SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

For the transition period from to

Commission file number 001-40747

Ipsidy Inc.

(Exact name of registrant as specified in its charter)

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

670 Long Beach Boulevard

Long Beach, New York
11561

(Address of principal executive offices) (zip code)

516-274-8700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock par value $0.0001 per share		AUID		The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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

Large Accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth Company ☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

Class		Outstanding at October 31, 2021
Common Stock, par value $0.0001		23,204,488
Documents incorporated by reference:		None

TABLE OF CONTENTS

		Page No.
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020		1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)		2

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)		3

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)		4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)		5

Notes to Unaudited Condensed Consolidated Financial Statements		6-21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		22-27

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		28

Item 4. Controls and Procedures.		28

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		29

Item 1A. Risk Factors.		29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		29

Item 3. Defaults Upon Senior Securities.		29

Item 4. Mine Safety Disclosures.		29

Item 5. Other Information.		29

Item 6. Exhibits.		30

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in this report, in Part I. Item 1A. Risk Factors also appear in our Annual Report on Form 10-K for the year ended December 31, 2020 and our other filings with the Securities and Exchange Commission. Some examples of risk factors which may affect our business are as follows:

●

our lack of significant revenues and history of losses,

●

our ability to continue as a going concern,

●

our ability to raise additional working capital as necessary,

●

our ability to satisfy our obligations as they become due,

●

the failure to successfully commercialize our product or sustain market acceptance,

●

the reliance on third party agreements and relationships for development of our business,

●

our operations in foreign markets,

●

breaches of network or information technology services,

●

the control exercised by our management,

●

the impact of government regulation on our business,

●

our ability to effectively compete,

●

the possible inability to effectively protect our intellectual property,

●

the lack of a public market for our securities and the impact of the penny stock rules on trading in our common stock should a public market ever be established, and

●

the impact of the Covid-19 Pandemic.

Other sections of this report include additional factors which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms “Ipsidy,” “authID.ai”, the “Company,” “we,” “our,” “us,” and similar terms refer to Ipsidy Inc., a Delaware corporation and its subsidiaries.

Effective June 14, 2021 we completed a 1-for-30 reverse stock split of our common stock. Additionally, the Company changed its ticker symbol to AUID.

The information which appears on our website www.authID.ai is not part of this report.

PART I – FINANCIAL INFORMATION

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2021			2020
	(Unaudited)
ASSETS
Current Assets:
Cash	$	9,233,399		$	3,765,277
Accounts receivable, net		170,291			72,986
Current portion of net investment in direct financing lease		78,731			72,682
Inventory		214,289			254,951
Other current assets		929,692			237,769
Total current assets		10,626,402			4,403,665

Property and Equipment, net		127,705			97,829
Other Assets		73,243			240,223
Intangible Assets, net		3,657,569			4,527,476
Goodwill		4,183,232			4,183,232
Net investment in direct financing lease, net of current portion		362,185			422,021
Total assets	$	19,030,336		$	13,874,446

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	2,122,257		$	2,665,132
Notes payable obligation, current portion		3,126			5,947
Capital lease obligation, current portion		20,813			39,232
Convertible debt		662,000			-
Deferred revenue		369,708			237,690
Total current liabilities		3,177,904			2,948,001

Capital lease obligation, net of current portion		-			10,562
Notes payable, net of discounts and current portion		-			487,339
Convertible debt		-			5,800,976
Other liabilities		-			47,809
Total liabilities		3,177,904			9,294,687

Stockholders’ Equity:
Common stock, $0.0001 par value, 1,000,000,000 shares authorized; 23,198,419 and 19,642,401 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		2,319			1,964
Additional paid in capital		124,609,145			102,651,304
Accumulated deficit		(108,980,665	)		(98,234,151	)
Accumulated comprehensive income		221,633			160,642
Total stockholders’ equity		15,852,432			4,579,759
Total liabilities and stockholders’ equity	$	19,030,336		$	13,874,446

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenues:
Products and services	$	516,218		$	501,700		$	1,657,296		$	1,587,330
Lease income		12,131			13,992			37,833			43,270
Total revenues, net		528,349			515,692			1,695,129			1,630,600

Operating Expenses:
Cost of Sales		121,509			114,985			494,558			532,506
General and administrative		5,331,159			1,527,723			10,308,785			5,400,639
Research and development		419,313			308,038			1,088,496			928,778
Impairment loss		-			-			-			1,035,629
Depreciation and amortization		319,017			276,232			943,436			923,563
Total operating expenses		6,190,998			2,226,978			12,835,275			8,821,115

