NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION
In
the opinion of Management, 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
in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) 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, 2017. The results of
operations for the three and nine months ended September 30, 2018 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, IDGS S.A.S., ID Solutions, Inc., FIN Holdings Inc., Ipsidy Enterprises Limited, and Cards Plus Pty Ltd. (collectively,
the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Going
concern
As of September 30, 2018, the Company had an accumulated deficit of approximately $73.8 million. For the
nine months ended September 30, 2018, the Company’s revenue aggregated approximately $3.1 million and the Company incurred
a loss from operations of approximately $6.7 million.
The
reports of our independent registered public accounting firm on our consolidated financial statements for the years ended December
31, 2017 and 2016 contained an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses.
These
unaudited 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 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 and /or acquiring new
clients to generate revenues and cash flows.
There
is no assurance that the Company will ever be profitable or be able to secure funding or generate sufficient revenues to sustain
operations. As such, there is substantial doubt about the Company’s ability to continue as a going concern. These unaudited
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.
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 three months ended September 30, 2018 and 2017 because their effect was antidilutive:
Security
|
|
2018
|
|
|
2017
|
|
Stock Options
|
|
|
105,950,000
|
|
|
|
104,500,000
|
|
Warrants
|
|
|
46,201,477
|
|
|
|
47,538,697
|
|
Total
|
|
|
152,151,477
|
|
|
|
151,588,697
|
|
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 September 30, 2018 and December 31, 2017
consist of kiosks that were not placed into service which are held for sale at September 30, 2018 and cards inventory. As of September
30, 2018, the Company fully reserved the value of the kiosks down to estimated net realizable value of $0.
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 the risks and rewards incidental to ownership of the asset are classified as direct
finance leases.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 supersedes the revenue recognition requirements
in ASU Topic 605, Revenue Recognition (“Topic 605”), and requires the recognition of revenue when promised goods or
services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled
to in exchange for those goods or services. ASU 2014-09 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts
with Customers, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period
of amortization of such costs. Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new standard.” The
new standard was adopted by the Company in our fiscal year beginning January 1, 2018.
The
two permitted transition methods under the new standard are the full retrospective method, in which the new standard would be
applied to each prior reporting period presented and the cumulative effect of applying the new standard would be recognized at
the earliest period shown, or the modified retrospective method, in which the cumulative effect of applying the new standard would
be recognized at the date of initial application. Based on our assessment, the impact of the new standard on our operations in
prior periods is not significant. The following is the Company’s revenue recognition policy determined by revenue stream
for its significant revenue generating activities through September 30, 2018.
Cards
Plus - The Company recognizes revenue for the design and production of cards when products are shipped or services have been performed
due to the short term nature of the contracts.
Payment
Processing – The Company recognizes revenue for variable fees generated for payment processing solutions that are earned
on a usage fee over time based on monthly transaction volumes or on a monthly flat fee rate. Additionally, the Company also sells
certain equipment from time to time for which revenue is recognized upon delivery to the customer.
Identity
Solutions Software – The Company recognizes revenue based on the identified performance obligations over
the performance period for fixed consideration and for variable fees generated that are earned on a usage fee based over
time based on monthly transaction volumes or on a monthly flat fee rate. The Company had a deferred revenue contract
liability of approximately $438,000 and $123,000 as of September 30, 2018 and December 31, 2017, respectively, for certain
revenue that will be earned in future periods. The $123,000 of deferred revenue contract liability as of December 31, 2017,
was earned in the nine months ended September 30, 2018. The deferred revenue relates to the service period of support
services for two customers. As of September 30, 2018 the majority of the deferred revenue contract liability will be
recognized over the next two quarters. We have allocated the selling price in the contract to one customer which has multiple
performance obligations based on the contract selling price that we believe represents a fair market price for the service
rendered.
In
2018, the Company introduced its new transaction platform and products as well as its pay for performance plan for both internal
and external salesforce, that is based on a percentage of the benefit derived by the Company. For the three and nine months ended
September 30, 2018, no revenues associated with these new platforms were recognized or required to be recognized as the services
have not yet commenced.
