NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – DESCRIPTION OF BUSINESS AMD SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ipsidy
Inc. (formerly ID Global Solutions Corporation) (“Ispidy” or the “Company”) was incorporated on September
21, 2011 under the laws of the State of Delaware. Ipsidy is a provider of secure, biometric identification, identity management
and electronic transaction processing services. Founded to pioneer innovative digital identification solutions, the Company is
focused on addressing the growing need for highly secure and convenient methods for identity management during a variety of electronic
transactions. The Company provides its biometric identification services to government and public sector organizations, seeking
to verify and manage identities for a variety of security purposes, including issuing identity cards and exercise of rights such
as voting in elections. With the acquisition of MultiPay S.A.S., the Company acquired a transaction processing platform that offers
secure multifunctional payment gateway services to merchants and financial institutions. With the development of the OnePayTM electronic
payment solution the Company believes it will be able to combine its core technologies and use its platform to power a solution
that will provide cost effective and secure means of financial inclusion for the un-banked and under banked population around
the globe.
Going
Concern
There
is substantial doubt that the Company may continue as a going concern for a period of one year from the date of this
document. As of December 31, 2016, the Company has a working capital and stockholders’ deficit of approximately $9.6
million, and $13.3 million, respectively. For the year ended December 31, 2016, the Company earned revenue of approximately
$1.9 million and incurred an operating loss of approximately $13.6 million.
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 or debt 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.
There
is no assurance that the Company will ever be profitable. These 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.
Basis
of Consolidation
The consolidated financial statements include the accounts of Ipsidy Inc. and its wholly-owned subsidiaries Innovation
in Motion Inc. MultiPay S.A.S., ID Global LATAM, IDGS S.A.S., ID Solutions, Inc., FIN Holdings, Inc., and Cards Plus Pty
Ltd. (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated
in consolidation.
The
summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated
financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s
management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles
generally accepted in the United States of America (“US GAAP”) in all material respects, and have been consistently
applied in preparing the accompanying consolidated financial statements.
Use
of Estimates
In
preparing these consolidated financial statements in conformity with US GAAP, management is required to make estimates
and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses
during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions
included in our consolidated financial statements relate to the realizability of accounts receivable and inventory, valuation
of long-lived assets, accruals for potential liabilities, and valuation assumptions related to derivative liabilities, equity
instruments and share based payments.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is probable. Revenue generally 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 includes benefits to the end user in which additional resources or services are required to be provided.
Revenue
from cloud-based services arrangements that allow for the use of a hosted software product or service 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 on a monthly
basis. 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.
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.
The
lease of equipment to customers that meet certain criteria are recognized as a direct financing lease. Direct financing lease
arrangements are recognized as revenue over the term of the associated lease based on the effective interest method. As of
December 31, 2016, the Company has 78 kiosks financed under direct financing leases. The revenue associated with these
arrangements is expected to be recognized through April 2026. The imputed interest rate in the arrangements
approximates 10.7%.
Accounts
Receivable
All
customers are granted credit on a short-term basis and related credit risks are considered minimal. The Company routinely reviews
its trade receivables and makes provisions for probable doubtful accounts; however, those provisions are estimates and actual
results could differ from those estimates and those differences may be material. Trade receivables are deemed uncollectible and
removed from accounts receivable and the allowance for doubtful accounts when collection efforts have been exhausted. At December
31, 2016 and 2015, no allowance for doubtful accounts was recorded.
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 net realizable value.
The kiosks 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 at December 31, 2016
consist solely of cards inventory as the kiosks, which were included in inventory in 2015, were deployed in the second
quarter of 2016 subject to a direct financing lease. Any adjustments to reduce the cost of inventories to their net
realizable value are recognized in earnings in the current period. For the years ending December 31, 2016 and 2015, the
Company did not believe an inventory valuation allowance was necessary to record inventory to net realizabe value.
Concentration
of Credit Risk
The
Company’s financial instruments that potentially expose the Company to a concentration of credit risk consist of cash
and accounts receivable. The Company’s cash is deposited at financial institutions and cash balances held in US bank
accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At various times
during the year, the Company may have exceeded amounts insured by the FDIC. At December 31, 2016, the Company held
approximately $205,000 in cash not insured by the FDIC. For the Company’s foreign subsidiaries, no amounts
are insured. At December 31, 2016, the Company held approximately $60,000 and $91,000 in cash maintained in Colombian
banks and African Banks, respectively.
Revenues
and accounts receivable: For the year ended December 31, 2016 23% of consolidated revenues were derived from one customer who
is a United States (“US”) customer and is substantially all of the US based income. Additionally, for the year
ended December 31, 2016, 59% and 18% of the consolidated revenues were from Cards Plus (Africa) and the Colombian operations,
respectively. Revenue for approximately 68% of the Colombian operations were derived from three customers. As of December 31,
2016, accounts receivable related to Cards Plus (Africa) was 64% of the total with most the remainder primarily, from
the Colombia operations. For the year ended, December 31, 2015, 68% of consolidated revenues were derived by one US
customer, which also is a related party and at December 31, 2015, 98%, of consolidated accounts receivable are due to the
Company by the same related party US customer. For the year ended December 31, 2015, the balance of revenue (32%) was derived
by the Company’s operations in Colombia.
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.
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 leasee substantially all of the risks
and rewards incidental to ownership of the asset are classified as direct finance leases.
Property
and Equipment, net
Property
and equipment consist of furniture and fixtures and computer equipment, and are stated at cost. Property and equipment are
depreciated using the straight-line method over the estimated useful service lives of three to five years. Maintenance and
repairs are expensed as incurred and improvements are capitalized. Gains or losses on the disposition of property and
equipment are recorded upon disposal.
Other
Assets - Software Development Costs
Other
assets consist primarily of costs associated with software development of new product offerings and enhancements to existing applications
in addition to construction of mobile biometric devices. Research & development costs are expensed as incurred. Development costs of computer software to be sold, leased or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. As of December 31, 2016 and 2015, the devices are still under development
and have not been placed in service. Upon completion, the amounts will be recorded in the appropriate asset category and expensed
over their estimated useful lives.
Intangible
Assets
Excluding goodwill, acquired intangible assets and internally developed software are amortized over their estimated useful lives. Acquired amortizing intangible assets are carried at cost, less accumulated amortization.
Internally developed software costs are capitalized upon reaching technological feasibility. Amortization of acquired finite-lived
intangible assets is computed over the estimated useful lives of the respective assets.
Goodwill
Goodwill
is recorded when the purchase price paid for an acquisition exceeds the fair value of net identified tangible and intangible assets
acquired. The Company performs an annual impairment test of goodwill and further periodic tests to the extent indicators of impairment
develop between annual impairment tests. The Company’s impairment review process compares the fair value of the reporting
unit to its carrying value, including the goodwill related to the reporting unit. To determine the fair value of the reporting
unit, the Company may use various approaches including an asset or cost approach, market approach or income approach or any combination
thereof. These approaches may require the Company to make certain estimates and assumptions including future cash flows, revenue
and expenses. These estimates and assumptions are reviewed each time the Company tests goodwill for impairment and are typically
developed as part of the Company’s routine business planning and forecasting process. While the Company believes its estimates
and assumptions are reasonable, variations from those estimates could produce materially different results. The Company did not
recognize any goodwill impairments for the years ended December 31, 2016 and 2015.
Stock-based
compensation
The
Company has accounted for stock-based compensation under the provisions of FASB ASC 718 – “Stock Compensation”
which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and
others receive shares of stock or equity instruments (stock options and common stock purchase warrants). For employee awards,
the fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses
assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. For non-employees, the
fair value of each stock option award is estimated on the measurement date using the Black-Scholes valuation model that uses assumptions
for expected volatility, expected dividends, expected term, and the risk-free interest rate. For non-employees, the Company utilizes
the graded vesting attribution method under which the entity treats each separately vesting portion (tranche) as a separate award
and recognizes compensation cost for each tranche over its separate vesting schedule. Expected volatilities are based on historical
volatility of peer companies and other factors estimated over the expected term of the stock options. For employee awards, the
expected term of options granted is derived using the “simplified method” which computes expected term as the average
of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect
at the time of grant for the period of the expected term.
Impairment
of Long-Lived Assets
Long-lived
assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.
If
the carrying amount of an asset exceeds its undiscounted estimated future cash flows, an impairment review is performed.
An impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Generally, fair value is determined using valuation techniques such as expected discounted cash flows or appraisals,
as appropriate. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer depreciated or amortized. The assets and liabilities
of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections
of the balance sheet. During the years ended December 31, 2016 and 2015, the Company wrote-off assets of approximately
$226,000 and $200,000, respectively after review of its assets.
Research
and Development Costs
Research
and development costs consist of expenditures for the research and development of new products and technology. These costs are
primarily expenses to vendors contracted to perform research projects and develop technology for the Company’s products.
Research and development costs are expensed as incurred.
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 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.