Loss from operations		(5,662,649	)		(1,711,286	)		(11,140,146	)		(7,190,515	)

Other Expense:
Warrant inducement expense		-			-			-			(366,795	)
Extinguishment of debt - gain (loss)		485,762			-			971,522			(985,842	)
Other income		6,736			16,779			14,394			51,445
Interest expense, net		(25,780	)		(212,658	)		(579,768	)		(701,861	)
Other income (expense), net		466,718			(195,879	)		406,148			(2,003,053	)

Loss before income taxes		(5,195,931	)		(1,907,165	)		(10,733,998	)		(9,193,568	)

Income Tax Expense		(2,974	)		(11,074	)		(12,516	)		(23,540	)

Net loss	$	(5,198,905	)	$	(1,918,239	)	$	(10,746,514	)	$	(9,217,108	)

Net Loss Per Share - Basic and Diluted	$	(0.24	)	$	(0.11	)	$	(0.52	)	$	(0.52	)

Weighted Average Shares Outstanding - Basic and Diluted		22,088,865			18,237,647			20,703,970			17,664,446

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net Loss	$	(5,198,905	)	$	(1,918,239	)	$	(10,746,514	)	$	(9,217,108	)
Foreign currency translation gain (loss)		18,966			29,057			60,991			(6,972	)
Comprehensive loss	$	(5,179,939	)	$	(1,889,182	)	$	(10,685,523	)	$	(9,224,080	)

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

											Accumulated
					Additional						Other
	Common Stock				Paid-in			Accumulated			Comprehensive
Nine Months Ended September 30, 2021	Shares		Amount		Capital			Deficit			Income			Total
Balances, December 31, 2020		19,642,401	$	1,964	$	102,651,304		$	(98,234,151	)	$	160,642		$	4,579,759
Sale of common stock for cash		1,642,856		164		10,282,834			-			-			10,282,998
Stock-based compensation		-		-		4,795,069			-			-			4,795,069
Settlement of accrued expense with stock options		-		-		349,376			-			-			349,376
Convertible notes converted to common stock		1,171,296		117		6,232,223			-			-			6,232,340
Stock option exercise for cash		4,802		1		24,659									24,660
Warrant exercise for cash		60,834		6		273,747									273,753
Cashless stock option exercise		412,569		40		(40	)		-			-			-
Cashless warrant exercise		263,661		27		(27	)		-			-			-
Net loss		-		-		-			(10,746,514	)		-			(10,746,514	)
Foreign currency translation		-		-		-			-			60,991			60,991
Balances, September 30, 2021		23,198,419	$	2,319	$	124,609,145		$	(108,980,665	)	$	221,633		$	15,852,432

Three Months Ended September 30, 2021
Balances, June 30, 2021		21,363,027	$	2,137	$	111,493,973		$	(103,781,760	)	$	202,667		$	7,917,017
Sale of common stock for cash		1,642,856		164		10,282,834			-			-			10,282,998
Stock-based compensation		-		-		2,533,943			-			-			2,533,943
Stock option exercise for cash		4,802		1		24,659			-			-			24,660
Warrant exercise for cash		60,834		6		273,747			-			-			273,753
Cashless stock option exercise		125,998		11		(11	)		-			-			-
Cashless warrant exercise		902		-		-			-			-			-
Net loss		-		-		-			(5,198,905	)		-			(5,198,905	)
Foreign currency translation		-		-		-			-			18,966			18,966
Balances, September 30, 2021		23,198,419	$	2,319	$	124,609,145		$	(108,980,665	)	$	221,633		$	15,852,432

Nine Months Ended September 30, 2020
Balances, December 31, 2019		17,270,848	$	1,727	$	95,032,252		$	(86,935,593	)	$	177,385		$	8,275,771
Modification of warrants issued with debt		-		-		95,223			-			-			95,223
Sale of common stock for cash		114,719		12		199,988			-			-			200,000
Warrant exercise		727,107		73		1,248,910			-			-			1,248,983
Warrant exercise inducement		-		-		366,795			-			-			366,795
Stock-based compensation		150,000		15		741,653			-			-			741,668
Issuance of common stock to settle accounts payable		3,540		-		8,270			-			-			8,270
Net loss		-		-		-			(9,217,108	)		-			(9,217,108	)
Foreign currency translation		-		-		-			-			(6,972	)		(6,972	)
Balances, September 30, 2020		18,266,214	$	1,827	$	97,693,091		$	(96,152,701	)	$	170,413		$	1,712,630