The
requirements under the new standard may impact future revenue and expenses recognition. One impact could be the accounting related
to the capitalization and deferral of incremental commission and other costs of obtaining new contracts. We will defer direct
and incremental commission as well as costs to obtain a contract and amortize those costs over the term of the related contract.
As of September 30, 2018, there was a deferred commission of approximately $7,000 related to future delivery of an identity solutions
system and services.
We
will review each new contract for the related performance obligations and related revenue and expense recognition implications.
We expect that the revenues derived from the new product offerings could include multiple performance obligations. A performance
obligation under the new revenue standard is defined as a promise to provide a “distinct” good or service to a customer.
The Company has determined that one possible treatment under the new standard is that these services will represent a stand-ready
series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. Further,
the Company has determined that the performance obligation to provide account access and facilitate transactions may meet the
criteria for the “as invoiced” practical expedient, in that the Company has a right to consideration from a customer
in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. As
a result, the Company anticipates it may recognize revenue in the amount to which the Company has a right to invoice, based on
completed performance at the relevant date. Additionally, the contracts could include implementation services, or support on an
“as needed” basis and we will review each contract and determine whether such performance obligations are separate
and distinct and apply the new standard accordingly to the revenue and expense derived from or related to each such service.
Additionally,
the Company will capitalize the direct incremental costs of acquiring and fulfilling a contract with a customer if
the Company expects to recover those costs. The direct incremental costs of acquiring and fulfilling a contract are those
that the Company incurs to acquire and fulfill a contract with a customer that it would not have incurred if the contract had
not been acquired (for example, a sales commission or specific incremental costs associated with the contract).
The
Company capitalizes the costs incurred to acquire and fulfill a contract only if those costs meet all the following criteria:
a.
|
The costs relate
directly to a contract or to an anticipated contract that the Company can specifically identify.
|
b.
|
The costs generate
or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations
in the future.
|
c.
|
The costs are expected
to be recovered.
|
The
Company will capitalize contract acquisition and fulfillment costs related to signing or renewing contracts that meet the above
criteria, which will be classified as contract cost assets in the Company’s Consolidated Balance Sheets.
Contract
cost assets will be amortized using the straight-line method over the expected period of benefit beginning at the time revenue
begins to be realized. The amortization of contract fulfillment cost assets associated with facilitating transactions will be
recorded as cost of services in the Company’s Consolidated Statements of Operations. The amortization of contract acquisition
cost assets associated with sales commissions that qualify for capitalization will be recorded as selling, general and administrative
expense in the Company’s Consolidated Statements of Operations.
As
of September 30, 2018, the Company had deferred contract costs, represented by contract cost assets of approximately $22,000 which
are included in other currents assets for certain costs incurred for the future delivery of a biometric identity system and services.
The performance obligation was principally met in the second quarter of 2018. Accordingly, the direct costs and the associated
revenue were recognized in the second quarter of 2018.
Revenue
related to direct financing leases is outside the scope of Topic 606 and is recognized over the term of the lease using the effective
interest method.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02 (Topic 842). Topic 842 amends a number of aspects of lease accounting, including
requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured
at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to
Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic
842): Targeted Improvements.” The new guidance aims to increase transparency and comparability among organizations by requiring
lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about
leasing arrangements. A modified retrospective application is required with an option to not restate comparative periods in the
period of adoption. This guidance is effective for the Company on January 1, 2019 with early adoption permitted. The Company is
currently evaluating the impact of the adoption of this standard on its consolidated financial statements, which will consist
primarily of a balance sheet gross up of its operating leases to show equal and offsetting right-of-use assets and lease liabilities.
The Company anticipates using the practical expedients that are included in the guidance for existing operating leases which allows
a waiver of lease assessment of their respective classification under the new standard. The Company would adopt the requirements
of the new standard as new arrangements are executed or as required.
On June 20, 2018, the FASB issued ASU 2018-07,1
which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of
the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.