The following potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended
December 31, 2016 and 2015 because their effect was antidilutive:
Security
|
|
2016
|
|
|
2015
|
|
Stock Options
|
|
|
86,925,000
|
|
|
|
47,800,000
|
|
Warrants
|
|
|
51,138,697
|
|
|
|
35,171,744
|
|
Convertible Debt
|
|
|
53,143,343
|
|
|
|
32,593,953
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
191,207,040
|
|
|
|
115,565,697
|
|
Derivative
Instruments
The
Company accounts for derivatives through the use of a fair value concept whereby all of the Company’s derivative positions
are stated at fair value in the accompanying consolidated balance sheets. 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 has determined that certain of the conversion features and warrants are considered derivative liabilities required
to be presented at fair value on the accompanying consolidated balance sheets with changes in fair value reported in the consolidated
statements of operations.
Common
Stock Purchase Warrants
The
Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40, “Derivatives and Hedging –
Contracts in Entity’s Own Equity” (“ASC 815-40”). Based on the provisions of ASC 815- 40, the Company
classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice
of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as
assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract
if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share settlement). All outstanding warrants as of December 31,
2015 and 2016, which did not contain down round anti-dilution provisions were classified as equity.
Business
Combinations
The
Company recognizes, with certain exceptions, 100% of the fair value of assets acquired, liabilities assumed, and noncontrolling
interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business
combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded
at their acquisition-date fair value. Subsequent changes to fair value of contingent consideration arrangements are generally
reflected in earnings. Any in-process research and development assets acquired are capitalized as of the acquisition date. Acquisition-related
transaction costs are expensed as incurred. The operating results of entities acquired are included
in the accompanying consolidated statements of operations from the date of acquisition.
Foreign
Currency Translation
The
assets, liabilities and results of operations of certain of Ipsidy’s subsidiaries are measured using their functional
currency which is the currency of the primary foreign economic environment in which they operate. Upon consolidating these
subsidiaries with Ipsidy, the applicable assets and liabilities are translated to U.S. dollars at currency exchange rates as
of the applicable dates and their revenues and expenses are translated at the weighted average currency exchange rates during
the applicable reporting periods. Translation adjustments resulting from the process of translating these subsidiaries’
financial statements are reported in other comprehensive income (loss) in the accompanying consolidated statements of
comprehensive income (loss).
Fair
Value Measurements
ASC
820, “Fair Value Measurements”, requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective
evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs
into three levels that may be used to measure fair value: Level 1, defined as observable inputs such as quoted prices in active
markets for identical assets or liabilities; Level 2, inputs other than level one that are either directly or indirectly observable
such as quoted prices for identical or similar assets or liabilities on markets that are not active; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company has
derivative liabilities required to be recorded at fair value on a recurring basis at December 31, 2016 and 2015.
Fair
Value of Financial Instruments
The
Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value.
The carrying amounts of the Company’s cash, accounts receivable, other receivables, accounts payable, accrued expenses,
and other current liabilities approximate their estimated fair value due to the short-term maturities of these financial instruments
and because related interest rates offered to the Company approximate current rates. The fair value of the Company’s notes
payable and convertible notes payable are $3,497,819 and $2,568,095, respectively, which differs from the carrying value or reported
amounts of $3,161,422 and $2,495,596, respectively, at December 31, 2016 because of the debt discounts as discussed in Notes 6
and 7.
Recent
Accounting Pronouncements
On
May 28 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard’s core principle is that a
company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. This standard also includes expanded disclosure
requirements that result in an entity providing users of financial statements with comprehensive information about the nature,
amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. This standard
will be effective for the calendar year ending December 31, 2018. The Company is currently in the process of evaluating the impact
of adoption of this ASU on the financial statements.
In
August 2014, the FASB issued Accounting Standard Update ASU2014-15 Disclosure of Uncertainties about an entity’s Ability
to Continue as a Going Concern. This ASU amends ASC205-40. ASC205-40 provides guidance about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
note disclosures. With the amendments made by ASU 2014-15, financial statement disclosures will be required when there is substantial
doubt about an entity’s ability to continue as a going concern or when substantial doubt is alleviated as a result of considerations
of management’s plans. The new standard provides management with principles for evaluating whether there is substantial
doubt by: providing a definition of substantial doubt, requiring an evaluation every reporting period (including interim periods),
providing principles for considering the mitigating effect of management’s plans, requiring certain disclosures when substantial
doubt is alleviated as a result of consideration of management’s plans, requiring an express statement and other disclosures
when substantial doubt is not alleviated, and requiring an assessment for a period of one year after the date that the financial
statements are issued (or available to be issued). The amendments are effective for the annual period ending after December 15,
2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In
November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740)” (“ASU 2015-17”). Currently
U.S. GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified
statement of financial position. The amendments under ASU 2015-17 will require that deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial position. The amendments in this update will be effective for fiscal years
beginning after December 15, 2016. The adoption
of ASU 2015-17 is not expected to have a material impact on the Company’s consolidated financial position, results of operations
or cash flows.
In
February 2016, the FASB issued ASU 2016-02, Leases. The standard requires all leases with lease terms over 12 months to be capitalized
as a right-of-use asset and lease liability on the balance sheet at the date of lease commencement. Leases will be classified
as either finance or operating. This distinction will be relevant for the pattern of expense recognition in the income statement.
This standard will be effective for the calendar year ending December 31, 2019. The Company is currently in the process of evaluating
the impact of adoption of this ASU on the financial statements.
In
March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based
Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation
arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is
effective for the Company beginning January 1, 2017. The Company will adopt the new guidance on January 1, 2017. The
adoption of this guidance is not expected to have a material impact on its consolidated results of operations and financial
position.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including
trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income
statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases
or decreases of expected credit losses that have taken place during the period. This standard will be effective for the calendar
year ending December 31, 2020. The Company is currently in the process of evaluating the impact of adoption of this ASU on the
financial statements.
In
August 2016, the FASB issued Accounting Standards Updated 2016-15, “Statement of Cash Flows - Classification of Certain
Cash Receipts and Cash Payments” (ASU 2016-15). The standard addresses eight specific cash flow issues to reduce diversity
in practice in how certain cash receipts and cash payments are presented on the Statements of Cash Flows. ASU 2016-15 is effective
for fiscal years and interim periods within those years beginning after December 15, 2017. The amendments require a retrospective
approach to adoption and early adoption is permitted, including in an interim period. The Company is currently evaluating the
potential impact of this standard.
In
January 2017, the FASB issued Accounting Standards Update 2017-01, “Business Combinations: Clarifying the Definition of
a Business” (ASU 2017-01). The standard clarifies the definition of a business and adds guidance to assist entities when
evaluating whether transactions should be accounted for as acquisitions or disposals of assets or as businesses. The standard
provides a screen to determine whether a set of assets and activities qualifies as a business or as a set of assets. ASU 2017-01
is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The amendments require
a prospective approach to adoption, and early adoption is only permitted for specific transactions. The Company is currently evaluating
the impact of this standard.
In
January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test
for Goodwill Impairment” (ASU 2017-04). The standard simplifies the subsequent measurement of goodwill by eliminating Step
2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform its goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount
of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years and interim periods within those years
beginning after December 15, 2019. The amendments require a prospective approach to adoption and early adoption is permitted for
interim or annual goodwill impairment tests. The Company is currently evaluating the impact of this standard.
NOTE
2
–
ACQUISITIONS
Multipay
S.A.
On
April 6, 2015 (the “Closing Date”), the Company and all of the shareholders (the “Multipay Shareholders”)
of Multipay S.A., a Colombian corporation (“Multipay”), closed (the “Closing”) on the Share Purchase Agreement
entered into between the parties on March 6, 2015. As a result of the Closing, the Company acquired 100% of the issued and outstanding
shares of Multipay (the “Multipay Shares”) from the Multipay Shareholders on a fully diluted basis. In consideration
for the Multipay Shares, the Company agreed to issue to the Multipay Shareholders up to an aggregate of 7,600,000 shares of common
stock of the Company. Under the terms of the initial agreement, within ten days of the Closing Date, the Company was required
to issue 7,000,000 shares of common stock. Upon the Multipay Shareholders paying certain liabilities in the approximate amount
of $370,000, the Company was required to deliver the balance of 600,000 shares of common stock to the Multipay Shareholders. In
the event the Multipay Shareholders did not pay the entire amount of certain liabilities by the 12-month anniversary of the
Closing Date, the Company would not be required to deliver the remaining shares of common stock. On May 7, 2015, the Company and
Multipay executed an amendment to the Share Purchase Agreement to 1) amend the number of shares to be issued within ten days of
the Closing Date from 7,000,000 shares to 6,101,517 shares; and 2) to amend the balance of shares to be delivered from 600,000
shares to 1,498,483 shares, upon the payment of certain liabilities by the Multipay Shareholders. The payment of these shares
was extended by six months to November 7, 2016. The 6,101,517 shares were issued on May 18, 2015. The Company recorded a contingent
liability of approximately $370,000 because of the contingency of the shares to be issued and debt to be released upon the payment
of certain liabilities by the Multipay Shareholders. See Note 14 related to Contingent Purchase Consideration.
