NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION
In
the opinion of the Company, the accompanying unaudited condensed consolidated financial statements are prepared in
accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we
considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote
disclosures normally included (US GAAP) in the consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2016. The results of operations for the three and six months ended June 30, 2017 are not necessarily
indicative of the results to be expected for future periods or the full year.
The
condensed consolidated financial statements include the accounts of Ipsidy Inc. and its wholly-owned subsidiaries MultiPay S.A.S.,
ID Global LATAM S.A.S., IDGS S.A.S., ID Solutions, Inc., Innovation in Motion Inc., FIN Holdings Inc., and Cards Plus Pty Ltd.
(the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Net
Loss per Common Share
The
Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share”. ASC 260 requires presentation
of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using
the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive. For the three and six months ended June 30, 2017, and the three months ended June 30, 2016, all potentially
diluted shares were excluded from the calculation of diluted EPS because their impact was anti-dilutive. The following table illustrates
the computation of basic and diluted EPS for the six months ended June 30, 2016:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to stockholders
|
|
$
|
6,859,819
|
|
|
|
207,538,833
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
—
|
|
|
|
10,714,189
|
|
|
|
|
|
Warrants
|
|
|
—
|
|
|
|
25,634,957
|
|
|
|
|
|
Convertible Debt
|
|
|
(17,712,426
|
)
|
|
|
31,465,287
|
|
|
|
|
|
Dilute EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to stockholders plus assumed conversions
|
|
$
|
(10,852,597
|
)
|
|
|
275,353,266
|
|
|
$
|
(0.04
|
)
|
Going
concern
As
of June 30, 2017, the Company had an accumulated deficit of approximately $61.4 million. For the six months ended June 30, 2017,
the Company earned revenue of approximately $1.1 million and incurred a loss from operations of approximately $7.5 million.
The
reports of our independent registered public accounting firms on our consolidated financial statements for the years ended December
31, 2016 and 2015 contained an explanatory paragraph regarding our ability to continue as a going concern based upon our net
losses and accumulated deficits.
These
condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will
continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a
going concern is dependent upon financial support from the Company’s current shareholders, the ability of the Company
to obtain additional equity financing to continue operations, the Company’s ability to generate sufficient cash flows
from operations, successfully locating and negotiating with other business entities for potential acquisition and /or
acquiring new clients to generate revenues and cash flows. As there can be no assurance that the Company will be able
to achieve positive cash flows (become profitable) and raise sufficient capital to maintain operations there is substantial
doubt about the Company’s ability to continue as a going concern.
These
condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to
continue as a going concern.
Inventories
Inventories
of kiosks held by IDGS S.A.S are stated at the lower of cost (using the first-in, first-out method) or market. The kiosks
will provide electronic ticketing for transit systems. Inventory of plastic/ID cards, digital printing material, which are
held by Cards Plus Pty Ltd., are at the lower of cost (using the average method) or market. The Plastic/ID cards and digital
printing material are used to provide plastic loyal ID and other types of cards. Inventories as of June 30, 2017 consist of
cards inventory and kiosks that have not been placed into service and inventory as of December 31,2016 consist solely of
cards inventory. The Company, in 2017, acquired approximately $707,000 of additional kiosks and components.
Leases
All
leases are classified at the inception as direct finance leases or operating leases based on whether the lease transfers substantially
all the risks and rewards of ownership.
Leases
that transfer to the lessee substantially all of the risks and rewards incidental to ownership of the asset are classified as
direct finance leases.
Other
Assets
The
increase in other assets is principally due to its continuing investments in its technology platform prior to the respective assets
being placed into service.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability
is probable. Revenue is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted
to governmental authorities.
Revenue
from the sale of unique secure credential products and solutions to customers is recorded at the completion of the project
unless the solution benefits to the end user in which additional resources or services are required to be
provided.
Revenue
from club-based services arrangements that allow for the use of hosted software product that are provided on a consumption
basis (for example, the number of transactions processed over a period of time) is recognized commensurate with the customer
utilization of such resources. Generally, the contract calls for a minimum number of transactions to be charged by the
Company monthly. Accordingly, the Company records the minimum transactional fee based on the passage of a month’s time
as revenues. Amounts in excess of the monthly minimum, are charged to customers based on the actual number of
transactions.
Consulting
services revenue is recognized as services are rendered, generally based on the negotiated hourly rate in the consulting arrangement
and the number of hours worked during the period. Consulting revenue for fixed price services arrangements is recognized as services
are provided.
Revenue
related to direct financing leases is recognized over the term of the lease using the effective interest method.