Currently, share-based payment arrangements to employees are accounted for under ASC 718,3 while nonemployee share-based payments
issued for goods and services are accounted for under ASC 505-50. ASC 505-50. Before the amendment, the major (but not the only)
difference for the Company was the determination of measurement date which generally is the date on which the measurement of equity
classified share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant
and nonemployee share based payments. Equity-classified nonemployee share-based payment awards are no longer measured at the earlier
of the date which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance
is complete. They are now measured at the grant date of the award which is the same as share-based payments for employees.
NOTE
2 – PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following as of September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Computers and equipment
|
|
$
|
215,071
|
|
|
$
|
179,351
|
|
Furniture and fixtures
|
|
|
156,867
|
|
|
|
156,867
|
|
|
|
|
371,938
|
|
|
|
336,218
|
|
Less Accumulated depreciation
|
|
|
176,001
|
|
|
|
126,499
|
|
Property and equipment, net
|
|
$
|
195,937
|
|
|
$
|
209,719
|
|
Depreciation
expense totaled $49,502 and $48,191 for the nine months ended September 30, 2018 and 2017, respectively.
NOTE
3 – OTHER ASSETS
The
Company’s other assets consist of software being developed for new product offerings that have not been placed into service.
Other assets consisted of the following at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Software and development
|
|
$
|
1,198,445
|
|
|
$
|
1,139,409
|
|
Other
|
|
|
96,486
|
|
|
|
104,122
|
|
|
|
$
|
1,294,931
|
|
|
$
|
1,243,531
|
|
During the quarter ended September
30, 2018, approximately by $680,000 of software and development costs were placed into service, As a result, they have
been reclassified to internally developed software (included in intangible assets) and being amortized over a 5
year period.
NOTE
4 – 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 nine months
ended September 30, 2018:
|
|
Customer
Relationships
|
|
|
Internally
Developed
Software
|
|
|
Intellectual
Property
|
|
|
Non-Compete
|
|
|
Patents
Pending
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
10 Years
|
|
|
|
5 Years
|
|
|
|
10 Years
|
|
|
|
10 Years
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at December 31, 2017
|
|
$
|
1,287,450
|
|
|
$
|
—
|
|
|
$
|
1,556,934
|
|
|
$
|
5,250
|
|
|
$
|
28,446
|
|
|
$
|
2,878,080
|
|
Additions
|
|
|
—
|
|
|
|
679,882
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,966
|
|
|
|
710,848
|
|
Amortization
|
|
|
(119,037
|
)
|
|
|
(16,995
|
)
|
|
|
(162,274
|
)
|
|
|
(2,113
|
)
|
|
|
|
|
|
|
(300,419
|
)
|
Carrying Value at September 30, 2018
|
|
$
|
1,168,413
|
|
|
$
|
662,887
|
|
|
$
|
1,394,660
|
|
|
$
|
3,137
|
|
|
$
|
59,412
|
|
|
$
|
3,288,509
|
|
The following is a summary of intangible assets as of September 30, 2018:
|
|
Customer
Relationships
|
|
|
Internally
Developed
Software
|
|
|
Intellectual
Property
|
|
|
Non-Compete
|
|
|
Patents
Pending
|
|
|
Total
|
|
Cost
|
|
$
|
1,587,159
|
|
|
$
|
679,882
|
|
|
$
|
2,146,561
|
|
|
$
|
14,087
|
|
|
$
|
59,412
|
|
|
$
|
4,487,101
|
|
Accumulated amortization
|
|
|
(418,746
|
)
|
|
|
(16,995
|
)
|
|
|
(751,901
|
)
|
|
|
(10,950
|
)
|
|
|
—
|
|
|
|
(1,198,592
|
)
|
Carrying Value at September 30, 2018
|
|
|
1,168,413
|
|
|
$
|
662,887
|
|
|
$
|
1,394,660
|
|
|
$
|
3,137
|
|
|
$
|
59,412
|
|
|
$
|
3,288,509
|
|
Future
expected amortization of intangible assets is as follows:
Fiscal Year Ending December 31,
|
|
|
|
|