In
accordance with ASC 805, “Business Combinations,” the Company accounted for the acquisition of Multipay as a business
combination using the acquisition method of accounting. The purchase price was allocated to specific identifiable tangible and
intangible assets at their respective fair values at the date of the acquisition.
The
following table summarizes the total fair value of consideration transferred as well as the fair values of the assets acquired
and liabilities assumed.
Common
stock consideration
|
|
$
|
860,491
|
|
Liabilities
assumed
|
|
|
909,721
|
|
Total
purchase consideration
|
|
|
1,770,212
|
|
Current
assets
|
|
|
(295,655
|
)
|
Property
and equipment
|
|
|
(20,000
|
)
|
Customer
relationships
|
|
|
(14,087
|
)
|
Intellectual
property
|
|
|
(1,273,781
|
)
|
Goodwill
|
|
$
|
166,689
|
|
Goodwill
was calculated as the excess of the consideration transferred over the fair value of the net assets recognized and
represents the expected revenue and cost synergies of the combined company, which are further described above. Goodwill
recognized as a result of the acquisition is not deductible for tax purposes. See Notes 1 and 3 for additional information
about goodwill and other intangible assets. The recognized goodwill related to MultiPay is directly attributable to its
payment gateway platform.
As
noted above, control was obtained on April 6, 2015, pursuant to the Share Purchase Agreement at which time the management of Ipsidy
took over the operations of MultiPay. Control was achieved with Ipsidy personnel in Colombia and a restructuring of the reporting
hierarchy to Ipsidy management.
FIN
Holdings, Inc.
On
February 8 2016, the Company entered into a Share Exchange Agreement with Fin Holdings, Inc., a Florida
corporation (“FIN”), and all of the FIN shareholders (the “FIN Shareholders”), pursuant to
which the Company acquired 100% of the issued and outstanding shares of FIN (the “FIN Shares”) which included FIN’s
two wholly-owned subsidiaries, ID Solutions, Inc. and Cards Plus Pty Ltd. (collectively, the “Subsidiaries”),
from the FIN Shareholders. One of the FIN shareholders was the Company’s Chief Operating Officer and owned then
approximately 1.7% of the Company’s outstanding common stock at the time of the acquisition. In consideration for the
FIN Shares, the Company issued to the FIN Shareholders an aggregate of 22,500,000 shares of common stock of the Company (the
“Purchase Shares”) with a fair value of $0.40 per share or $9,000,000. The closing occured on February 8,
2016.
In
accordance with ASC 805, “Business Combinations”, the Company accounted for the acquisition of FIN using the acquisition
method of accounting. The purchase price was allocated to specific identifiable tangible and intangible assets at their respective
fair values at the date of acquisition.
The
following table summarizes the total fair value of the consideration transferred as well as the fair values of the assets and
liabilities assumed.
Common
stock consideration
|
|
$
|
9,000,000
|
|
Liabilities
assumed
|
|
|
914,218
|
|
Total
purchase consideration
|
|
|
9,914,218
|
|
Current
assets
|
|
|
(843,317
|
)
|
Property
and equipment
|
|
|
(100,339
|
)
|
Customer
relationships
|
|
|
(1,587,159
|
)
|
Intellectual
property
|
|
|
(814,049
|
)
|
Goodwill
|
|
$
|
6,569,354
|
|
Goodwill
is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue
and benefits of the combined company. FIN was acquired on February 8, 2016 pursuant to a Share Exchange Agreement at which time
control was achieved through a restructuring of the reporting hierarchy to Ipsidy management.
The
condensed consolidated financial statements for the year ended December 31, 2016 include FIN’s results for the period from
the date of acquisition to December 31, 2016. Revenue and operating income for the year ended December 31, 2016 included in the
results was approximately $1,583,000 and net operating profit of approximately $242,000.
The
following unaudited proforma financial information gives effect to the Company’s acquisition of FIN as if the acquisition
had occurred on January 1, 2015 and had been included in the Company’s consolidated statement of operations for the years
ended 2016 and 2015.
|
|
Year
ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Proforma
net revenue
|
|
$
|
2,051,494
|
|
|
$
|
2,309,547
|
|
Proforma
net loss
|
|
|
(9,858,944
|
)
|
|
|
(36,945,398
|
)
|
The
activity for goodwill for the years ending December 31, 2016 and 2015 is as follows:
|
|
|
|
Balance, January 1, 2015
|
|
$
|
—
|
|
Acquisition of Multipay
|
|
|
166,689
|
|
Balance, December 31, 2015
|
|
|
166,689
|
|
Acquisition of FIN Holdings
|
|
|
6,569,354
|
|
Balance, December 31, 2016
|
|
$
|
6,736,043
|
|
NOTE
3 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)
The
Company’s intangible assets consist of intellectual property acquired from Multi-Pay 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 years ended
December 31, 2016 and 2015:
|
|
Customer
Relationships
|
|
|
Intellectual
Property
|
|
|
Non-Compete
|
|
|
Patents
|
|
|
|
|
Useful Lives
|
|
10
Years
|
|
|
10
Years
|
|
|
5
Years
|
|
|
Pending
|
|
|
Total
|
|
Carrying
Value at December 31, 2014
|
|
$
|
—
|
|
|
$
|
421,774
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
421,774
|
|
Additions
|
|
|
—
|
|
|
|
1,127,654
|
|
|
|
14,087
|
|
|
|
—
|
|
|
|
1,141,741
|
|
Amortization
|
|
|
—
|
|
|
|
(125,924
|
)
|
|
|
(1,057
|
)
|
|
|
—
|
|
|
|
(126,981
|
)
|
Carrying Value
at December 31, 2015
|
|
|
—
|
|
|
|
1,423,504
|
|
|
|
13,030
|
|
|
|
—
|
|
|
|
1,436,534
|
|
Additions
|
|
|
1,587,159
|
|
|
|
814,049
|
|
|
|
—
|
|
|
|
19,200
|
|
|
|
2,420,408
|
|
Amortization
|
|
|
(140,993
|
)
|
|
|
(236,695
|
)
|
|
|
(4,963
|
)
|
|
|
—
|
|
|
|
(382,651
|
)
|
Carrying
Value at December 31, 2016
|
|
$
|
1,446,166
|
|
|
$
|
2,000,858
|
|
|
$
|
8,067
|
|
|
$
|
19,200
|
|
|
$
|
3,474,291
|
|
The
following is a summary of intangible assets as of December 31, 2015:
|
|
Intellectual
Property
|
|
|
Non-Compete
|
|
|
Total
|
|
Cost
|
|
$
|
1,630,597
|
|
|
$
|
14,087
|
|
|
$
|
1,644,684
|
|
Accumulated
amortization
|
|
|
(204,947
|
)
|
|
|
(3,203
|
)
|
|
|
(208,150
|
)
|
Carrying
Value at December 31, 2015
|
|
$
|
1,425,650
|
|
|
$
|
10,884
|
|
|
$
|
1,436,534
|
|
The
following is a summary of intangible assets as of December 31, 2016:
|
|
Customer
Relationships
|
|
|
Intellectual
Property
|
|
|
Non-Compete
|
|
|
Patent
Pending
|
|
|
Total
|
|
Cost
|
|
$
|
1,587,159
|
|
|
$
|
2,444,646
|
|
|
$
|
14,087
|
|
|
$
|
19,200
|
|
|
$
|
4,065,092
|
|
Accumulated
amortization
|
|
|
(140,993
|
)
|
|
|
(443,788
|
)
|
|
|
(6,020
|
)
|
|
|
—
|
|
|
|
(590,801
|
)
|
Carrying
Value at December 31, 2016
|
|
$
|
1,446,166
|
|
|
$
|
2,000,858
|
|
|
$
|
8,067
|
|
|
$
|
19,200
|
|
|
$
|
3,474,291
|
|
Future
expected amortization of intangible assets is as follows:
Year
Ending December 31,
|
|
|
|
|
2017
|
|
|
$
|
407,706
|
|
2018
|
|
|
|
407,706
|
|
2019
|
|
|
|
407,706
|
|
2020
|
|
|
|
407,706
|
|
2021
|
|
|
|
406,793
|
|
Thereafter
|
|
|
|
1,436,674
|
|
|
|
|
$
|
3,474,291
|
|
NOTE
4 – PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following as of December 31, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
Computers
and equipment
|
|
$
|
192,928
|
|
|
$
|
88,047
|
|
Furniture
and fixtures
|
|
|
109,200
|
|
|
|
69,168
|
|
|
|
|
302,128
|
|
|
|
157,215
|
|
Less
Accumulated depreciation
|
|
|
186,446
|
|
|
|
119,440
|
|
Property
and equipment, net
|
|
$
|
115,682
|
|
|
$
|
37,775
|
|
Depreciation
expense totaled $38,843 and $20,071 for the years ended December 31, 2016 and 2015, respectively.