Three Months Ended September 30, 2020
Balances, June 30, 2020		18,221,807	$	1,822	$	97,581,421		$	(94,234,462	)	$	141,356		$	3,490,137
Warrant and stock cashless exercises		44,407		5		(5	)		-			-			-
Stock-based compensation		-		-		111,675			-			-			111,675
Net loss		-		-		-			(1,918,239	)		-			(1,918,239	)
Foreign currency translation		-		-		-			-			29,057			29,057
Balances, September 30, 2020		18,266,214	$	1,827	$	97,693,091		$	(96,152,701	)	$	170,413		$	1,712,630

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(10,746,514	)	$	(9,217,108	)
Adjustments to reconcile net loss with cash flows from operations:
Depreciation and amortization expense		943,436			923,563
Stock-based compensation		4,795,069			741,668
(Gain)/loss on extinguishment of note payable		(971,522	)		985,842
Amortization of debt discounts and issuance costs		554,020			333,388
Impairment losses		-			1,035,629
Warrant exercise inducement		-			366,795
Changes in operating assets and liabilities:
Accounts receivable		(92,993	)		73,442
Net investment in direct financing lease		53,787			48,341
Other current assets		(524,943	)		450,755
Inventory		47,480			(70,040	)
Accounts payable and accrued expenses		336,099			1,232,898
Deferred revenue		132,018			(36,902	)
Other liabilities		(47,809	)		-
Net cash flows from operating activities		(5,521,872	)		(3,131,729	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(79,703	)		(8,643	)
Purchase of intangible assets		(23,702	)		-
Investment in other assets		-			(172,880	)
Net cash flows from investing activities		(103,405	)		(181,523	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of offering costs		10,282,998			-
Proceeds from exercise of warrants		273,753			1,248,983
Proceeds from exercise of stock options		24,660			1,510,000
Proceeds from paycheck protection program		485,762			485,760
Payment of debt issuance costs		-			(104,800	)
Payments on notes payable		(4,400	)		-
Principal payments on capital lease obligation		(28,981	)		(29,669	)
Net cash flows from financing activities		11,033,792			3,110,274

Effect of Foreign Currencies		59,607			(96,653	)

Net Change in Cash		5,468,122			(299,631	)
Cash, Beginning of the Period		3,765,277			567,081
Cash, End of the Period	$	9,233,399		$	267,450

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	10,984		$	7,505
Cash paid for income taxes	$	12,516		$	23,540

Non-cash Investing and Financing Activities:
Reclass from other assets to intangible assets	$	8,270		$	-
Modification of warrants issued with convertible debt	$	-		$	95,223
Exchange of notes payable and accrued interest for convertible notes payable	$	-		$	2,662,000
Settlement of accounts payable with issuance of common stock	$	349,376		$	8,270
Conversion of convertible note payable and accrued interest to common stock	$	6,232,340		$	-

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES

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 and 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 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, 2020. The results of operations for the nine months ended September 30, 2021 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, Cards Plus Pty Ltd. and Ipsidy Peru S.A.C. (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Reverse Stock Split

At the Annual Meeting of stockholders of the Company held on March 22, 2021, the stockholders approved an amendment to our certificate of incorporation to effect a reverse stock split at a ratio not less than 1-for-2 and not greater than 1-for-50, with the exact ratio to be set within that range at the discretion of our board of directors before December 31, 2021

On June 14, 2021 (the “Effective Time”), the Company completed a 1-for-30 reverse stock split of its Common Stock, as previously authorized at the Annual Meeting. Pursuant to the reverse stock split, at the Effective Time, every 30 issued shares of Common Stock were automatically combined into one share of Common Stock without any change in the par value per share.

The par value of the Company’s Common Stock was unchanged at $0.0001 per share after the reverse stock split. As a result, on the effective date of the reverse stock split, the stated capital on the Company’s balance sheet attributable to Common Stock was reduced proportionately based on the reverse stock split ratio of 1-for-30 and the additional paid-in capital account was credited with the amount by which the stated capital was reduced.

After the reverse stock split, net income or loss per share, and other per share amounts were adjusted because there are fewer shares of the Company’s Common Stock outstanding.

The financial statements, net income or loss per share and other per share amounts for periods ending before the reverse stock split were recast to give retroactive effect to the reverse stock split.

Going Concern

As of September 30, 2021, the Company had an accumulated deficit of approximately $109.0 million. For the nine months ended September 30, 2021 the Company earned revenue of approximately $1.7 million and incurred a loss from operations of approximately $11.1 million.

The reports of our independent registered public accounting firm on our consolidated financial statements for the years ended December 31, 2020 and 2019 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 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.