Remainder of 2018
|
|
|
$
|
129,280
|
|
2019
|
|
|
|
513,489
|
|
2020
|
|
|
|
506,549
|
|
2021
|
|
|
|
504,735
|
|
2022
|
|
|
|
494,433
|
|
Thereafter
|
|
|
|
1,140,023
|
|
|
|
|
$
|
3,288,509
|
|
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following as of September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Trade payables
|
|
$
|
357,720
|
|
|
$
|
232,842
|
|
Accrued interest
|
|
|
346,667
|
|
|
|
275,000
|
|
Accrued payroll and related obligations
|
|
|
243,512
|
|
|
|
468,012
|
|
Other accrued expenses
|
|
|
361,449
|
|
|
|
471,331
|
|
Total
|
|
$
|
1,309,348
|
|
|
$
|
1,447,185
|
|
NOTE
6 - NOTES PAYABLE, NET
The
following is a summary of notes payable as of September 30, 2018 and December 31, 2017:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
In January 2017, the Company issued a Senior Unsecured Note (“Note”) a face value of $3,000,000,
payable two years from 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 $830,018 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. On April 30, 2018, the
Company and the noteholder agreed to extend the due date of the Note until April 30, 2020 in consideration of 1,500,000 shares
of the Common Stock issued to the noteholder. The April 2018 change in the terms of this Note payable 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. See below.
|
|
$
|
2,000,000
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Total Principal
Outstanding
|
|
$
|
2,000,000
|
|
|
$
|
3,000,000
|
|
Unamortized Deferred
Debt Discount
|
|
|
(126,927
|
)
|
|
|
(168,345
|
)
|
Unamortized
Deferred Debt Issuance Costs
|
|
|
(46,865
|
)
|
|
|
(455,935
|
)
|
Notes
Payable, Net
|
|
$
|
1,826,208
|
|
|
$
|
2,375,720
|
|
On
August 9, 2018, the Company repaid $1,000,000 of principal of the $3,000,000 Note held by the Stern Trust plus the related accrued interest of approximately $158,000. Additionally, the Company recorded approximately
$96,000 of additional amortization of Deferred Debt Discount and Debt Issuance Costs in connection with the payment of principal.
The
following is a roll-forward of the Company’s notes payable and related discounts for the nine months ended September 30,
2018:
|
|
|
Principal
Balance
|
|
|
Debt
Issuance
Costs
|
|
|
Debt
Discounts
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
|
$
|
3,000,000
|
|
|
$
|
(168,345
|
)
|
|
$
|
(455,935
|
)
|
|
$
|
2,375,720
|
|
Payments
|
|
|
|
(1,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000,000
|
)
|
Amortization
|
|
|
|
—
|
|
|
|
121,480
|
|
|
|
329,008
|
|
|
|
450,488
|
|
Balance at September 30, 2018
|
|
|
$
|
2,000,000
|
|
|
$
|
(46,865
|
)
|
|
$
|
(126,927
|
)
|
|
$
|
1,826,208
|
|
NOTE
7 – 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 March 31,
2017. The note was repaid in April 2017.
Notes
Payable
In
February 1, 2017, the Company issued to the Stern Trust a Senior Unsecured Note with a face value of $3,000,000, payable
over two years from issuance along with an aggregate of 4,500,000 shares of Common Stock with a fair value of $1,147,500
(Note 6). Theodore Stern, a director of the Company, is the trustee of the Stern Trust. On August 9, 2018, the Company
prepaid $1,000,000 of principal of the $3,000,000 Note plus the related accrued interest of approximately $158,000. During
the three and nine months ended September 30, 2018, the Company recorded approximately $67,000 and $229,000 of interest
expense under the terms and conditions of the Note. Additionally, the Company and the Stern Trust agreed to extend the due
date of the note until April 30, 2020 for an extension fee of 1,500,000 shares of Common Stock at a fair market value of
$420,000.