Income
Taxes
The
Company accounts for income taxes under Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 740 “Income Taxes.” Under the asset and liability method of FASB ASC
740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance
is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets
through future operations. For the three and six months ended June 30, 2017 and 2016, there is no provision for income tax as
the Company had a tax loss for United States and foreign activities and all of the Company’s carryforwards are reserved
for. The Company’s gain or loss on derivative liability during the six months ending June 30, 2017 and 2016 is not subject
to tax.
Recent
Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2017-04 –
Simplifying the Test for Goodwill Impairment
, which modified the goodwill
impairment test and required an entity to write down the carrying value of goodwill up to the amount by which carrying amount
of a reporting unit exceeded its fair value. We have not early adopted this ASU and are currently evaluating the impact on
our financial statements.
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480), Derivatives and Hedging (Topic 815)
. The amendments in Part I of this Update change the classification analysis
of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether
certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer
precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The
amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability
at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments,
the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of
the down round feature when it is triggered. The effect is treated as a dividend and as a reduction of income available
to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features
are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt -Debt
with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update
recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in
the Codification, to a scope exception. We are currently reviewing the potential impact to the financial
statements.
NOTE
2 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)
The
Company’s intangible assets consist of intellectual property acquired from MultiPay and FIN and are amortized over their
estimated useful lives as indicated below. The following is a summary of activity related to intangible assets for the six months
ended June 30, 2017:
|
|
Customer Relationships
|
|
|
Intellectual Property
|
|
|
Non-Compete
|
|
|
Patents
Pending
|
|
|
|
|
Useful Lives
|
|
10 Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
n/a
|
|
|
Total
|
|
Carrying Value at December 31, 2016
|
|
$
|
1,446,166
|
|
|
$
|
2,000,858
|
|
|
$
|
8,067
|
|
|
$
|
19,200
|
|
|
$
|
3,474,291
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,132
|
|
|
|
18,132
|
|
Amortization
|
|
|
(67,953
|
)
|
|
|
(141,251
|
)
|
|
|
(1,410
|
)
|
|
|
—
|
|
|
|
(210,614
|
)
|
Carrying Value at June 30, 2017
|
|
$
|
1,378,213
|
|
|
$
|
1,859,607
|
|
|
$
|
6,657
|
|
|
$
|
37,332
|
|
|
$
|
3,281,809
|
|
The
following is a summary of intangible assets as of June 30, 2017:
|
|
Customer Relationships
|
|
|
Intellectual Property
|
|
|
Non-Compete
|
|
|
Patent Pending
|
|
|
Total
|
|
Cost
|
|
$
|
1,587,159
|
|
|
$
|
2,444,646
|
|
|
$
|
14,087
|
|
|
$
|
37,332
|
|
|
$
|
4,083,224
|
|
Accumulated amortization
|
|
|
(208,946
|
)
|
|
|
(585,039
|
)
|
|
|
(7,430
|
)
|
|
|
—
|
|
|
|
(801,415
|
)
|
Carrying Value at June 30, 2017
|
|
$
|
1,378,213
|
|
|
$
|
1,859,607
|
|
|
$
|
6,657
|
|
|
$
|
37,332
|
|
|
$
|
3,281,809
|
|
Future
expected amortization of intangible assets is as follows for the six-month period remaining in 2017 and the calender years ending
from 2018-2022 and thereafter:
|
|
|
|
|
2017
|
|
|
|
222,017
|
|
2018
|
|
|
|
423,203
|
|
2019
|
|
|
|
423,203
|
|
2020
|
|
|
|
423,203
|
|
2021
|
|
|
|
423,203
|
|
2022
|
|
|
|
423,203
|
|
Thereafter
|
|
|
|
943,777
|
|
|
|
|
$
|
3,281,809
|
|
NOTE
3 – PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following as of June 30, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Computers and equipment
|
|
$
|
197,491
|
|
|
$
|
192,928
|
|
Equipment under capital lease (see note 12)
|
|
|
163,407
|
|
|
|
—
|
|
Furniture and fixtures
|
|
|
109,200
|
|
|
|
109,200
|
|
|
|
|
470,098
|
|
|
$
|
302,128
|
|
Less Accumulated depreciation
|
|
|
218,735
|
|
|
|
186,446
|
|
Property and equipment, net
|
|
$
|
251,363
|
|
|
$
|
115,682
|
|
Depreciation
expense totaled $35,920 and $24,029 for the Six Months ended June 30, 2017 and 2016, respectively.
See
Note 11 for equipment amounting to $163,407 acquired pursuant to a capital lease.
