54) Form of Promissory Note issued to the December 2016 Accredited Investors
     
4.32 (56) Form of Subscription Agreement by and between ID Global Solutions Corporation and the August 2016 Accredited Investors
     
4.33 (56) Form of Letter Agreement entered with the April 2016 Accredited Investors
     
4.34 (56) Stock Option issued to Parity Labs, LLC

 

29

 

 

4.35 (57) Stock Option Agreement entered between the Company and Stuart P. Stoller dated January 31, 2017
     
4.36 (58) Securities Purchase Agreement entered between the Company and the Theodore Stern Revocable Trust dated January 31, 2017
     
4.37 (58) Promissory Note in the principal amount of $3,000,000 payable to the Theodore Stern Revocable Trust
     
4.38 (58) Stock Option Agreement entered between the Company and Philip D. Beck dated January 31 2017
     
4.39 (59) Form of Subscription Agreement by and between Ipsidy Inc and the March 2017 Accredited Investors
     
10.2 (3) Assignment of Patents
     
10.3 (3) Assignment of Patents
     
10.4 (3) Assignment of Patents
     
10.5 (3) Employment Agreement of David Jones
     
10.6 (3) Employment Agreement of Douglas Solomon
     
10.7 (3) Employment Agreement of Thomas Szoke
     
10.8 (3) Promissory Note
     
10.9 (3) Flextronics Manufacturing Services Agreement
     
10.10 (4) Agreement with Tiber Creek Corporation
     
10.11 (4) Adjusted Compensation Agreement David S. Jones through September 30, 2013
     
10.12 (4) Adjusted Compensation Agreement David S. Jones from October 1, 2013
     
10.13 (5) Agreement extending due date of $600,000 Penn Investments Note
     
10.14 (5) Agreement extending due date of $310,000 Penn Investments Note
     
10.15 (5) Promissory Note for $20,000 payable to Penn Investments
     
10.16 (5) Promissory Note for $180,000 payable to Penn Investments
     
10.17 (6) Note Conversion Agreement dated September 24, 2014 by and between ID Global Corporation and Penn Investments, Inc.
   
10.18 (8) Promissory Note in the principal amount of $17,000 dated August 7, 2014 from Thomas Szoke
     
10.19 (8) Promissory Note in the principal amount of $17,000 dated August 28, 2014 from Thomas Szoke
     
10.20 (9) The ID Global Solutions Corporation Equity Compensation Plan
     
10.21 (10) Real Estate Purchase Agreement dated December 12, 2014 by and between ID Global Solutions Corporation and Megan DeVault and Jeffrey DeLeon
     
10.21(a) (10) Commercial Lease Agreement dated December 19, 2014 by and between ID Global Solutions Corporation and DeLeon-Costa Investments, LLC
     
10.22 (11) Share Purchase Agreement by and between ID Global Solutions Corporation and the Multipay S.A. Shareholders
     
10.23 (12) Form of Share Purchase Agreement by and between ID Global Solutions Corporation and the Multipay S.A. Shareholders
     
10.24 (15) Director Agreement by and between ID Global Solutions Corporation and Ricky Solomon dated May 28, 2015
     
10.25 (16) Executive Employment Agreement by and between ID Global Solutions Corporation and Charles D. Albanese dated May 28, 2015
     
10.26 (25) Rental Contract with Purchase Option by and between ID Global Solutions Corporation and Basetek S.A.S., a Colombian company, dated September 15, 2015

 

30

 

 

10.27 (36) Director Agreement by and between ID Global Solutions Corporation and Herbert M. Seltzer dated September 25, 2015
     
10.28 (37) Director Agreement by and between ID Global Solutions Corporation and Charles Albanese dated September 25, 2015
     
10.29 (38) Employment Agreement between ID Global Solutions Corporation and Maksim Umarov dated July 1, 2015
     
10.30 (39) Letter Agreement entered between ID Global Solutions Corporation and Maksim Umarov dated September 25, 2015
     
10.31 (40) Letter Agreement entered between ID Global Solutions Corporation and Douglas Solomon dated September 25, 2015
     
10.32 (41) Letter Agreement entered between ID Global Solutions Corporation and Thomas Szoke dated September 25, 2015
     
10.33 (48) Share Exchange Agreement by and between ID Global Solutions Corporation, Fin Holdings, Inc. and the Fin Holdings, Inc. shareholders
     