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following as of December 31, 2016 and December 31, 2016:
|
|
2016
|
|
|
2015
|
|
Trade
payables
|
|
$
|
341,002
|
|
|
$
|
301,455
|
|
Accrued
interest
|
|
|
600,624
|
|
|
|
96,579
|
|
Accrued
payroll and related
|
|
|
421,771
|
|
|
|
240,038
|
|
Other
|
|
|
324,503
|
|
|
|
79,428
|
|
Total
|
|
$
|
1,687,900
|
|
|
$
|
717,500
|
|
NOTE
6 - NOTES PAYABLE, Net
The
following is a summary of notes payable as of December 31, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
In
connection with the acquisition of MultiPay in 2015, the Company assumed three promissory notes. Payments of $6,300 including
principal and interest are due monthly. The interest rate at December 31, 2016 is 15.47% per annum. Total outstanding principal
and interest is due on September 16, 2017.
|
|
$
|
46,210
|
|
|
$
|
96,669
|
|
|
|
|
|
|
|
|
|
|
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. The noteholder also received 20,414 shares of the Company’s common stock with a fair value of $2,041. This amount was repaid in April 2017.
|
|
|
13,609
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
The
below Notes Payable were not initially convertible; except the accrued interest portion which was convertible into common
stock of the Company. Further, in January 2017, the below notes, which were being renegotiated, through December
31, 2016 and related accrued interest were converted into common stock of the Company (see Note 16). To the extent notes and
accrued interest were subsequently converted to equity, such notes and related accrued interest have been reclassified to
long term liabilities for financial statement presentation in accordance with US GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
August 2015, the Company issued a 12% note in the amount of $27,000. The note is secured by the assets of the Company, matured
in August 2016, and accrued interest 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 also issued warrants for the purchase of 180,000 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 $148,160, which was presented as a discount against the note and amortized into interest expense over the
term of the note. The entire principle balance of the notes was repaid in September 2016.
|
|
|
—
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
In
September 2015, the Company issued 12% notes totaling $973,000. The notes are secured by the assets of the Company,
matured in September 2016, and accrued interest is 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 $77,840, which are presented as a discount against the notes and amortized into interest expense
over the term of the notes.
|
|
|
963,000
|
|
|
|
973,000
|
|
|
|
|
|
|
|
|
|
|
In
October 2015, the Company issued 12% notes in the amount of $225,000. The notes are secured by the assets of the Company,
matured in October 2016, and accrued interest is 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 are presented as a discount against the notes and amortized into interest expense
over the term of the notes.
|
|
|
225,000
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
|
In
November 2015, the Company issued a 12% note in the amount of $25,000. The note is secured by the assets of the Company, matured
in October 2016, and accrued interest 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 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 are presented as a discount against the note and amortized into interest expense over the
term of the note.
|
|
|
25,000
|
|
|
|
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 warrants provide the holders with anti-dilution
protection that requires these features to be bifurcated and presented as derivative liabilities. See
Note 8. The Company also incurred debt issuance costs of $165,300 which are presented as a discount against the
notes and amortized into interest expense over the term of the notes.
|
|
|
850,000
|
|
|
|
850,000
|
|
|
|
|
|
|
|
|
|
|
In
January 2016, the Company issued 12% notes totaling of $100,000. These notes are secured by the assets of the Company,
matured in January 2017, and accrued interest 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 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. See Note 8.
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
In
December 2016, the Company issued promissory notes with an aggregate face value of $1,275,000 which are payable one year
from the date of issuance and bear 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 note 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 will be amortized into expense over the one-year term of the notes. 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 cost against the notes to be amortized over the term of the notes.
|
|
|
1,275,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
Principal Outstanding
|
|
$
|
3,497,819
|
|
|
$
|
2,196,669
|
|
Less
Current Maturities
|
|
|
(109,819
|
)
|
|
|
(634,069
|
)
|
|
|
|
3,388,000
|
|
|
|
1,562,600
|
|
Unamortized
Deferred Discounts
|
|
|
(159,375
|
)
|
|
|
(1,193,947
|
)
|
Unamortized
Debt Issuance Costs
|
|
|
(177,022
|
)
|
|
|
(368,653
|
)
|
Notes
Payable, Net
|
|
$
|
3,051,603
|
|
|
$
|
—
|
|
The
following is a roll-forward of the Company’s notes payable and related discounts for the years ended December 31, 2016 and
2015:
|
|
Principal
Balance
|
|
|
Debt
Issuance Costs
|
|
|
Debt
Discounts
|
|
|
Total
|
|
Balance
at December 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
New
issuances
|
|
|
2,296,669
|
|
|
|
(454,100
|
)
|
|
|
(1,489,776
|
)
|
|
|
352,793
|
|
Payments
|
|
|
(100,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(100,000
|
)
|
Amortization
|
|
|
|
|
|
|
85,447
|
|
|
|
295,829
|
|
|
|
381,276
|
|
Balance
at December 31, 2015
|
|
|
2,196,669
|
|
|
|
(368,653
|
)
|
|
|
(1,193,947
|
)
|
|
|
634,069
|
|
New
issuances
|
|
|
1,388,609
|
|
|
|
(260,719
|
)
|
|
|
(233,134
|
)
|
|
|
894,756
|
|
Payments
|
|
|
(87,459
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(87,459
|
)
|
Amortization
|
|
|
—
|
|
|
|
452,350
|
|
|
|
1,267,706
|
|
|
|
1,720,056
|
|
Balance
at December 31, 2016
|
|
$
|
3,497,819
|
|
|
$
|
(177,002
|
)
|
|
$
|
(159,375
|
)
|
|
$
|
3,161,422
|
|
NOTE
7. CONVERTIBLE NOTES PAYABLE, NET
In January 2017, Convertible Notes
along with accrued interest through January 31, 2017 were converted into shares of common stock. To the extent notes and
accrued interest were subsequently converted to equity, such notes and related accrued interest have been reclassified to
long term liabilities for financial statement presentation in accordance with US GAAP. Additionally, in February 2017, the
remaining convertible notes in the amount of $300,000 were settled (see Note 16).
Convertible
notes consisted of the following as of December 31, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
In
June 2015, the Company issued 10% convertible notes with in the aggregate principal amount of $700,000. The notes are secured
by the assets of the Company, matured in June 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 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 for anti-dilution
protection that requires these features to be bifurcated and presented as derivative liabilities. See
Note 8. The Company also incurred debt issuance costs of $124,500, which are presented as a discount against the note and
amortized into interest expense over the term of the notes. During the years ended December 31, 2016, a holder of a note elected
to convert principal and accrued interest totaling $21,222 into 704,074 shares of common stock.
|
|
$
|
680,000
|
|
|
$
|
700,000
|
|
|
|
|
|
|
|
|
|
|
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 to adjustment for anti-dilution protection that requires these features to be bifurcated and presented as derivative
liabilities. See Note 8. 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 notes.
|
|
|
166,000
|
|
|
|
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, matured 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
|
|
|
|
172,095
|
|
|
|
|
|
|
|
|
|
|
In
April 2016, the Company issued 12% convertible notes in the amount of $1,550,000. The notes are secured by the assets of the
Company, mature in October 2016, and are 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 1,033,337 shares of common stock and 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 conversion rate on the notes and exercise price of the warrants are subject to adjustment for anti-dilution
protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values. 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 notes. In August 2016, the Company entered into an agreement with the April
2016 Accredited Investors to reduce the exercise price on the embedded conversion features and warrants to $0.10 and increase
the number of warrants to 15,500,000. The August 2016 change in terms of these Convertible Notes has been determined to be a loan extinguishment in accordance with ASC 470 Debt. The reported amounts under a loan extinguishment are not significantly different than that of the Company’s reported amounts. See notes 8 and 10.
|
|
|
1,550,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
Principal Outstanding
|
|
$
|
2,568,095
|
|
|
$
|
1,038,095
|
|
Less Current Maturities
|
|
|
(250,000
|
)
|
|
|
(383,346
|
)
|
|
|
|
2,318,095
|
|
|
|
654,749
|
|
Unamortized
Deferred Discounts
|
|
|
(6,466
|
)
|
|
|
(583,049
|
)
|
Unamortized
Debt Issuance Costs
|
|
|
(66,033
|
)
|
|
|
(71,700
|
)
|
Notes
Payable, Net
|
|
$
|
2,245,596
|
|
|
$
|
—
|
|
The
following is a roll-forward of the Company’s convertible notes and related discounts for the years ended December 31, 2015
and 2016:
|
|
Principal
Balance
|
|
|
Discounts
Issuance Costs
|
|
|
Debt
Discounts
|
|
|
Total
|
|
Balance
at December 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
New
issuances
|
|
|
1,212,095
|
|
|
|
(140,700
|
)
|
|
|
(1,119,994
|
)
|
|
|
(48,599
|
)
|
Conversions
|
|
|
(174,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(174,000
|
)
|
Amortization
|
|
|
—
|
|
|
|
69,000
|
|
|
|
536,945
|
|
|
|
605,945
|
|
Balance
at December 31, 2015
|
|
|
1,038,095
|
|
|
|
(71,700
|
)
|
|
|
(583,049
|
)
|
|
|
383,346
|
|
New
issuances
|
|
|
1,550,000
|
|
|
|
(226,400
|
)
|
|
|
(636,373
|
)
|
|
|
687,227
|
|
Conversions
|
|
|
(20,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,000
|
)
|
Amortization
|
|
|
—
|
|
|
|
232,067
|
|
|
|
1,212,956
|
|
|
|
1,445,023
|
|
Balance
at December 31, 2016
|
|
$
|
2,568,095
|
|
|
$
|
(66,033
|
)
|
|
$
|
(6,466
|
)
|
|
$
|
2,495,596
|
|
NOTE
8 –DERIVATIVE LIABILITY
Due
to the potential adjustment in the conversion price associated with certain of these convertible debentures and the potential
adjustment in the exercise price of certain of the warrants, the Company has determined that certain conversion features and warrants
are considered derivative liabilities.