NOTE
4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following as of June 30, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Trade payables
|
|
$
|
428,858
|
|
|
$
|
341,002
|
|
Accrued interest
|
|
|
125,000
|
|
|
|
600,624
|
|
Accrued payroll and related
|
|
|
710,848
|
|
|
|
421,771
|
|
Other accrued expenses
|
|
|
338,218
|
|
|
|
324,503
|
|
Total
|
|
$
|
1,602,924
|
|
|
$
|
1,687,900
|
|
NOTE
5 - NOTES PAYABLE, NET
On
January 31, 2017, the Company entered into
Conversion Agreements with several
accredited investors (the “Investors”) pursuant to which substantially all Investors agreed to convert all
amounts of notes payable and convertible notes payable (Note 6) due and payable to such persons including interest under the
terms of their respective financing or loan agreement as of January 31, 2017 into shares of Company common stock at $0.10 per
share. Certain Investors that had a conversion price less than $0.10 converted at such applicable conversion price. The
Conversion Agreements resulted in the conversion of notes and convertible notes amounting to approximately $6,331,000 into
84,822,006 shares of Company common stock with a fair value of approximately $21,610,000. The Investors also agreed to waive
any existing rights with respect to certain anti-dilution rights contained in their Stock Purchase Warrants. The Company
agreed to reduce the exercise of all outstanding Stock Purchase Warrants acquired as part of a financing or loan that had
an exercise price in excess of $0.10 per share to $0.10 per share.
As
a result of the above agreements associated with the conversion Agreements, the Company recorded a loss on the conversion of
debt of approximately $6.0 million (including the effect of the elimination of related conversion feature derivative
liabilities – see Note 7), a loss on the modification of warrants of approximately $0.2 million, and a loss on the
modification of the derivatives of approximately $0.3 million.
On
February 22, 2017, the Company entered into an Agreement and Release the (“February 22, 2017 Agreement”) with
a holder of certain debentures that will represent final and full payment of all amounts owed under these debentures
which include debt with a face value of $300,000, accrued interest of approximately $31,000, cancellation of 3,600,000
warrants previously accounted for as derivative liabilities as well as certain pledged shares (2,500,000 shares) in exchange
for $300,000 in cash which was paid in May 2017. As a result of the February 22, 2017 Agreement, the Company recorded a gain
on the extinguishment of notes payable of approximately $2.8 million.
See
notes 6 and 7.
The
following is a summary of notes payable as of June 30, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
In connection with the acquisition of MultiPay in 2015, the Company assumed three promissory notes. At June 30, 2017, the remaining outstanding note carried an outstanding balance of $15,220. Payments of $6,300 including principal and interest are due monthly. The interest rate is 15.47% per annum. Total outstanding principal and interest is due on September 16, 2017.
|
|
$
|
15,220
|
|
|
$
|
46,210
|
|
|
|
|
|
|
|
|
|
|
The
below section of notes payable were all converted to common stock at $0.10 per share. in connection with the January 2017, conversion
agreements described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2015, the Company issued 12% notes totaling $973,000. The notes were secured by the assets of the Company, matured in September 2016, and accrued interest was convertible into common stock of the Company at a rate of $0.10 per share. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 6,486,667 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years. The Company also incurred debt issuance costs of $77,480, which were presented as a discount against the notes and amortized into interest expense over the terms of the notes.
|
|
|
—
|
|
|
|
963,000
|
|
In October 2015, the Company issued 12% notes in the amount of $225,000. The notes were secured by the assets of the Company, matured in October 2016, and accrued interest was convertible into common stock of the Company at a rate of $0.10 per share. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 1,500,000 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years. The Company also incurred debt issuance costs of $36,400, which were presented as a discount against the note and amortized into interest expense over the terms of the notes.
|
|
|
—
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
|
In November 2015, the Company issued a 12% note in the amount of $25,000. The note was secured by the assets of the Company, matured in October 2016, and accrued interest was convertible into common stock of the Company at a rate of $0.10 per share. In connection with the issuance of this note, the Company also issued warrants for the purchase of 166,667 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five years. The Company also incurred debt issuance costs of $94,400, which was presented as a discount against the note and amortized into interest expense over the term of the note
|
|
|
—
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
In December 2015, the Company issued 12% notes totaling $850,000. The notes are secured by the assets of the Company and matured in December 2016. Any unpaid accrued interest on the note is convertible into common stock of the Company at a rate of $0.48 per share. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 1,770,834 shares of the Company’s common stock at an exercise price of $0.48 per share for a period of five years. The conversion rate on the accrued interest and the exercise price on the warrants provide the holders with anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values. See Note 8.
|
|
|
—
|
|
|
|
850,000
|
|
|
|
|
|
|
|
|
|
|
In
January 2016, the Company issued 12% notes in the amount of $100,000. The note was secured by the assets of the Company, matured
in January 2017, and accrued interest was convertible into common stock of the Company at a rate of $0.48 per share. In connection
with the issuance of these notes, the Company also issued warrants for the purchase of 208,332 shares of the Company’s common
stock at an exercise price of $0.48 per share for a period of five years. The conversion rate on the accrued interest and the
warrants provide the holders with anti-dilution protection that requires these features to be bifurcated and presented as derivative
liabilities at their fair values. See Note 8.