The April 2018 change in the term of this note payable 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 reported amounts.
Purchase
of Common Stock
In
August 2018, Mr. Stern and Mr. Selzer, directors of the Company, purchased an additional 6,666,667 and 666,667 shares of
common stock, respectively, of the latest offering as described in Note 8.
Other
In
connection with the latest offering of common stock, the Company incurred fees to Network 1 Financial Securities, Inc.
(“Network 1”), a registered broker-dealer. The Network 1 fees and expenses comprise of approximately $659,000
paid in cash and approximately 2,470,000 common stock purchase warrants exercisable at a price of $0.165 cents per
share that expires in 5 years. The approximate fair market value of the warrants granted was $314,000. A member of the
Company’s Board of Director’s previously maintained a partnership with a key principal of Network 1.
NOTE
8
–
STOCKHOLDER’S EQUITY
Common
Stock
During
the nine months ended September 30, 2018, the Company granted 720,000 shares of restricted stock to the non-employee Directors
in connection with their compensation to serve as Board Members. The shares were valued at the fair value at the date of grant
and vest quarterly. Additionally, during the nine months ended September 30, 2018, the Company granted 2,750,000 shares of restricted
stock to employees of which 2,000,000 will be vested upon achieving certain performance criteria and 750,000 will vest over a
three-year period. The Company also issued 170,240 shares of common stock to a service provider in satisfaction of $32,213 due
for services.
During
the nine months ended September 30, 2018, investors exercised 4,433,333 warrants at an average price of $0.05 cents per share
on a cashless exercise basis in exchange for shares of common stock of the Company.
During
the nine months ended September 30, 2018, the Company cancelled 728,448 shares of common stock in settlement of amounts due from
the Multipay acquisition.
In
August 2018, the Company entered into Subscription Agreements with accredited investors (the “August 2018 Accredited Investors”)
pursuant to which the August 2018 Accredited Investors purchased an aggregate of approximately 64,072,000 shares of the
Company’s common stock for an aggregate purchase price of approximately $9,611,000. In connection with this private offering,
the Company paid Network 1, a registered broker-dealer, a cash fee of approximately $629,000 and will issue approximately 2,470,000
common stock purchase warrants valued at approximately $314,000 that are exercisable for a term of five years at an exercise price
of $0.165 per share.
Warrants
The
following is a summary of the Company’s warrant activity for the nine months ended September 30, 2018:
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
Outstanding at December 31,2017
|
|
|
|
48,164,543
|
|
|
$
|
0.08
|
|
|
|
2.9 Years
|
|
Granted
|
|
|
|
2,470,267
|
|
|
|
0.16
|
|
|
|
4.9 Years
|
|
Exercised
|
|
|
|
(4,433,333
|
)
|
|
$
|
0.05
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
|
46,201,477
|
|
|
$
|
0.09
|
|
|
|
2.1
Years
|
|
Stock
Options
During
the nine months ended September 30, 2018, the Company granted options to acquire 5,250,000 shares of common stock to five
employees and one non-employee of which 3,250,000 options are exercisable at an average price of $0.22 per share and
2,000,000 are exercisable at $0.25 per share. The options have a term of ten years, were granted at fair market value at the
date of grant. and vest over three years. The grant date fair value of the options totaled approximately $792,000, which
will be charged to expense over the three-year vesting term of which approximately $231,000 was related to
non-employees.