The
fair values of the embedded conversion features and the warrants are estimated and recorded as derivative liabilities on
the date of issuance, offset by a discount on the related convertible note payable up to the face amount of the note, with
any excess fair value recorded as derivative expense on the date of issuance. The Company’s convertible debt is
convertible into common stock at conversion rates that vary based on certain triggering events. Accordingly, the conversion feature is required to be presented at fair value on the dates of
issuance, settlement, and at each reporting date. The Company also has warrants to purchase common stock outstanding that
provide for adjustments to the exercise prices upon the future dilutive issuances. The Company utilizes Monte Carlo
simulations and stochastic forecasting to estimate the fair value of the warrants and conversion options. The ranges of
assumptions utilized in estimating the fair value of the warrants and conversion options on the dates of issuance,
settlement, and as of and for the years ended December 31, 2016 and 2015, are as follows:
|
|
2016
|
|
2015
|
Expected
Volatility
|
|
19%
to 87%
|
|
58%
to 83%
|
Expected
Term
|
|
0.0
to 5.0 Years
|
|
0.0
to 5.0 Years
|
Risk
Free Rate
|
|
0.036%
to 1.93%
|
|
0.02%
to 1.8%
|
Dividend
Rate
|
|
0.00%
|
|
0.00%
|
Triggering Capital raise probabilities
|
|
50% to 75%
|
|
25% to 75%
|
A
summary of derivative activity for the years ended December 31, 2016 and 2015 is as follows:
|
|
|
|
Balance
at January 1, 2015
|
|
$
|
—
|
|
New
issuances
|
|
|
5,337,711
|
1
|
Conversion
feature reclassified to equity upon conversion of related notes payable.
|
|
|
(2,706,167
|
)
|
Change
in fair value
|
|
|
22,814,101
|
|
Balance
at December 31, 2015
|
|
$
|
25,445,645
|
|
New
issuances
|
|
|
648,836
|
|
Conversion
feature reclassified to equity upon conversion of related note payable and repayments
|
|
|
(692,850
|
)
|
Change
in fair value
|
|
|
(7,345,000
|
)
|
Balance
at December 31, 2016
|
|
$
|
18,056,631
|
|
1
The
fair value of derivative liabilities on the dates of issuance is recorded as a discount up to the face amount of the note. During
the year ended December 31, 2015, the fair value of derivative liabilities on the dates of issuance exceeded the face value of
the related debt by $3,832,920, which was recorded as derivative expense on the date of issuance and is included in loss on derivatives
on the accompanying consolidated statement of operations.
As discussed above (Notes 6 and 7) certain notes payable, convertible notes payable and related interest
were converted into equity in January 2017. Accordingly, the associated derivative liability related to these notes payable, convertible
notes payable and related interest is classified as long-term liabilities at December 31, 2016 in accordance with US GAAP.
NOTE
9 – RELATED PARTY TRANSACTIONS
2016
t
ransactions
Acquisition
of FIN
As
discussed in Note 2, the Company acquired all of the issued and outstanding shares of FIN in February 2016. The Company’s
Chief Operating Officer and a 1.7% shareholder in the Company was also a significant shareholder in FIN at the time of the acquisition.
Outstanding
Indebtedness
As
of December 31, 2016, the Company has an outstanding indebtedness due to a member of the Company’s Board of Directors. Total
amounts due to this related party amounted to $190,000 at December 31, 2016.
Also,
on December 31, 2016, the Company has an outstanding note payable to an officer and member of the Company’s Board of
Directors. Total amount due was $13,609 at December 31, 2016. This note was repaid in April 2017. The related party
also received 20,414 shares of Common Stock with a fair value of $2,041.
Other
In
connection with the Company’s ability to secure third-party financing, the Company paid Network 1 Financial Securities,
Inc. (“Network 1”), a registered broker-dealer, a cash fee and reimbursement of expenses totaling of $364,000 and
issued Network 1 4,450,000 shares of common stock of the Company in accordance with its agreement during the year
ended December 31, 2016. 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 an 8% commission of the total amount of proceeds
from any financing it secures for the Company in addition to 8% in shares of common stock.
On
August 10, 2016, the Company entered into a Letter Agreement (the “Amendment”) with Parity Labs, LLC
(“Parity”), a company
principally owned by Mr. Beck and his
family,
to amend the compensation section of that certain Advisory Agreement previously entered into between the
Company and Parity on November 16, 2015 for the provision of strategic advisory services, to provide for the issuance to
Parity of a common stock 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 vested in entirety when Mr. Beck became Chief
Executive Officer of Ipsidy Inc. on January 31, 2017. T
he
Company’s headquarters are
located in Long Beach, New
York where the Company currently leases private offices.
The facilities are managed
by
Bridgeworks LLC,
(“Bridgeworks”)
a
company providing office facilities to emerging companies, principally owned by Mr. Beck and his family. The arrangement
with Bridgeworks LLC
allows the Company to use offices and conference rooms for a fixed, monthly fee $4,500. Since
2014, Mr. Beck has served as managing member of Parity, and since 2015, as Chairman, a Member and co-founder of Bridgeworks.
During 2016, the Company paid parity and Bridgeworks $147,078 and $6,750 for strategic advisory services and the
use of facilities.
2015
t
ransactions
Revenues.
During the year ended December 31, 2015, the Company entered into a consulting and management agreement with ID Solutions,
Inc., which is a related party. Certain members of the Company’s Board of Directors are also members of the Board for ID
Solutions, Inc. Total revenues for the year ending December 31, 2015 amounted to $500,000.
Notes
Payable.
On September 4, 2015, the Company entered into a Securities Purchase Agreement with a director of the Company,
pursuant to which the director advanced $100,000 into the Company in consideration of a Secured Promissory Note (the “Director
Note”) and a common stock purchase warrant to acquire an aggregate of 250,000 shares of common stock exercisable for a period
of five years at an exercise price of $0.40. The Company repaid the $100,000 by the end of September 2015 (Note 6).
Convertible
Notes Payable.
As of December 31, 2015, the Company had outstanding amounts due via convertible notes payable to certain
members of the Company’s Board of Directors. Total amounts due to these related parties amounted to $172,095 at December
31, 2015. Refer to Note 7 for terms of this convertible notes payable.
Other.
In connection with the Company’s ability to secure third-party financing, the Company paid Network 1 Financial Securities,
Inc. (“Network 1”), a registered broker-dealer, cash fees and reimbursement of expenses totaling $294,400, and issued
Network 9,946,667 shares of common stock of the Company in accordance with its agreement. A member of the Company’s Board
of Directors previously maintained a partnership with a key principal of Network 1. In addition to the cash fee paid, the agreement
calls for Network 1 to receive an 8% commission of the total amount of proceeds from any financing it secures for the Company.
The proceeds are paid directly to Network 1 prior to the Company receiving the loans proceeds and amounted to $296,400 for the
year ending December 31, 2015. These costs incurred to secure third party financing are included as deferred debt issuance costs
and are presented within convertible notes payable, net and notes payable, net, in the accompanying consolidated balance sheets.
NOTE
10
–
STOCKHOLDERS’ DEFICIT
On
August 24, 2015, the Company amended its certificate of incorporation to increase the number of its authorized shares of common
stock from 300,000,000 shares to 500,000,000 shares. The Company had 234,704,655 and 187,854,139 shares issued and outstanding
as of December 31, 2016 and 2015, respectively. In addition, the Company authorized 20,000,000 shares of preferred stock.