On August 26, 2021, the Company’s completed its public offering (the “Offering”) of 1,642,856 shares of its common stock at a public offering price of $7.00 per share, including 214,285 shares sold upon full exercise of the underwriter’s option to purchase additional shares, for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and offering expenses.

In November 2021, the Company filed an S-3 to register an indeterminate number of securities of each identified class of securities up to a proposed aggregate offering price of $200,000,000, which may from time to time be offered in unspecified numbers and at indeterminate prices.

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.

Covid-19

Covid-19 emerged globally in December 2019, and it has been declared a pandemic. Covid-19 is still impacting customers, business, results and financial condition throughout the world. The Company’s day-to-day operations have been impacted differently depending on geographic location and services that are being performed. The Cards Plus business located in South Africa operations has had limitations on its operations as they are following the guidance and requirements of the South African government. Our operations in the United States and Colombia have suffered less immediate impact as most staff can work remotely and can continue to develop our product offerings.

That said we have seen our business opportunities develop more slowly as business partners and potential customers include Covid-19 considerations. Furthermore, working remotely can cause a delay in decision making and finalization of negotiations and agreements.

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 and nine months ended September 30, 2021 and 2020 because their effect was antidilutive:

Security	2021		2020
Convertible notes payable		117,529		1,182,557
Warrants		1,413,611		1,581,774
Stock options		9,322,153		3,660,778
		10,853,293		6,425,109

Inventories

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, 2021 and December 31, 2020 consist of cards inventory. As of September 30, 2021 and December 31, 2020, the Company recorded an inventory valuation allowance of approximately $26,000 and $18,000 to reflect net realizable value of the cards inventory.

Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.

Revenue Recognition

Cards Plus – The Company recognizes revenue for the design and production of cards at the point in time when products are shipped, or services have been performed due to the short term nature of the contracts. Additionally, the cards produced by the Company have no alternative use and the Company has an enforceable right to payment for work performed should the contract be cancelled. As of September 30, 2021 and December 31, 2020, Cards Plus had approximately $40,000 and $88,000, respectively, of contract liability from payments received in advance that will be earned in future periods.

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 contract liability of approximately $330,000 and $150,000 as of September 30, 2021 and December 31, 2020 relating to certain revenue that will be earned in future periods. The majority of the $150,000 of deferred revenue contract liability as of December 31, 2020 was earned in the first quarter of fiscal year 2021. As of September 30, 2021, the majority of the deferred revenue contract liability of $330,000 will be recognized in the ensuing two quarters.

All contracts are reviewed for their respective performance obligations and related revenue and expense recognition implications. Certain of the revenues are derived from identity services that could include multiple performance obligations. A performance obligation is defined as a promise to provide a “distinct” good or service to a customer. The Company has determined that one possible treatment under U.S. GAAP 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 should 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.

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.

NOTE 2 – OTHER CURRENT ASSETS

Other current assets consisted of the following as of September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
Prepaid insurance	$	163,361	$	39,117
Prepaid licensing fees		103,521		30,841
Operating lease right of use		99,667		131,568
Prepaid marketing expense		263,929		-
Payroll tax receivable		85,735		-
Prepaid services		175,000		-
Other		38,479		36,243

	$	929,692	$	237,769

NOTE 3 – PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following as of September 30, 2021 and December 31, 2020:

	September 30, 2021			December 31, 2020
Property and equipment	$	377,622		$	297,839
Equipment under finance lease		163,407			163,407
		541,029			461,246
Less Accumulated depreciation		(413,324	)		(363,417	)
Property and equipment, net	$	127,705		$	97,829

Depreciation expense totaled $49,827 and $40,231 for the nine months ended September 30, 2021 and 2020, respectively.

NOTE 4 – OTHER ASSETS

Other assets consisted of the following at September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020

Operating lease right of use assets	$	-	$	49,856
Other		73,243		190,367
	$	73,243	$	240,223

NOTE 5 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)

The Company’s intangible assets consist primarily of acquired and developed software as well as intellectual property acquired from previous acquisitions 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, 2021:

	Customer Relationships			Acquired and Developed Software			Intellectual Property			Patents			Total

Useful Lives		10 Years			5 Years			10 Years			-

Carrying Value at December 31, 2020	$	811,303		$	3,171,394		$	416,471		$	128,308		$	4,527,476
Additions		-			-			-			23,702			23,702
Amortization		(122,645	)		(699,442	)		(61,018	)		(10,504	)		(893,609	)
Carrying Value at September 30, 2021	$	688,658		$	2,471,952		$	355,453		$	141,506		$	3,657,569

The following is a summary of intangible assets as of September 30, 2021

	Customer Relationships			Acquired and Developed Software			Intellectual Property			Patents			Total

Cost	$	1,587,159		$	4,476,273		$	828,577		$	155,297		$	7,047,306
Accumulated amortization		(898,501	)		(2,004,321	)		(473,124	)		(13,791	)		(3,389,737	)
Carrying Value at September 30, 2021	$	688,658		$	2,471,952		$	355,453		$	141,506		$	3,657,569

Amortization expense totaled approximately $894,000 and $883,000 for the nine months ended September 30, 2021 and 2020, respectively.