The
Company determined the grant date fair value of the options granted during the nine months ended September 30, 2018 using the
Black Scholes Method and the following assumptions:
Expected
Volatility – 77-78%
Expected
Term – 6.5 Years
Risk
Free Rate – 2.4-2.7%
Dividend
Rate – 0.00%
Activity
related to stock options for the three months ended September 30, 2018 is summarized as follows:
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Term (Yrs.)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December
31, 2017
|
|
|
|
103,208,331
|
|
|
$
|
0.19
|
|
|
|
8.3
|
|
|
$
|
11,457,291
|
|
Granted
|
|
|
|
5,250,000
|
|
|
$
|
0.24
|
|
|
|
10.0
|
|
|
$
|
—
|
|
Forfeitures
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
(2,508,331
|
)
|
|
|
0.15
|
|
|
|
—
|
|
|
|
296,176
|
|
Outstanding as of September 30, 2018
|
|
|
|
105,950,000
|
|
|
|
0.20
|
|
|
|
7.96
|
|
|
$
|
10,638,500
|
|
Exercisable as of September 30, 2018
|
|
|
|
90,005,553
|
|
|
$
|
0.21
|
|
|
|
7.86
|
|
|
$
|
9,432,500
|
|
The
following table summarizes stock option information as of September 30, 2018:
Exercise
Prices
|
|
|
Outstanding
|
|
|
Weighted
Average
Contractual
Life
(Yrs.)
|
|
|
Exercisable
|
|
$0.00
|
|
|
|
3,500,000
|
|
|
|
7.00
|
|
|
|
3,500,000
|
|
$0.05
|
|
|
|
33,450,000
|
|
|
|
7.86
|
|
|
|
28,033,331
|
|
$0.10
|
|
|
|
27,200,000
|
|
|
|
8.00
|
|
|
|
23,172,219
|
|
$0.13
|
|
|
|
250,000
|
|
|
|
9.05
|
|
|
|
—
|
|
$0.15
|
|
|
|
2,800,000
|
|
|
|
7.10
|
|
|
|
2,800,000
|
|
$0.22
|
|
|
|
2,750,000
|
|
|
|
9.30
|
|
|
|
—
|
|
$0.25
|
|
|
|
2,500,000
|
|
|
|
9.03
|
|
|
|
500,000
|
|
$0.26
|
|
|
|
500,000
|
|
|
|
9.55
|
|
|
|
—
|
|
$0.29
|
|
|
|
1,000,000
|
|
|
|
8.55
|
|
|
|
—
|
|
$0.40
|
|
|
|
1,000,000
|
|
|
|
7.67
|
|
|
|
1,000,000
|
|
$0.45
|
|
|
|
31,000,000
|
|
|
|
7.10
|
|
|
|
31,000,000
|
|
Total
|
|
|
|
105,950,000
|
|
|
|
7.70
|
|
|
|
90,005,553
|
|
During
the nine months ended September 30, 2018, the Company recognized approximately $1,798,000 of stock-based compensation expense
related to options of which non-employees expense was approximately $331,000. As of September 30, 2018, there was approximately
$1,907,000 of unrecognized compensation costs related to stock options outstanding of which approximately $462,000 was related
to non-employees and will be expensed through 2021.
Restricted
Stock
During
the nine months ended September 30, 2018, the Company granted 2,750,000 shares of restricted stock to employees of which 2,000,000
shares will be vested by upon achieving certain performance criteria and 750,000 common shares will vest over a three-year period.
The restricted stock that is not subject to performance criteria will be expensed over the three-year vesting period was valued
at the fair market value at the date of grant. Additionally, in the nine months ended September 30, 2018, the Company granted
720,000 shares of restricted stock to non-employee Directors in connection with their compensation to serve as Board Members.
The shares were valued at the fair market value at the date of grant and vest quarterly.
NOTE
9 – 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 began in May 2016 when the kiosk was 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 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 revenue in the quarter and nine months ended September 30, 2018 of approximately $17,000 and $53,000.
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:
Remainder of 2018
|
|
|
$
|
30,537
|
|
2019
|
|
|
|
122,148
|
|
2020
|
|
|
|
122,148
|
|
2021
|
|
|
|
122,148
|
|
2022
|
|
|
|
122,148
|
|
Thereafter
|
|
|
|
407,160
|
|
Sub-total
|
|
|
|
926,289
|
|
Less deferred revenue
|
|
|
|
(293,796
|
)
|
Net investment in lease
|
|
|
$
|
632,493
|
|
NOTE
10 – 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 September 30, 2018 is $50,897. The following is a schedule showing the future minimum lease
payments under capital lease by year and the present value of the minimum lease payments as of September 30, 2018. The interest
rate related to the lease obligation is 12% and the maturity date is March 31, 2022.