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
In December 2016, the Company issued promissory notes with an aggregate face value of $1,275,000 which were payable one year from the date of issuance and accrued interest of 10% per annum for the initial six months of the term of the Notes and 15% per annum for the remaining six months of the term of the Notes. The notes holders also received 1,912,500 shares of common stock, with a fair value of $191,250. The Company allocated the proceeds to the notes and common stock based on their relative fair values, resulting in a discount against the notes for the common stock of $166,304, which was amortized into expense through the date of conversion. In connection with the issuance of the notes and common stock, the Company also incurred debt issuance costs of $212,427, of which $184,719 was recorded as debt issuance costs against the notes to be amortized over the one-year terms of the notes.
|
|
|
—
|
|
|
|
1,275,000
|
|
|
|
|
|
|
|
|
|
|
In November 2016,, the Company issued a 12% promissory note due in January 2017 to an officer and principal stockholder in the amount of $13,609. In connection with the issuance of this note, the company also issued warrants for the purchase of 1,146,667 shares of the Company’s common stock at an exercise price of $0.15 per share. This loan was repaid in April 2017. The note holder also received 20,414, shares of the Company’s common stock with a fair value of $2,041.
|
|
|
—
|
|
|
|
13,609
|
|
|
|
|
|
|
|
|
|
|
In January 2017, the Company issued a Senior Unsecured Note with a face value of $3,000,000, payable two years form issuance, along with an aggregate of 4,500,000 shares of Common Stock, with a fair value of $1,147,500. The Company allocated the proceeds to the common stock based on their relative fair value and recorded a discount of $391,304 to be amortized into interest expense over the two-year term of the note. The Company also paid debt issuance costs consisting of a cash fee of $120,000 and 1,020,000 shares of common stock of the Company with a fair value of $306,000, of which $208,696 was recorded as debt issuance costs to be amortized into interest expense over the two-year term of the note.
|
|
|
3,000,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Principal Outstanding
|
|
$
|
3,015,220
|
|
|
$
|
3,497,819
|
|
Unamortized Deferred Debt Discounts
|
|
|
(666,375
|
)
|
|
|
(159,375
|
)
|
Unamortized Deferred Debt Issuance Costs
|
|
|
(246,042
|
)
|
|
|
(177,022
|
)
|
Notes Payable, Net
|
|
$
|
2,102,803
|
|
|
$
|
3,161,422
|
|
The
following is a roll-forward of the Company’s notes payable and related discounts for the six Months ended June 30, 2017:
|
|
Principal
Balance
|
|
|
Debt Issuance Costs
|
|
|
Debt
Discounts
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
3,497,819
|
|
|
$
|
(177,022
|
)
|
|
$
|
(159,375
|
)
|
|
$
|
3,161,422
|
|
New issuances
|
|
|
3,000,000
|
|
|
|
(310,790
|
)
|
|
|
(841,727
|
)
|
|
|
1,847,483
|
|
Payments
|
|
|
(44,599
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,599
|
)
|
Conversions
|
|
|
(3,438,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,438,000
|
)
|
Amortization
|
|
|
—
|
|
|
|
241,770
|
|
|
|
334,727
|
|
|
|
576,497
|
|
Balance at June 30, 2017
|
|
$
|
3,015,220
|
|
|
$
|
(246,042
|
)
|
|
$
|
(666,375
|
)
|
|
$
|
2,102,803
|
|
Future
maturities of notes payable are as follows for the six-month period remaining in 2017 and the calender
years ending from 2018-2019:
2017
|
|
|
$
|
15,220
|
|
2018
|
|
|
|
—
|
|
2019
|
|
|
|
3,000,000
|
|
Net investment in lease
|
|
|
$
|
3,015,220
|
|
NOTE
6 - CONVERTIBLE NOTES PAYABLE, NET
See
Note 5 for transactions associated with the reduction in convertible notes payable on January 31, 2017.
Convertible
notes consisted of the following as of June 30, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
The
below section of convertible notes payable were all converted to common stock at $0.10 per share in connection with the January
2017, conversion agreements described above.