Future expected amortization of intangible assets is as follows:

Fiscal Year Ending December 31,
Remainder of 2021	$	297,060
2022		1,094,905
2023		1,043,916
2024		819,604
2025		302,986
Thereafter		99,098
	$	3,657,569

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following as of September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
Trade payables	$	769,602	$	311,024
Accrued interest*		17,469		554,755
Accrued payroll and related obligations		656,938		891,790
Current portion of operating lease liabilities		100,290		117,414
Other**		577,958		790,149
Total	$	2,122,257	$	2,665,132

In June 2021, the majority of the accrued interest was converted into common stock. See Note 8.

Included in Other expenses was accrued non-employee Directors’ Compensation of approximately $349,000 at December 31, 2020. In May 2021, the non-employee Directors were compensated for their service through a grant of stock options and therefore the balance of the accrual for Director’s Compensation was $ 0 as of September 30, 2021. See Note 10.

NOTE 7 - NOTES PAYABLE, NET

The following is a summary of notes payable as of September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020

Paycheck Protection Program Loan #1	$	-	$	485,760
Paycheck Protection Program Loan #2		-		-
Installment loan payable related to a vehicle acquisition payable in monthly payments of $539 per month at an interest rate of 10.8% per annum payable for 36 months		3,126		7,526
Notes Payable, Net	$	3,126	$	493,286
Notes Payable, current portion,	$	3,126	$	5,947
Notes Payable, net of current portion		-		487,339
	$	3,126	$	493,286

Paycheck Protection Program Loans

In May 2020, the Company received a loan of approximately $486,000 under the Paycheck Protection Program (“PPP”) as part of the Coronavirus Aid, Relief and Economic Security Act which is administered by the U.S. Small Business Association (“USSBA”) related to its U.S. Operations. The Company received notice from the USSBA in May 2021, that the May 2020 PPP loan was forgiven as we met the applicable requirements.

In January 2021, the Company received a second loan of approximately $486,000 under the PPP related to its U.S. Operations. The Company received notice from the USSBA in August 2021, that the January 2021 PPP loan was forgiven as the Company met the applicable requirements.

In accordance with ASC 470, extinguishment accounting, the amount forgiven by the USSBA is recorded as other income – gain on extinguishment of notes payable.

NOTE 8 – CONVERTIBLE NOTES PAYABLE

On December 13, 2019, the Company entered into Securities Purchase Agreements with several accredited investors (the “8% Note Investors”) providing for the sale by the Company to the 8% Note Investors of 8% Convertible Notes in the aggregate amount of $428,000 (the “8% Notes”). The 8% Notes were to mature on November 30, 2021 and were a general unsecured obligation of the Company.

In February 2020, the Company and the holders of the 8% Notes entered into an amendment agreement pursuant to which the principal and interest due under the 8% Notes will remain due and payable on the same terms as exist in the 8% Notes prior to modification, that the maturity shall be extended to the same maturity date as the 2020 Notes, namely February 28, 2022, and the 8% Notes became a secured obligation of the Company.

On February 14, 2020 the Company, entered into Securities Purchase Agreements with several accredited investors (the “2020 Note Investors”) providing for the sale by the Company to the 2020 Note Investors of 15% Senior Secured Convertible Notes in the aggregate amount of $1,510,000 (the “2020 Notes”). Philip D. Beck, Chief Executive Officer and Chairman of the Board, invested $50,000 in consideration of a 2020 Note in the principal amount of $50,000 paid by a deduction from his salary. Theodore Stern, a former director of the Company, invested $50,000 in consideration of a 2020 Note in the principal amount of $50,000. Herbert Selzer, a former director of the Company invested $100,000 in consideration of a 2020 Note in the principal amount of $100,000. Mr. Selzer provided $50,000 on the closing date and provided the balance of the funding in April 2020.