Year Ending
|
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
|
|
$
|
10,774
|
|
2019
|
|
|
|
43,096
|
|
2020
|
|
|
|
43,096
|
|
2021
|
|
|
|
43,096
|
|
Thereafter
|
|
|
|
10,775
|
|
Total minimum lease payments
|
|
|
|
150,837
|
|
Less: Amount representing interest
|
|
|
|
(28,163
|
)
|
Present value of minimum lease payments
|
|
|
$
|
122,674
|
|
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Legal
Matters
From
time to time, the Company is a party to various legal or administrative proceedings arising in the ordinary course of our business.
While any litigation contains an element of uncertainty, we have no reason to believe the outcome of such proceedings will have
a material adverse effect on the financial condition or results of operations of the Company.
NOTE
12 – 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’s
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 $7.5 million, $0.8 million and $2.1 million, respectively, of which $4.9 million, $0.1 million
and $1.71 million related to goodwill as of September 30, 2018.
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.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
217,184
|
|
|
$
|
130,047
|
|
|
$
|
1,717,881
|
|
|
$
|
380,280
|
|
South America
|
|
|
100,257
|
|
|
|
90,888
|
|
|
|
295,743
|
|
|
|
334,432
|
|
Africa
|
|
|
384,368
|
|
|
|
386,711
|
|
|
|
1,053,301
|
|
|
|
1,037,075
|
|
|
|
|
701,809
|
|
|
|
607,646
|
|
|
|
3,066,925
|
|
|
|
1,751,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identity Management
|
|
|
601,552
|
|
|
|
516,758
|
|
|
|
2,771,182
|
|
|
|
1,417,355
|
|
Payment Processing
|
|
|
100,257
|
|
|
|
90,888
|
|
|
|
295,743
|
|
|
|
334,432
|
|
|
|
|
701,809
|
|
|
|
607,646
|
|
|
|
3,066,925
|
|
|
|
1,751,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
(566,507
|
)
|
|
|
(658,419
|
)
|
|
|
(1,180,436
|
)
|
|
|
(2,428,744
|
)
|
South America
|
|
|
(1,365,614
|
)
|
|
|
(1,130,917
|
)
|
|
|
(4,973,078
|
)
|
|
|
(5,990,828
|
)
|
Africa
|
|
|
6,787
|
|
|
|
(88,798
|
)
|
|
|
(575,645
|
)
|
|
|
(922,630
|
)
|
|
|
|
(1,925,334
|
)
|
|
|
(1,878,134
|
)
|
|
|
(6,729,159
|
)
|
|
|
(9,342,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identity Management
|
|
|
(559,720
|
)
|
|
|
(747,217
|
)
|
|
|
(1,756,081
|
)
|
|
|
(3,351,374
|
)
|
Payment Processing
|
|
|
(1,365,614
|
)
|
|
|
(1,130,917
|
)
|
|
|
(4,973,078
|
)
|
|
|
(5,990,828
|
)
|
|
|
|
(1,925,334
|
)
|
|
|
(1,878,134
|
)
|
|
|
(6,729,159
|
)
|
|
|
(9,342,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(218,075
|
)
|
|
|
(230,698
|
)
|
|
|
(703,542
|
)
|
|
|
(1,125,880
|
)
|
Other income/(expense)
|
|
|
1,198
|
|
|
|
—
|
|
|
|
78,932
|
|
|
|
(4,106,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,142,211
|
)
|
|
|
(2,108,832
|
)
|
|
|
(7,353,769
|
)
|
|
|
(14,574,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(2,887
|
)
|
|
|
(1,187
|
)
|
|
|
(17,304
|
)
|
|
|
(6,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,145,098
|
)
|
|
$
|
(2,110,019
|
)
|
|
$
|
(7,371,073
|
)
|
|
$
|
(14,581,691
|
)
|