In June 2015, the Company issued 10% convertible notes in the
aggregate principal amount of $700,000. The notes were secured by the assets of the Company, matured in June 2016, and were
convertible into common stock of the Company at a conversion rate of $0.03 per share, subject to adjustment. In connection
with the issuance of these notes, the Company also issued warrants for the purchase of 15,400,000 shares of the Company’s
common stock at an exercise price of $0.05 per share for a period of five years. The conversion rate on the notes and exercise
price of the warrants are subject to adjustment to anti-dilution protection that required these features to be bifurcated
and presented as derivative liabilities at their fair values. See Note 7. The Company also incurred debt issuance costs of
$124,000, which were presented as a discount against the note and amortized into interest expense over the term of the note.
|
|
|
—
|
|
|
$
|
680,000
|
|
|
|
|
|
|
|
|
|
|
In
July 2015, the Company issued 10% convertible notes with in the aggregate principal amount of $190,000. The notes
are secured by the assets of the Company, matured in July 2016, and are convertible into common stock of the Company at a
conversion rate of $0.03 per share, subject to adjustment. In connection with the issuance of these notes, the Company
also issued warrants for the purchase of 4,180,000 shares of the Company’s common stock at an exercise price of $0.05
per share for a period of five years. The conversion rate on the notes and exercise price of the warrants are subject
for adjustment to anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities
at their fair values. See Note 7. The Company also incurred debt issuance costs of $16,200, which are presented
as a discount against the note and amortized into interest expense over the term of the note
|
|
|
—
|
|
|
|
166,000
|
|
|
|
|
|
|
|
|
|
|
In February
2016, the Company re-issued a 12% convertible note in the amount of $172,095. The note is secured by the assets of the
Company, originally maturing in September 2016, and is convertible into common stock of the Company at a rate of $0.10
per share. In connection with the issuance of this note, the Company issued warrants for the purchase of 1,146,667 shares of
the Company’s common stock at an exercise price of $0.15 per share for a period of five years.
|
|
|
—
|
|
|
|
172,095
|
|
|
|
|
|
|
|
|
|
|
In
April 2016, the Company issued 12% convertible notes in the amount of $1,550,000. The note is secured by the assets of the
Company, matures in October 2016, and is convertible into common stock of the Company at a rate of $0.25 per share. In
connection with the issuance of these notes, the Company also issued warrants for the purchase of 6,200,000 shares of the
Company’s common stock at an exercise price of $0.25 per share for a period of five years. The Company also
issued 1,033,337 shares of common stock to the noteholders. The Company also incurred debt issuance costs of $226,400, which
are presented as a discount against the note and amortized into interest expense over the term of the note. In
August 2016, the Company entered into an agreement with the April 2016 Investors to reduce the exercise price on the embedded
conversion feature and warrants to $0.10 and increase the number of warrants to 15,500,000. The August 2016 change
in the terms of these convertible notes has been determined to be a debt extinguishment in accordance with ASC 470. The
reported amounts under the debt extinguishment are not significantly different than that of the Company’s reported amounts.
|
|
|
—
|
|
|
|
1,550,000
|
|
|
|
|
|
|
|
|
|
|
Total
Principal Outstanding
|
|
$
|
—
|
|
|
$
|
2,568,095
|
|
Unamortized
Discounts – Derivatives
|
|
|
—
|
|
|
|
(6,466
|
)
|
Unamortized
Discounts – Debt issuance costs
|
|
|
—
|
|
|
|
(66,033
|
)
|
Convertible
Notes, Net
|
|
$
|
—
|
|
|
$
|
2,495,59
6
|
|
The
following is a roll-forward of the Company’s convertible notes and related discounts for the six months ended June 30, 2017:
|
|
|
Principal
Balance
|
|
|
Debt Issuance Costs
|
|
|
Debt
Discounts
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
|
$
|
2,568,095
|
|
|
$
|
(66,033
|
)
|
|
$
|
(6,466
|
)
|
|
$
|
2,495,596
|
|
Conversions
|
|
|
|
(2,568,095
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,568,095
|
)
|
Amortization
|
|
|
|
—
|
|
|
|
66,033
|
|
|
|
6,466
|
|
|
|
72,499
|
|
Balance at June 30, 2017
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE
7 –DERIVATIVE LIABILITY
Due
to the potential adjustment in the conversion price associated with certain of the convertible debentures and the potential adjustment
in the exercise price of certain of the warrants, the Company had determined that certain conversion features and warrants are
derivative liabilities.
As
described in Note 5 above, the Company on January 31, 2017 entered into
Conversion
Agreements with Investors pursuant to which each Investors agreed to convert all amounts of debt accrued and payable to such
persons including interest under the terms of their respective financing or loan agreement into shares of Company common
stock at $0.10 per share. Certain Investors that had a conversion price less than $0.10 converted at such applicable
conversion price. The investors at the time of conversion also agreed to waive any existing rights with respect to certain
price protection and anti-dilution rights contained in their Stock Purchase Warrants.