Common
Stock
2015
Common Stock Transactions
|
●
|
In
May 2015, in connection with the acquisition of MultiPay and in consideration of the
purchased assets, the Company issued 6,101,517 shares of common stock valued at $860,491
(Note 2).
|
|
●
|
During
the period from September 2015 through December 2015, holders of convertible notes payable
elected to convert an aggregate $181,205 principal and interest into 6,040,166 shares
of the Company’s common stock.
|
|
●
|
During
the year ended December 31, 2015, the Company issued 12,174,167 shares of common stock
for debt issuance costs, consulting, legal, and other services valued at an aggregate of $856,150.
|
2016
Common Stock Transactions
|
●
|
During
the year ended December 31, 2016, the Company issued 704,074 shares of common stock upon
the conversion of principal and interest on convertible debt totaling $21,222.
|
|
●
|
During
the year ended December 31, 2016, the Company issued 4,450,000 shares of common stock
for broker dealer services. The fair value of the shares based on publicly quoted trading prices was $377,938.
|
|
●
|
During
the year ended December 31, 2016, the Company issued 969,654 shares of common stock as
consideration for services. The fair value of the shares, totaling $311,103, was estimated
based on the publicly quoted trading price and recorded as expense.
|
|
●
|
During
the year ended December 31, 2016, the Company issued 2,966,251 shares of common stock
in connection with the issuance of certain debt instruments. The fair value of the shares
was estimated based on publicly quoted trading prices and $222,815 was allocated to
debt issuance costs recorded against the carrying value of the related debt and amortized
into interest expense over the terms of the respective debt agreements.
|
|
●
|
During
the year ended December 31, 2016, the Company issued 22,500,000 shares of common stock
as consideration for the acquisition of FIN Holdings valued at $9,000,000. The fair value of the shares was estimated based
on the publicly traded shares. See
Note
2.
|
|
●
|
During
the year ended December 31, 2016, the Company issued 260,537 shares of common stock in
partial settlement of a contingent liability of $59,681 related to its acquisition of
MultiPay. See Note 10.
|
|
●
|
On
August 10, 2016 through August 26, 2016, the Company entered into and closed Subscription
Agreements with several accredited investors (the “August 2016 Accredited Investors”)
pursuant to which the August 2016 Accredited Investors purchased an aggregate of 25,000,000
shares of the Company’s common stock (the “2016 Subscription Shares”) for an
aggregate purchase price of $1,250,000. In order to reduce the dilution as a result of
this private offering, certain shareholders of the Company including the Chief Executive
Officer, directors and others agreed to return to the Company 10,000,000 shares of common
stock in the aggregate for cancellation. In connection with the sale of shares, the Company
issued 2,000,000 shares of common stock and paid $120,242 of cash for equity issuance
costs.
|
Warrants
|
●
|
During
the year ended December 31, 2015, in connection with the issuance of convertible debt
and promissory notes, the Company issued warrants to acquire 35,171,744 shares of common
stock each with a five-year term. These warrants were issued at prices ranging $0.05
per share to $0.48 cents per share.
|
|
●
|
During
the year ended December 31, 2016, in connection with the issuance of convertible debt
and promissory notes, the Company issued warrants to acquire 15,708,332 shares of common
stock each with a five-year term. Of these warrants, 208,332 were issued with an exercise
price of $0.48 per share and 15,500,000 were issued with an exercise price of $0.25 per
share (subsequently repriced in August 2016 to $0.10 per share). Additionally, the Company issued warrants to a supplier to acquire
258,621
shares of common stock at an exercise price of $0.58 per share.
|
The
following is a summary of the Company’s warrant activity for the years ended December 31, 2016 and 2015:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Life
|
|
Outstanding
at December 31, 2014
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
Granted
|
|
|
|
35,171,744
|
|
|
$
|
0.10
|
|
|
|
|
|
Outstanding
at December 31, 2015
|
|
|
|
35,171,744
|
|
|
$
|
0.10
|
|
|
|
3.6
Years
|
|
Granted
|
|
|
|
15,966,953
|
|
|
$
|
0.11
|
|
|
|
4.3
Years
|
|
Outstanding
at December 31, 2016
|
|
|
|
51,138,697
|
|
|
$
|
0.11
|
|
|
|
3.8
Years
|
|
Stock
Options
The
IPSIDY Equity Compensation Plan established on November 21, 2014 (the “2014 Plan”) authorized 25,000,000
shares of common stock to be issued under the 2014 plan. The 2014 Plan contains an “evergreen formula” pursuant to
which the number of shares of common stock available for issuance under the 2014 Plan will automatically increase on the
first trading day of January each calendar year during the term of the 2014 Plan, beginning with calendar year 2015, by an
amount equal to 2% of the total number of shares of common stock outstanding on the last trading day in December of the
immediately preceding calendar year, up to a maximum annual increase of 250,000 shares of common stock. The purpose of the
2014 Plan is to enable the Company to offer its employees, officers, directors and consultants equity-based compensation. The
2014 Plan is administered by our board of directors. Plan options may either be:
|
•
|
incentive
stock options (ISOs),
|
|
•
|
non-qualified
options (NSOs),
|
|
•
|
awards
of our common stock, or
|
|
•
|
rights
to make direct purchases of our common stock which may be subject to certain restrictions.
|
The Company has also granted equity awards that have not
been approved by security holders.
2015
Stock Option Issuances
|
●
|
In
May 2015, the Company granted to two officers, options to acquire 7,000,000 shares of
common stock, of which 3,500,000 are exercisable at an exercise price of $0.10 per share
over a five-year term vesting over eight quarters, and 3,500,000 are exercisable at an
exercise price of $0.0001 per share over a five-year term vesting over eight quarters.
|
|
●
|
In
September 2015, the Company granted to employees, five-year options to acquire 37,300,000
shares of common stock, of which 2,400,000 are exercisable at an exercise price of $0.15
per share vesting over twelve quarters, 1,000,000 are exercisable at an exercise price
of $0.10 per share vesting on the date of grant, 3,500,000 are exercisable at an exercise
price of $0.10 per share vesting over eight quarters, 400,000 are exercisable at an exercise
price of $0.15 per share vesting over four quarters, and 30,000,000 are exercisable at
an exercise price of $0.45 per share vesting over four quarters.
|
|
●
|
In
October 2015, the Company granted to an employee, options to acquire 3,500,000 shares
of common stock, of which 1,000,000 are exercisable at an exercise price of $0.15 per
share over a five-year term vesting on the date of grant, and 2,500,000 are exercisable
at an exercise price of $0.15 per share over a five-year term vesting over twelve quarters
|
2016
Stock Option Issuances
|
●
|
During
the three months ended March 31, 2016, the Company granted to employees, options to acquire
2,500,000 shares of common stock, of which 1,000,000 are exercisable at an exercise price
of $0.45 per share vesting over two years, 1,000,000 are exercisable at an exercise price
of $0.40 per share vesting on the date of grant and 500,000 are exercisable at an exercise
price of $0.10 per share vesting quarterly over two years. The options have a 5 year
term.
|
|
●
|
On
August 10, 2016, the Company issued to several of its employees and consultants stock
options (the “Plan Options”) under its Equity Compensation Plan to acquire
an aggregate of 17,000,000 shares (including 6,500,000 performance based shares) of common
stock of the Company exercisable at $0.05 per share. The Plan Options contain vesting
periods of 12 quarters commencing on October 1, 2016 as well as various vesting based
on achieving certain performance milestones. The Plan Options are exercisable for a period
of ten years.
|
|
●
|
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. The Parity Option vested in entirety upon Mr. Beck becoming Chief Executive Officer
of Ipsidy, Inc. in January 2017. Mr. Beck is a manager of Parity.
|
|
●
|
Additionally,
the Company amended existing stock options to acquire 50,300,000 shares of common stock by extending the term from five years to ten years.