The 2020 Notes mature February 28, 2022 and are a secured obligation of the Company. At the option of the 2020 Note Investors, they may at any time convert the 2020 Notes. The number of shares delivered shall be equal to 150% of the amount of the principal converted divided by the conversion price of $6.00 per share. The Company may require that the 2020 Note Investors convert all or a portion of the 2020 Notes, if the Company’s volume weighted average price for any preceding 20-day period is equal to or greater than $9.00.

In connection with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, a cash fee of approximately $104,800.

During the first quarter of 2021, convertible notes totaling $120,000 and a portion of their accrued interest at the option of the noteholders were converted into approximately 33,000 shares of common stock of the Company.

Additionally, during the nine months ended September 30, 2021, the Company received conversion notices from (i) the Stern Trust converting the principal amount, repayment premium and interest in the amount of approximately $3.5 million payable under the Restated Stern Note into approximately 561,000 shares of common stock, (ii) the 8% Note Investors converting principal and interest in the amount of approximately $0.4 million into approximately 180,000 shares of common stock and (iii) the 2020 Note Investors converting principal, repayment premium and interest in the amount of approximately $2.5 million into approximately 398,000 shares of common stock. The Stern Trust is owed approximately $0.7 million in interest under the Restated Stern Note, which has not been converted and remains outstanding. As a result, a total of approximately $6.1 million of Company net indebtedness was converted and the Company issued approximately 1,138,000 shares of common stock in the aggregate.

The following is a summary of the convertible notes payable outstanding at September 30, 2021:

8% convertible notes payable issued December 2019	$	-
15% convertible notes payable issued February 2020		-
10% convertible notes payable issued February 2020		662,000

	$	662,000

Future maturities of convertible notes payable are as follows:

2021	$	-
2022		662,000

	$	662,000

NOTE 9 – RELATED PARTY TRANSACTIONS

Convertible Notes Payable

In 2021, the Company received conversion notices from Stern Trust of which Theodore Stern, (a former member of the Board of Directors until June 9, 2021) is the Trustee, converting the principal amount, repayment premium and interest in the amount of approximately $3.5 million payable under the Restated Stern Note into approximately 561,000 shares of common stock. Additionally, Theodore Stern and Herbert Selzer (also a former member of the Board of Directors until June 9, 2021) provided conversion notices for their respective 2020 Notes converting the principal, repayment premium and interest in the amount of approximately $256,000 into approximately 41,000 shares of common stock. The Stern Trust is owed approximately $0.7 million in interest under the Restated Stern Note, which has not been converted and remains outstanding.

Executive Officers

On June 14, 2021, Phillip L. Kumnick resigned as Chief Executive Officer of Ipsidy Inc., and Thomas L. Thimot was appointed Chief Executive Officer in his place. Further, Philip R. Broenniman resigned as President and Chief Operating Officer and Cecil N. Smith III (Tripp) was appointed President and Chief Technology Officer. In May 2021 the Company granted to each of Mr. Kumnick and Mr. Broenniman options (the “May 2021 Options”) to acquire a total of 1,166,667 shares of common stock at an exercise price of $7.20 per share for a term of ten years that vest upon the achievement of certain market capitalization thresholds, or performance conditions. In November 2021 Mr. Kumnick and Mr. Broenniman agreed to cancel 300,000 and 200,000, respectively, of these stock options in consideration of removing certain service conditions.

Mr. Thomas Thimot and Mr. Cecil Smith, became employed by the Company as Chief Executive Officer and President and Chief Technology Officer effective June 14, 2021. Mr. Thimot and the Company entered into an Offer Letter pursuant to which Mr. Thimot will earn an annual salary of $325,000 with a bonus target at 50% of the base salary (pro-rated for 2021) upon terms to be agreed with the Compensation Committee for 2021 and on the understanding that the 2022 target will include a requirement of the Company achieving three times the annual revenue of 2021. Additionally, Mr. Thimot was granted an option to acquire 1,200,000 shares of common stock at an exercise price of $7.80 per share for a term of ten years of which half of the options vest monthly over four years and the balance is subject to certain performance vesting requirements.

On June 14, 2021, Mr. Smith and the Company entered an into an Offer Letter pursuant to which Mr. Smith will earn an annual salary of $275,000 with a bonus target at 50% of the base salary (pro-rated for 2021) upon terms to be agreed with the Compensation Committee for 2021. In addition, Mr. Smith will receive a bonus of $50,000 after 90 days of service. Additionally. Mr. Smith was granted an option to acquire 600,000 shares of common stock at an exercise price of $7.80 per share for a term of ten years of which half of the options vest monthly over four years and the balance is subject to certain performance vesting requirements.