Additionally,
on February 22, 2017, the Company entered into an Agreement and Release with a holder of certain debentures that will represent
final and full payment of all amounts owed under such which include debt with a face value of $300,000, accrued interest of approximately
$31,000, cancellation of 3,600,000 warrants (previously accounted for as derivative liabilities) as well as certain
pledged shares (2,500,000 shares) in exchange for $300,000 in cash. These debentures also had potential price adjustments on these
debentures that have also been eliminated.
Therefore,
as a result of the conversion and repayment of the outstanding indebtedness and related accrued interest as well as
the elimination of anti-dilution rights of Stock Purchase Warrants, the Company no longer holds liabilities with derivatives
requiring fair value as of June 30, 2017.
A
summary of derivative activity for the six months ended June 30, 2017 is as follows:
Balance
at December 31, 2016
|
|
$
|
18,056,631
|
|
Modification of derivatives
|
|
|
319,770
|
|
Cancellation of warrants previously accounted
for as derivative liabilities and elimination of derivative conversion features resulting from conversion of related party
debt to equity
|
|
|
(11,213,573
|
)
|
Reclassification of derivatives to equity upon removal of price protection in warrants
|
|
|
(7,614,974
|
)
|
Change in fair value
|
|
|
452,146
|
|
Balance at June 30, 2017
|
|
$
|
—
|
|
NOTE
8 – RELATED PARTY TRANSACTIONS
Amount
Due Officer and Director
In
November 2016, the Company issued a note payable for $13,609 to one if its Board of Directors and was outstanding at December
31, 2016. The note was repaid in April 2017. In November 2016, the related party also received 20,414 shares of the Company’s
common stock with a fair value of $2,041.
Convertible
Notes Payable
On
January 31, 2017, the Company entered into Conversion Agreements with Mr. Selzer, a director of the Company and Vista Associates,
a family partnership to which Mr. Selzer converted $150,000 in debt plus interest into 1,753,500 shares of common stock and $40,000
of debt plus interest into 1,537,778 shares of common stock.
Purchase
of Common Stock
In
March 2017, Mr. Selzer purchased an additional 500,000 shares of common stock of the latest offering as described in Note 9.
Other
In
connection with securing third-party financing, the Company incurred fees to Network 1 Financial Securities, Inc. (“Network
1”), a registered broker-dealer. The Network 1 fees comprise of $360,000 payable in cash and the issuance of 2,200,000 shares
of common stock of the Company. A member of the Company’s Board of Directors previously maintained a partnership with a
key principal of Network 1. The agreement calls for Network 1 to receive commission, in cash and stock based on the total amount
of proceeds from any financing it secures for the Company.
The
Company leases it Corporate headquarters from Bridgeworks LLC, (“Bridgeworks”), a company providing office facilities
to emerging companies, principally owned by Mr. Beck and his family. Mr. Beck is Chairman, Chief Executive Officer and President
of the Company. During the first six months of 2017, the Company paid Bridgeworks $27,000.
The
Company entered into a consulting agreement with Graham Beck, a son of Mr. Beck for digital marketing services beginning April
1, 2017 at a rate of $2,500 per month with an expected end date of September 2017. During the first six months of 2017, the expense
associated with Graham Beck was $7,500.
NOTE
9
–
STOCKHOLDER’S EQUITY (DEFICIT)
Common
Stock
As
described in Note 5, on January 31, 2017, in connection with the issuance of a $3,000,000 Senior Unsecured Note, an aggregate
of 4,500,000 shares of Common Stock was issued to the Investor and the Company issued Network 1 Financial Securities, Inc., a
registered broker-dealer, 1,200,000 shares of common stock of the Company in conjunction with its services.
As
described in Notes 5 and 6, on January 31, 2017, the Company entered into
Conversion Agreements
with Investors pursuant to which each Investors agreed to convert all amounts of debt accrued and payable to such person including
interest under the terms of their respective financing or loan agreement as of January 31, 2017 into shares of Company common
stock at $0.10 per shares. The Conversion Agreements resulted in the issuance of an approximately of 84,822,000 shares of Company
common stock.
On
March 22, 2017, Ipsidy Inc. (the “Company”) entered into Subscription Agreements with several accredited investors
(the "March 2017 Accredited Investors") pursuant to which the March 2017 Accredited Investors agreed to purchase an
aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4,000,000. The Company
has received proceeds of $3,570,000 through June 30, 2017. An individual March 2017 Accredited Investor has agreed to fund $430,000
by the balance of the offering by the end of the third quarter of 2017. In connection with this private offering, the Company
paid Network 1 Financial Securities, Inc. (“Network”), a registered broker-dealer, a cash fee of $240,000 and agreed
to issue Network 1,000,000 shares of common stock of the Company upon increasing its authorized shares of common stock.