The additional compensation cost related to the extension of the term was approximately $516,000.
|
|
●
|
In
October 2016, options to acquire 875,000 shares (500,000 performance based shares) of
common stock for an exercise price of $0.10 per share were forfeited.
|
The
Company determined the grant date fair value of the options granted during the years ended December 31, 2016 and 2015 using the
Black Scholes Method and the following assumptions:
|
|
2016
|
|
2015
|
Expected
Volatility
|
|
79.0%
to 93.0%
|
|
85.0%
to 93.0%
|
Expected
Term
|
|
2.5
– 5.9 Years
|
|
2.5
to 4.2 Years
|
Risk
Free Rate
|
|
1.16%
to 1.49%
|
|
1.40%
to 1.51%
|
Dividend
Rate
|
|
0.00%
|
|
0.00%
|
Activity
related to stock options for the years ended December 31, 2015 and 2016 is summarized as follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Contractual Term (Yrs.)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of January1, 2015
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
|
47,800,000
|
|
|
$
|
0.32
|
|
|
|
8.7
|
|
|
$
|
7,698,650
|
|
Outstanding
as of December 31, 2015
|
|
|
|
47,800,000
|
|
|
$
|
0.32
|
|
|
|
8.7
|
|
|
$
|
7,698,650
|
|
Granted
|
|
|
|
40,000,000
|
|
|
$
|
0.07
|
|
|
|
9.1
|
|
|
$
|
7,475,000
|
|
Forfeited
|
|
|
|
(875,000
|
)
|
|
$
|
0.07
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding
as of December 31, 2016
|
|
|
|
86,925,000
|
|
|
$
|
0.21
|
|
|
|
9.5
|
|
|
$
|
10,023,400
|
|
Exercisable
as of December 31, 2016
|
|
|
|
55,416,666
|
|
|
$
|
0.29
|
|
|
|
8.9
|
|
|
$
|
4,277,237
|
|
The
following table summarizes stock option information as of December 31, 2016:
Exercise
Prices
|
|
|
Outstanding
|
|
|
Weighted
Average Contractual Life
|
|
|
Exercisable
|
|
$
|
0.0001
|
|
|
|
3,500,000
|
|
|
|
8.8
Years
|
|
|
|
2,625,000
|
|
$
|
0.05
|
|
|
|
36,500,000
|
|
|
|
9.6
Years
|
|
|
|
11,708,333
|
|
$
|
0.10
|
|
|
|
8,125,000
|
|
|
|
9.1
Years
|
|
|
|
6,375,000
|
|
$
|
0.15
|
|
|
|
6,300,000
|
|
|
|
8.7
Years
|
|
|
|
3,233,333
|
|
$
|
0.25
|
|
|
|
500,000
|
|
|
|
9.3
Years
|
|
|
|
100,000
|
|
$
|
0.40
|
|
|
|
1,000,000
|
|
|
|
9.2
Years
|
|
|
|
1,000,000
|
|
$
|
0.45
|
|
|
|
31,000,000
|
|
|
|
8.8
Years
|
|
|
|
30,375,000
|
|
|
Total
|
|
|
|
86,925,000
|
|
|
|
8.9
Years
|
|
|
|
55,416,666
|
|
As
of December 31, 2016, there was approximately $1,628,000 and $2,822,000 of unrecognized compensation costs related to
employee stock options and non-employee stock options outstanding which will be recognized in 2017 through 2019. The company will recognize forfeitures as they occur. Stock compensation expense for the years
ended December 31, 2016 and December 31, 2015 was approximately $8,648,000 and $6,320,000, respectively.
NOTE
11 – DIRECT FINANCING 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 commenced in May 2016 when the kiosks were installed and
operational. The term of the rental contract is ten years at an approximate monthly rental of $11,900. The lessee 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. As such, the lease was accounted for as a direct financing lease.
The
Company has recorded the transaction at its 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 month and initial direct costs are not considered significant. The transaction
resulted in incremental revenue in the year ended December 31, 2016 of approximately $52,500.
The
equipment under the capital lease is 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:
Year
Ending December 31,
|
|
|
|
|
2017
|
|
|
$
|
122,145
|
|
2018
|
|
|
|
122,145
|
|
2019
|
|
|
|
122,145
|
|
2020
|
|
|
|
122,145
|
|
2021
|
|
|
|
122,145
|
|
Thereafter
|
|
|
|
529,323
|
|
|
|
|
|
1,140,048
|
|
Less
deferred revenue
|
|
|
|
(421,043
|
)
|
Net
investment in lease
|
|
|
$
|
719,005
|
|
NOTE
12
–
INCOME TAXES
The
Company accounts for income taxes in accordance with ASC 740 which prescribes a recognition threshold and measurement process
for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also
provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition.
There were no unrecognized tax benefits as of December 31, 2016 and 2015.
The
Company’s loss before income taxes from US and Foreign sources for the years ended December 31, 2016, are as follows:
|
|
2016
|
|
|
2015
|
|
United
States
|
|
$
|
(8,701,796
|
)
|
|
$
|
(35,853,893
|
)
|
Outside
United States
|
|
|
(1,146,661
|
)
|
|
|
(825,276
|
)
|
Loss
before income taxes
|
|
$
|
(9,848,457
|
)
|
|
$
|
(36,679,169
|
)
|
The
following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company’s effective
tax rate for financial statement purposes for the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
U.S.
Federal Statutory Tax Rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State
taxes
|
|
|
3.63
|
%
|
|
|
3.63
|
%
|
Permanent
items
|
|
|
35.71
|
%
|
|
|
(30.32
|
)%
|
Change
in valuation allowance
|
|
|
(73.34
|
)%
|
|
|
(7.31
|
)%
|
Totals
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2016 and 2015 are
summarized as follows:
|
|
2016
|
|
|
2015
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$
|
2,669,107
|
|
|
$
|
1,086,609
|
|
Debt
issuance costs
|
|
|
1,882
|
|
|
|
—
|
|
Charitable
Contributions
|
|
|
290,528
|
|
|
|
—
|
|
Value
of stock options and stock compensation
|
|
|
5,655,810
|
|
|
|
2,378,259
|
|
Total
deferred tax assets
|
|
|
8,617,327
|
|
|
|
3,464,868
|
|
Less:
Valuation allowance
|
|
|
(8,463,727
|
)
|
|
|
(2,621,446
|
)
|
Net
deferred tax assets
|
|
|
153,600
|
|
|
|
843,422
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
Fixed
and intangible assets
|
|
|
(1,625
|
)
|
|
|
(9,034
|
)
|
Debt
issuance costs
|
|
|
(91,451
|
)
|
|
|
(165,704
|
)
|
Debt
discounts
|
|
|
(60,524
|
)
|
|
|
(668,684
|
)
|
Total
deferred tax liabilities
|
|
|
(153,600
|
)
|
|
|
(843,422
|
)
|
Total
deferred tax assets and liabilities, net
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2016, the Company has available federal net operating loss carry forward of $7.1 million and state net
operating loss carry forwards of $7.1 million, the most significant of
which expire from 2020 until 2036.
Additionally,
the Company has income tax net operating loss carryforwards related to our international operations which have an
indefinite life.
The
Company assess the recoverability of its net operating loss carry forwards and other deferred tax assets and records a valuation
allowance to the extent recoverability does not satisfy the “more likely than not” recognition criteria. The Company
continues to maintain the valuation allowance until sufficient positive evidence exists to support full or partial reversal. As
of December 31, 2016 the Company had a valuation allowance totaling $8.1 million against its deferred tax assets, net of deferred
tax liabilities, due to insufficient positive evidence, primarily consisting of losses within the taxing jurisdictions that have
tax attributes and deferred tax assets.
NOTE 13 – FAIR VALUE MEASUREMENTS
The fair value of an asset or liability
is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes
a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value and defines three levels of inputs that may be used to measure fair value as previously defined in the summary of accounting
policies and procedures.
The Company’s financial liabilities
as of December 31 that are measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (included in current liabilities)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,056,631
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (included in current liabilities)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,445,645
|
|
We classified the derivative liability
as Level 3 due to the lack of relevant observable market data over fair value inputs such as the probability-weighting of the various
scenarios in the arrangement. The change in the derivative activity for the years ended December 31, 2016 and 2015 is included in Note 8 to the consolidated financial statements.
The Company’s non-financial
assets and liabilities that were measured at fair value during the years ended December 31 were as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
2016
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
—
|
|
|
|
100,339
|
|
|
|
—
|
|
Current assets
|
|
|
311,867
|
|
|
|
—
|
|
|
|
—
|
|
Accounts paybles and other current liabilities
|
|
|
914,218
|
|
|
|
—
|
|
|
|
—
|
|
Inventory
|
|
|
112,408
|
|
|
|
—
|
|
|
|
—
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
2,401,208
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
6,569,354
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
—
|
|
|
|
20,000
|
|
|
|
—
|
|
Current assets
|
|
|
295,655
|
|
|
|
—
|
|
|
|
—
|
|
Accounts paybles and other current liabilities
|
|
|
909,721
|
|
|
|
—
|
|
|
|
—
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
1,287,868
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
166,689
|
|
NOTE
14
–
COMMITMENTS AND CONTINGENCIES
Contingent
Purchase Consideration
The
Company has recorded a contingent liability of approximately $370,000 related to the acquisition of Multipay because of the contingency
of the shares to be issued and debt to be released upon the payment of certain liabilities by the Multipay Shareholders. During
the year ended December 31, 2016, the Company issued 260,537 shares of common stock in settlement of approximately $60,000 of
the existing obligation, paid certain existing obligations and the remaining balance of approximately $49,000 as of December 31,
2016 is included in accounts payable and accrued expenses.
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.
Executive
Compensation
As
of December 31, 2016, the Company had employment agreements with certain key members of the management team providing base salary
amounts and provisions for stock compensation, cash bonuses and other benefits to be granted at the discretion of the Board of
Directors.
As
of January 31, 2017, the Company made certain changes to the management team and its Board of Directors and entered into Executive
Retention Agreements with four members of the management team. The Executive Retention Agreements include provisions for base
salary, bonus amounts upon meeting certain performance milestones, severance benefits for involuntary termination from a change
in control or other events as defined in their respective agreements. Additionally, the vesting of certain awards could be accelerated
upon a change in control (as defined).