Appointment of Board of Directors

On June 9, 2021 Theodore Stern, Herbert Selzer and Thomas Szoke resigned as directors of the Company. The size of the Board of directors was increased to seven and Dr. Michael A. Gorriz, Michael L. Koehneman, Sanjay Puri, Mr. Thimot and Jacqueline L. White were appointed as additional directors of the Company. Messrs. Stern, Selzer and Szoke did not advise the Company of any disagreement with the Company on any matter relating to its operations, policies or practices. Mr. Szoke will continue with the Company as Chief Solutions Architect.

The Company granted each of the four new Board of Directors as of June 2021 stock options to acquire 62,500 shares of common stock or a total of 250,000 at an exercise price of $7.80 per share for a term of ten years that vest one third per year after each Annual Meeting. The Company granted the previously serving Board of Directors stock options to acquire 93,470 common shares that are vested as the services were previously rendered. The stock options were granted in lieu of other forms of Board of Director Compensation. The Company also granted Mr. Selzer and Mr. Stern 22,388 stock options to acquire common shares for service in 2021 prior to their resignation as Board Members. Upon their resignation as directors in June 2021, 13,992 stock options were vested and the balance was cancelled.

Other

In the third quarter of 2021, the Company and Progress Partners Inc. (“Progress”) modified their Business Advisory Agreement dated May 6, 2020 (“Progress Agreement”). The amended Progress Agreement provides for Progress to undertake continuing business development activities for the Company, for which the Company agreed to pay Progress $350,000 which was paid, October 15, 2021. Additionally, the Company agreed to pay Progress, another $115,000 for additional consulting services. Mr. Puri, a Director of the Company beginning June 9, 2021 is an employee and Managing Director of Progress but is not a principal shareholder nor an executive officer of Progress.

NOTE 10 – STOCKHOLDER’S EQUITY

Common Stock

On August 26, 2021, the Company completed the Offering of 1,642,856 shares of its common stock at a public offering price of $7.00 per share, including 214,285 shares sold upon full exercise of the underwriter’s option to purchase additional shares, for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and offering expenses.

During the nine months ended September 30, 2021, shares of common stock were issued as a result of the following non-cash transactions:

●

In the first quarter of 2021, convertible notes totaling $120,000 and a portion of their accrued interest at the option of the noteholders were converted into approximately 33,000 shares of common stock of the Company

●

Additionally, during the three and nine months ended September 30, 2021, the Company received conversion notices from (i) the Stern Trust converting the principal amount, repayment premium and interest in the amount of approximately $3.5 million payable under the Restated Stern Note into approximately 561,000 shares of common stock, (ii) the 8% Note Investors converting principal and interest in the amount of approximately $0.4 million into approximately 180,000 shares of common stock and (iii) the 2020 Note Investors converting principal, repayment premium and interest in the amount of approximately $2.5 million into approximately 398,000 shares of common stock. The Stern Trust is owed approximately $0.7 million in interest under the Restated Stern Note, which has not been converted and remains outstanding. As a result, a total of approximately $6.1 million of Company indebtedness was converted and the Company issued approximately 1,138,000 shares of common stock in the aggregate.

●

Certain warrant and stock option holders exercised their respective warrants and stock options by means of the cashless exercise feature and were issued approximately 549,000 common shares of the Company.

Warrants

The following is a summary of the Company’s warrant activity for the nine months ended September 30, 2021:

				Weighted Average		Weighted Average
	Number of			Exercise		Remaining
	Shares			Price		Life
Outstanding at December 31, 2020		1,823,267		$	4.20	3.4 Years
Granted		64,286		$	8.75	4.3 Years
Exercised/cancelled		(473,942	)	$	3.20	4.2 years
Outstanding at September 30, 2021		1,413,611		$	4.61	3.2 Years

Under the terms of the Underwriting Agreement in connection with the Offering, the Company issued underwriters warrants (the “Representative’s Warrants”) to purchase an aggregate of 64,286 shares of common stock (4.5% of the total shares issued in the Offering). The Representative’s Warrants are exercisable at a per share price of $8.75 (equal to 125% of the Offering price of the Company’s common stock). The Representative’s Warrants are exercisable for a term of four and one half years beginning on February 23, 2022.

Stock Options

During the nine months ended September 30, 2021, the Company determined the grant date fair value of the options granted using the Black Scholes Method and use the following assumptions:

Expected Volatility – 68-75%

Expected Term – 5.0 Years

Risk Free Rate – 0.70- 0.78%

Dividend Rate – 0.00%

Activity related to stock options for the nine months ended September 30, 2021 is summarized as follows:

●

The Company granted Mr. Thimot and Mr. Smith stock options to acquire 1,200,000 and 600,000 shares of common stock respectively upon their employment of which half of the options vest monthly over four years and the balance vest upon the achievement of certain market capitalization thresholds or performance conditions.