Additionally,
the Company cancelled certificates for 2,500,000 shares of common stock acquired in conjunction with the purchase of certain debentures.
During
the quarter ended June 30, 2017, the Company issued approximately 487,000 shares of common stock as consideration for services.
The fair value of the shares, totaling approximately $63,000 was estimated based on the publicly quoted trading price and recorded
as expense.
Warrants
As
more fully described above the Company agreed to reduce the exercise of all outstanding Stock Purchase Warrants acquired as part
of a financing or loan that had an exercise price in excess of $0.10 per share to $0.10 per share.
Furthermore,
as more fully described above in Note 5, the Company as part of a transaction cancelled 3.6 million warrants.
The
following is a summary of the Company’s warrant activity for the six months ended June 30, 2017:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Life
|
|
Outstanding at December 31, 2016
|
|
|
|
51,138,697
|
|
|
$
|
0.11
|
|
|
|
3.8 Years
|
|
Cancelled
|
|
|
|
(3,600,000
|
)
|
|
$
|
0.08
|
|
|
|
3.9 Years
|
|
Outstanding at June 30, 2017
|
|
|
|
47,538,697
|
|
|
$
|
0.08
|
|
|
|
3.2 Years
|
|
Stock
Options
On
August 10, 2016, the Company entered into an amended agreement (the “Amendment”) with Parity Labs, LLC (“Parity”)
to amend the compensation section of an existing Advisory Agreement previously entered into between the Company and Parity on
November 16, 2015 for the provision of strategic advisory services. The Amendment calls for the Company to issue to Parity the
option (the "Parity Option") to acquire 20,000,000 shares of common stock of the Company, exercisable at $0.05 per share
for a period of ten years. The Parity Option vests as to 10,000,000 shares of common stock immediately and then in 12 equal tranches
of 833,333 shares per month commencing on September 1, 2016. Parity options vested in entirety when Mr. Beck became Chief Executive
Officer (“CEO”) of Ipsidy, Inc. in January 2017. Mr. Beck is the manager of Parity.
In
connection with the engagement of the CEO and Chief Financial Officer (“CFO”) on January 31, 2017,
the
Company granted the CEO and CFO stock options to acquire 15,000,000 shares and 5,000,000 shares of common stock of the
Company respectively at an exercise price of $0.10 per share for a period of ten years. Further, upon the Company
being legally entitled to do so, the Company has agreed to enter a Restricted Stock Purchase Agreements with the CEO and CFO
in which they will be provided 15,000,000 shares and 5,000,000 shares of common stock at a per share price of $0.0001, which
shares of common stock vest upon achieving a performance threshold which has not been achieved at June 30, 2017.
The
Company determined the grant date fair value of the options granted during the Six Months ended June 30, 2017 using the Black
Scholes Method and the following assumptions:
Expected
Volatility – 85%
Expected
Term – 5.0 Years
Risk
Free Rate – 1.92%
Dividend
Rate – 0.00%
Activity
related to stock options for the Six Months ended June 30, 2017 is summarized as follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Contractual Term (Yrs.)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of December 31, 2016
|
|
|
|
86,925,000
|
|
|
$
|
0.21
|
|
|
|
9.5
|
|
|
$
|
10,023,400
|
|
Granted
|
|
|
|
20,000,000
|
|
|
$
|
0.10
|
|
|
|
9.8
|
|
|
$
|
—
|
|
Forfeitures
|
|
|
|
(875,000
|
)
|
|
$
|
0.10
|
|
|
|
8.8
|
|
|
$
|
—
|
|
Outstanding
as of June 30, 2017
|
|
|
|
106,050,000
|
|
|
$
|
0.19
|
|
|
|
9.1
|
|
|
$
|
9,215,000
|
|
Exercisable
as of June 30, 2017
|
|
|
|
76,183,334
|
|
|
$
|
0.16
|
|
|
|
8.7
|
|
|
$
|
5,322,000
|
|
The
following table summarizes stock option information as of June 30, 2017:
Exercise
Prices
|
|
|
Outstanding
|
|
|
Weighted
Average Contractual Life
|
|
|
Exercisable
|
|
$
|
0.0001
|
|
|
|
3,500,000
|
|
|
|
8.25 Years
|
|
|
|
3,500,000
|
|
$
|
0.05
|
|
|
|
36,500,000
|
|
|
|
9.11 Yeas
|
|
|
|
22,625,000
|
|
$
|
0.10
|
|
|
|
27,250,000
|
|
|
|
9.30 Years
|
|
|
|
14,083,335
|
|
$
|
0.15
|
|
|
|
6,300,000
|
|
|
|
8.10 Years
|
|
|
|
4,049,999
|
|
$
|
0.25
|
|
|
|
500,000
|
|
|
|
8.75 Years
|
|
|
|
300,000
|
|
$
|
0.40
|
|
|
|
1,000,000
|
|
|
|
8.67 Years
|
|
|
|
1,000,000
|
|
$
|
0.45
|
|
|
|
31,000,000
|
|
|
|
8.25 Years
|
|
|
|
30,625,000
|
|
|
Total
|
|
|
|
106,050,000
|
|
|
|
9.04 Years
|
|
|
|
76,183,334
|
|
Stock
option expense for the three and six months ended June 30, 2017 was approximately $973,000 and $4,267,000, respectively, and for
the corresponding periods ended June 30, 2016 was $2,037,000 and $6,152,000, respectively. The quarter and six months ended June
30, 2017, included approximately $93,000 and $1,767,000 of non-employee stock compensation. As of June 30, 2017, there was approximately
$4,804,000 of unrecognized compensation costs related to stock options outstanding which will be expensed through 2020.