10.34 (55) Contract for the Provision of Cash Collection Services entered into by and between ID Global LATAM S.A.S. and Recaudo Bogota S.A.S. dated December 30, 2016
     
10.35 (57) Confidential Settlement Agreement and General Release between ID Global Solutions Corporation and Charles D. Albanese dated January 26, 2017
     
10.36 (57) Executive Retention Agreement entered between the Company and Stuart P. Stoller dated January 31, 2017
     
10.37 (58) Indemnification Agreement entered between the Company and Stuart P. Stoller dated January 31, 2017
     
10.38 (58) Executive Retention Agreement entered between the Company and Philip D. Beck dated January 31 2017
     
10.39 (58) Executive Retention Agreement entered between the Company and Thomas Szoke dated January 31 2017
     
10.40 (58) Executive Retention Agreement entered between the Company and Douglas Solomon dated January 31, 2017
     
10.41 (58) Form of Conversion Agreement dated January 31, 2017
     
10.42 (58) Stand-Off Agreement dated January 31, 2017 entered between Philip Beck, Stuart Stoller, Thomas Szoke, Douglas Solomon, Herbert Selzer, Ricky Solomon and the Company
     
10.43 (60) Amendment No. 1 to the Share Purchase Agreement by and between Ipsidy Inc and the MultiPay Shareholders dated March 7, 2105
     
10.44 (58) Form of Indemnity Agreement
     
14.1  (61) Code of Ethics
     
21.1  (61) List of Subsidiaries
     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act*
     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS XBRL Instance Document *

101.SC XBRL Taxonomy Extension Schema Document *

101.CA XBRL Taxonomy Extension Calculation Linkbase Document *

L

101.DEF XBRL Taxonomy Extension Definition Linkbase Document *

101.LA XBRL Taxonomy Extension Label Linkbase Document *

B

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *

 

* Filed herein

 

31

 

 

(1)            Previously filed on Form 10-12G on November 9, 2011 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(2)            Previously filed on Form 8-K on August 13, 2013 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(3)            Previously filed on Form S-1 on February 13, 2014 (File No.: 333-193924), as amended, as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(4)            Previously filed on Form S-1 on June 26, 2014 (File No.: 333-193924), as amended, as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference

 

(5)            Previously filed on Form S-1 on August 12, 2014 (File No.: 333-193924), as amended, as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference

 

(6)            Previously filed on Form 8-K on September 25, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(7)            Previously filed on Form 8-K on October 9, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(8)            Previously filed on Form 10-Q on November 14, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(9)            Previously filed on Form 8-K on November 28, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(10)          Previously filed on Form 8-K on December 22, 2014 (File No.: 000-54545) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.

 

(11)          Previously filed on Form 8-K on March 12, 2015 (File No.: 000-54545) and incorporated herein by this reference.

 

(12)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 12, 2015.

 

(13)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.

 

(14)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.

 

(15)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.

 

(16)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on June 1, 2015.

 

(17)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.

  

(18)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.

 

(19)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.

 

(20)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on July 2, 2015.

 

(21)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015.

 

(22)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015.

 

(23)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015.

 

(24)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 9, 2015

 

(25)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on September 22, 2015.

 

(26)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(27)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(28)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

32

 

 

(29)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(30)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(31)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(32)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(33)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(34)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(35)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(36)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(37)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(38)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(39)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(40)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(41)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(42)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on October 1, 2015.

 

(43)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.

 

(44)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.

 

(45)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.

  

(46)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 29, 2015.

 

(47)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on January 8, 2016.

 

(48)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 12, 2016.

 

(49)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.

 

(50)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.

 

(51)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.

 

(52)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 25, 2016.

 

(53)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 28, 2016.

 

(54)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on December 28, 2016.

 

(55)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on January 6, 2017.

 

(56)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on August 16, 2016.

 

(57)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 1, 2017.

 

(58)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 6, 2017.

 

(59)          Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on March 23, 2017

 

(60)          Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities Exchange Commission on March 31, 2017.

 

(61)          Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on July 12, 2017.

 

33

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Ipsidy Inc.
   
  By: /s/ Philip Beck
 

Philip Beck, Chairman of the Board of Directors, Chief Executive Officer,

and President

  Principal Executive Officer
   
  By: /s/ Stuart Stoller
  Chief Financial Officer,
  Principal Financial and Accounting Officer
   
Dated: August  14, 2017  

  

34