●

The Company granted each of Mr. Kumnick and Mr. Broenniman stock options to acquire 583,333 shares of common stock that vest upon the achievement of certain market capitalization thresholds or performance conditions. In November 2021 Mr. Kumnick and Mr. Broenniman agreed to cancel 300,000 and 200,000, respectively, of these stock options in consideration of removing certain service conditions.

●

The Company granted each of the four new Board of Directors as of June 2021 stock options to acquire 62,500 shares of common stock or a total of 250,000 that vest one third a year after each Annual Meeting.

●

The Company granted the previously serving Board of Directors stock options to acquire 93,470 common shares that are vested as the services were rendered. The stock options were granted in lieu of other forms of Board of Director Compensation and was used to eliminate previously accrued Board of Director compensation. The Company also granted to each of Mr. Selzer and Mr. Stern 22,388 stock options to acquire common shares for service in 2021 prior to their resignation as Board Members. Upon their resignation as directors in June 2021, 6,997 stock options to each of them were vested and the balance was cancelled.

●

The Company granted options to acquire 1,003,334 shares of common stock to employees. The options for 803,334 vest annually over a three-year period, 100,000 vest equally over a four-year period, and the balance of 100,000 vest upon the achievement of certain market capitalization thresholds or performance conditions.

The options have a term of ten years and all options were granted at market value.

Activity related to stock options for the nine months ended September 30, 2021, is summarized as follows:

				Weighted		Weighted
				Average		Average		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term (Yrs.)		Value

Outstanding as of December 31, 2020		5,645,802		$	4.50		7.5	$	8,823,639

Granted		4,358,246		$	7.95		10.0		-
Exercised		(504,804	)	$	1.54		5.0	$	3,485,482
Forfeited/cancelled		(177,091	)	$	4.30		8.8		-

Outstanding as of September 30, 2021		9,322,153		$	6.28		7.1	$	48,380,894
Exercisable as of September 30, 2021		4,708,113		$	5.15		4.5	$	30,866,033

The following table summarizes stock option information as of September 30, 2021:

Exercise Price	Outstanding		Weighted Average Contractual Life (Yrs.)		Exercisable

$.03 - $4.00		3,664,901		4.9		3,208,347
$4.01 - $7.00		162,784		4.7		162,784
$7.01 - $10.00		4,007,801		9.6		270,315
$10.01 - $13.50		1,486,667		4.3		1,066,667
		9,322,153		7.1		4,708,113

During the nine months ended September 30, 2021, the Company recognized approximately $3,567,000 of stock option compensation expense of which approximately $2,388,000 relates to performance-based awards of directors and officers. As of September 30, 2021, there was approximately $15,443,000 of unrecognized compensation costs related to stock options outstanding that are expected to be expensed through 2025.

Additionally, the Company recorded approximately $1,228,000 for restricted stock expense as the Company met certain performance thresholds.

Total stock-based compensation expense consisting of stock options and restricted stock in the nine months ended September 30, 2021 was approximately $4,795,000.

At the Annual Meeting of Stockholders held on March 22, 2021, the stockholders approved and ratified an increase of 2,500,000 shares of common stock allocated to the Company’s 2017 Incentive Stock Plan.

See Note 6 for additional information regarding accrued Directors’ compensation.

NOTE 11 – DIRECT FINANCING LEASE

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 per month and initial direct costs are not considered significant. The transaction resulted in incremental revenue in the quarter ended September 30, 2021 of approximately $38,000.

The equipment is subject to a 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 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
Remainder of 2021		30,537
2022		122,148
2023		122,148
2024		122,148
2025		122,148
Thereafter		40,716
Sub-total		559,845
Less deferred revenue		(118,929	)
Net investment in lease	$	440,916

NOTE 12 – 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 finance 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. The cost basis of the lease equipment is $163,407 and the accumulated amortization as of September 30, 2021 is $147,334. The following is a schedule showing the future minimum lease payments under finance lease by year and the present value of the minimum lease payments as of September 30, 2021. The interest rate related to the lease obligation is 12% and the maturity date is March 31, 2022.

Year ending December 31
Remainder of 2021	$	10,774
2022		10,774
Total minimum lease payments		21,548
Less: Amount representing interest		(735

SEC Form 10-Q filed by Ipsidy Inc.