NOTE
10 – DIRECT FINACING LEASE
In
September 2015, the Company and an entity in Colombia entered into a rental contract for the rental of 78 kiosks to provide cash
collection and fare services at transportation stations. The lease term began in May 2016 when the kiosk were installed and operational
and when the lease commenced. The term of the rental contract is ten years at an approximate monthly rental of $11,900. The lease
has the option at the end of the lease term to purchase each unit for approximately $40. The term of the lease approximates the
expected economic life of the kiosks. The lease was accounted for as a direct financing lease.
The
Company has recorded the transaction as it’s net investment in the lease and will receive monthly payments of $11,856 before estimated
executory costs, or $142,272, annually, to reduce investment in the lease and record income associated with the related amount
due. Executory costs are estimated to be $1,677 monthly and initial direct costs are not considered significant. The transaction
resulted in incremental revenue in the six-months ended June 30, 2017 of approximately $38,000.
The
equipment is subject to direct lease valued at approximately $748,000. At the inception of the lease term, the aggregate
minimum future lease payments to be received is approximately $1,422,000 before executory cost. Unearned income is recorded
at the inception of this lease was approximately $474,000 and will be recorded over the term of the lease using the effective
income rate method. Future minimum lease payments to be received under the lease for the next five years and thereafter are
as follows for the six-month period remaining in 2017 and the calender
years ending from 2018-2022 and thereafter:
|
|
|
|
2017
|
|
$
|
61,073
|
|
2018
|
|
|
122,145
|
|
2019
|
|
|
122,145
|
|
2020
|
|
|
122,145
|
|
2021
|
|
|
122,145
|
|
2022
|
|
|
122,145
|
|
Thereafter
|
|
|
529,322
|
|
Sub-total
|
|
|
1,078,975
|
|
Less deferred revenue
|
|
|
(383,064
|
)
|
Net investment in lease
|
|
$
|
695,911
|
|
NOTE
11 – LEASE OBLIGATION PAYABLE
The
Company entered into a lease in March 2017 for the rental of its printer for its secured plastic and credential card products
business under an arrangement that is classified as a capital lease. The leased equipment is amortized on a straight line basis
over its lease term including the last payment (61 payments) which would transfer ownership to the Company. Total amortization
related to the lease equipment as of June 30, 2017 is $2,679. The following is a schedule showing the future minimum leas payments
under capital lease by year and the present value of the minimum lease payments as of June 30, 2017. The interest rate related
to the lease obligation is 12% and the maturity date is March 31, 2022. Future cash payment related to this capital lease are
as follow for the six-month period remaining in 2017 and the calender years ending from 2018-2022 and thereafter.
|
|
|
|
2017
|
|
$
|
21,547
|
|
2018
|
|
|
43,096
|
|
2019
|
|
|
43,096
|
|
2020
|
|
|
43,096
|
|
2021
|
|
|
43,096
|
|
2022
|
|
|
10,777
|
|
Total minimum lease payments
|
|
|
204,708
|
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
49,248
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
155,460
|
|
NOTE
12
–
COMMITMENTS AND CONTINGENCIES
Legal
Matters
From
time to time, claims are made against the Company in the ordinary course of business, which could result in litigation. Claims
and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages,
fines, penalties or injunctions prohibiting the Company from selling one or more products or engaging in other activities. The
occurrence of an unfavorable outcome in any specific period could have a material adverse effect on the Company’s results
of operations for that period or future periods. The Company is not presently a party to any pending or threatened legal proceedings.