Operating
Leases
On
December 19, 2014, the Company entered in a twelve-month lease for office facilities in Florida at a monthly rate of $3,000, with
an option to extend the lease for another twelve months for $3,300 per month for 2016. On December 28, 2016, the parties extended
the lease for an additional twelve months through December 31, 2017 at a monthly rent of $3,400 per month. The Company provided
termination notice to the landlord and will cease paying rent at this location effective August 31, 2017.
The
Company entered into a new office lease in Plantation, Florida beginning July 1, 2017 for approximately 2,100 square feet. Monthly
rent will approximate $2,600 per month for thirty-seven months with a 3% increase on each subsequent annual anniversary. The company
will be responsible for their respective share of building expenses.
Additionally,
the Company leased office space during 2016 in Long Beach, New York at a monthly rent of $2,250. Beginning in February 2017, the
monthly rent was increased to $4,500 as additional office space was required. The agreement is on a month to month basis.
In
addition, the Company is party to operating leases for its office location and warehouse in Colombia. The Company
through April 30, 2017, paid $4,400 a month for its office location. In April 2017, MultiPay S.A.S. entered into a new lease
beginning April 22, 2017 for two years to replace it current offices. The new lease cost is approximately $8,500 per month
with an inflation adjustment after one year. The lease will be extended for one additional year unless written notice to the
contrary is provided at least six months in advance The Company also rents a warehouse at a rate of approximately $2,700 a
month per a one year lease that expires on August 31, 2017. Furthermore, the Company leases an apartment at approximately
$2,100 a month and the current lease term is June 6, 2016 to June 5, 2017. The lease has automatic renewals for successive one year periods
.
The
Company also leases space for its operation in South Africa. The current lease expires on June 30, 2017 and the approximate monthly
rent is $6,500 and is currently reviewing lease options. Additionally, Cards Plus entered into an equipment lease for approximately
$3,600 per month for five years.
Rent
expense for the years ended 2016 and 2015 was approximately $230,000 and $72,000 respectively.
Other
The Company
has agreed to issue 1% of ID G
LOBAL
LATAM to Slabb, Inc. in early 2017.
The Company has entered into a software service and license agreement for $400,000 of which $100,000
was paid in 2016 and the balance of $300,000 will be remitted in 2017 upon meeting certain milestones.
NOTE
15 – SEGMENT INFORMATION
General
information
The
segment and geographic information provided in the table below is being reported consistent with the Company’s method of
internal reporting. Operating segments are defined as components of an enterprise for which separate financial information is
available and which is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate
resources and in assessing performance. The CODM regularly reviews net revenue and gross profit by geographic regions. The Company
products and services operate in two reportable segments; identity management and payment processing.
Information
about revenue, profit/loss and assets
The
CODM evaluates performance and allocates resources based on net revenue and operating results of the geographic region as the
current operations of each geography are either primarily identity management or payment processing. Identity management revenue
is generated in North America and Africa and payment processing is earned in South America which are the three geographic regions
of the Company. We have included the lease income in payment processing are the leases are related to unattended ticking kiosks.
Long
lived assets are in North America, South America and Africa. Most assets are intangible assets recorded from the
acquisition of Multipay (South America) in 2015 and FIN Holdings (North America and Africa) in 2016. Assets for North
America, South America and Africa amounted to approximately $8.0 million, $2.1 million and $2.1 million respectively of which
$4.2 million, $.2 million and $1.7 million related to goodwill as of December 31, 2016.
Analysis
of revenue by segment and geographic region and reconciliation to consolidated revenue, gross profit, and net loss are provided
below. The Company has included in the schedule below an allocation of corporate overhead based on management’s estimate
of resource requirements.
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
450,781
|
|
|
$
|
500,000
|
|
South
America
|
|
|
348,335
|
|
|
|
235,364
|
|
Africa
|
|
|
1,130,822
|
|
|
|
—
|
|
|
|
|
1,929,938
|
|
|
|
735,364
|
|
|
|
|
|
|
|
|
|
|
Identity
Management
|
|
|
1,581,603
|
|
|
|
500,000
|
|
Payment
Processing
|
|
|
348,335
|
|
|
|
235,364
|
|
|
|
|
1,929,938
|
|
|
|
735,364
|
|
|
|
|
|
|
|
|
|
|
Loss From
Operations
|
|
|
|
|
|
|
|
|
North
America
|
|
|
(2,973,328
|
)
|
|
|
(6,048,447
|
)
|
South
America
|
|
|
(7,426,341
|
)
|
|
|
(2,847,173
|
)
|
Africa
|
|
|
(3,167,804
|
)
|
|
|
—
|
|
|
|
|
(13,567,473
|
)
|
|
|
(8,895,620
|
)
|
|
|
|
|
|
|
|
|
|
Identity
Management
|
|
|
(6,141,132
|
)
|
|
|
(6,048,447
|
)
|
Payment
Processing
|
|
|
(7,426,341
|
)
|
|
|
(2,847,173
|
)
|
|
|
|
(13,567,473
|
)
|
|
|
(8,895,620
|
)
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative liability
|
|
|
7,345,000
|
|
|
|
(26,647,021
|
)
|
Interest
expense
|
|
|
(3,625,984
|
)
|
|
|
(1,136,528
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(9,848,457
|
)
|
|
|
(36,679,169
|
)
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
2,946
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(9,851,403
|
)
|
|
$
|
(36,679,169
|
)
|
NOTE
16 – SUBSEQUENT EVENTS
On
December 30, 2016, ID Global LATAM S.A.S. (“IDG LATAM”), a wholly owned subsidiary of the Company, entered into
a Contract for the Provision of Cash Collection Services (the “Contract”) with Recaudo Bogota S.A.S.
(“RB”), a Colombian company, pursuant to which the Company agreed to supply, maintain and provide platform
services for 740 unattended payment collection and fare ticketing kiosks, in consideration of approximately $30 million
dollars (excluding VAT) payable over the ten year period of the Contract. Pursuant to the contract, the Company has agreed to
issue 1% of LATAM to Slabb, Inc. in 2017. Also, pursuant to the contract IDG LATAM is required to obtain
a performance bond from a financial institution in the amount of $6 million dollars. In addition, IDG LATAM will need to
obtain financing for the cost of the equipment to be supplied but has not as of the date hereof entered into a definitive
agreement for such financing nor has the required performance bond been obtained. The parties are currently re-negotiating
the terms of the Contract including a potential phased delivery and a reduction in the number of kiosks. If the negotiation
is formalized in a definitive agreement, this would potentially result in a reduction in the consideration paid over the
ten-year period of the Contract and reduce the required performance bond.
During
January and February 2017, the Company entered into
Conversion Agreements with several accredited
investors (the “Investors”) pursuant to which each Investor 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 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.
On
January 31, 2017, the Company closed a Securities Purchase Agreement with an accredited investor pursuant to which the
accredited investor invested $3,000,000 into the Company in consideration of a Senior Unsecured Note and an aggregate of
4,500,000 shares of Common Stock. In connection with this private offering, the Company paid Network 1 Financial
Securities, Inc., a registered broker-dealer, a cash fee of $120,000 and issued 1,020,000 shares of common stock of the
Company.
On
January 31, 2017, the Company engaged Philip D. Beck as Chief Executive Officer, President and Chairman of the Board of Directors
and Stuart P. Stoller as Chief Financial Officer. In addition, Andras Vago, David Jones and Charles Albanese resigned as directors
of the Company and Mr. Albanese also resigned as Chief Financial Officer. Thomas Szoke resigned as Chief Executive Officer and
was engaged as Chief Technology Officer. Douglas Solomon resigned as Chief Operating Officer and was engaged as Executive Director,
Government Relations and Enterprise Security.
In
connection with the engagement of Philip D. Beck and Stuart P. Stoller,
the
Company granted Mr. Beck and Mr. Stoller, stock options to acquire 15 million shares and 5 million 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 Mr. Beck and Mr. Stoller to purchase
15 million shares and 5 million shares, respectively, of common stock at a per share price of $0.0001, which shares of common
stock vest upon achieving a performance threshold.
Effective
February 1, 2017, the Company amended its certificate of incorporation to change its legal name to “Ipsidy Inc.” from
ID Global Solutions Corporation. The name change was effected pursuant to Section 242 of the Delaware Corporation Law (the “DGCL”).
Under the DGCL, the amendment to the Company’s certificate of incorporation to effect the name change did not require stockholder
approval. The name change does not affect the rights of the Company’s security holders. There were no other changes to the
Company’s incorporation in connection with the name change.
On
February 22, 2017, the Company entered an Agreement and Release 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 as well as the right to certain pledged shares (2,500,000 common
shares) in exchange for $300,000 in cash.
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 $3,170,000 in the first quarter of 2017, received $400,000 in the second quarter of 2017
and the remaining $430,000 is expected to be received 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.