authID Inc. - Quarter Report: 2017 September (Form 10-Q)

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, 2017

OR

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

For the transition period from to

Commission file number 000-54545

Ipsidy Inc.

(Exact name of registrant as specified in its charter)

(Former Name of Registrant as Specified in its Charter)

780 Long Beach Boulevard 

Long Beach, New York
11561 

(Address of principal executive offices) (zip code)

407-951-8640 

(Registrant’s telephone number, including area code)

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

☒     Yes    ☐   No

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

☒    Yes    ☐   No

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

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

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

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

☐ No

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

OTHER PERTINENT INFORMATION

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

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

 ITEM 1. FINANCIAL STATEMENTS

IPSIDY INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(Unaudited)

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME  

(Unaudited)

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES 

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

(Unaudited)

See notes to condensed consolidated financial statements.

IPSIDY INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited)

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 the Company, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US 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, 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for future periods or the full year.

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

Net Loss per Common Share

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

Going concern

As of September 30, 2017, the Company had an accumulated deficit of approximately $63.5 million. For the nine months ended September 30, 2017, the Company earned revenue of approximately $1.8 million and incurred a loss from operations of approximately $9.3 million.

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

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

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

Inventories

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

Leases

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

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

Other Assets

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

Revenue Recognition

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

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

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

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

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

Income Taxes

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

Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States. The core principal of the new standard is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company will adopt the new standard on January 1, 2018 and expects to use the modified retrospective approach upon adoption. The Company believes the impact of adopting the new accounting standard will not have a significant impact on its consolidated financial position, results of operations or cash flows. However, the Company’s evaluation of the new standard and the final determination of the impact of the new standard’s adoption is still in progress.

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

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

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

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

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

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

NOTE 3 – PROPERTY AND EQUIPMENT, NET

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

Depreciation expense totaled $48,191 and $24,029 for the nine months ended September 30, 2017 and 2016, respectively.

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

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

NOTE 5 - NOTES PAYABLE, NET

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

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

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

See notes 6 and 7. 

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

The following is a roll-forward of the Company’s notes payable and related discounts for the nine months ended September 30, 2017:

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

NOTE 6 - CONVERTIBLE NOTES PAYABLE, NET

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

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

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

NOTE 7 –DERIVATIVE LIABILITY

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

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

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

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

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

NOTE 8 – RELATED PARTY TRANSACTIONS

Amount Due Officer and Director

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

Convertible Notes Payable

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

Purchase of Common Stock

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

Other

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

The Company leases it Corporate headquarters from Bridgeworks LLC, (“Bridgeworks”), a company providing office facilities to emerging companies, principally owned by Mr. Beck and his family. Mr. Beck is Chairman, Chief Executive Officer and President of the Company. During the first nine months of 2017, the Company paid Bridgeworks $52,322.

The Company entered into a consulting agreement with Graham Beck, a son of Mr. Beck for digital marketing services beginning April 1, 2017 at a rate of $2,500 per month. During the first nine months of 2017, the expense associated with Graham Beck was $15,000.

On September 13, 2017, one of the former officers and a former director (Douglas Solomon) of the Company entered into a Confidential Settlement Agreement and General Release (the “Settlement Agreement”) pursuant to which the Offer Letter and Executive Retention Agreement entered between the Company and Mr. Solomon dated January 31, 2017, were terminated effective September 1, 2017 and Mr. Solomon resigned as Executive Director, Government Relations Enterprise Security upon execution of the Settlement Agreement. The Company agreed to pay Mr. Solomon approximately $8,000 representing unused 2017 vacation entitlement and pay for one day, reimburse Mr. Solomon for all expenses consistent with the Company’s reimbursement policy and pay Mr. Solomon’s COBRA employee only benefits through September 2018 if Mr. Solomon elected to be included under such coverage. The parties also provided mutual releases from all claims, demands, actions, causes of action or liabilities. As further consideration for entering into the Settlement Agreement, Mr. Solomon and the Company entered into an Agency Agreement dated September 13, 2017 pursuant to which Mr. Solomon agreed to be engaged as a non-exclusive sales agent for the Company’s products on an as needed basis for a term of three years in consideration of sales commissions including a monthly non-refundable minimum commission to be paid for 24 months. During the quarter ended September 30, 2017, the Company paid Mr. Solomon $13,028 under the terms of such agreement.

NOTE 9 – STOCKHOLDER’S EQUITY (DEFICIT)

Common Stock

On September 28, 2017, the stockholders of the Company approved increasing the number of authorized shares of common stock from 500,000,000 to 1,000,000,000.

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

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

On March 22, 2017, the Company entered into Subscription Agreements with several accredited investors (the “March 2017 Accredited Investors”) pursuant to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $4,000,000. The proceeds were received during 2017. In connection with this private offering, the Company paid Network 1 Financial Securities, Inc. (“Network”), a registered broker-dealer, a cash fee of $240,000 and issued Network 1,000,000 shares of common stock of the Company.

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

During the nine months ended September 30, 2017, the Company issued approximately 594,000 shares of common stock as consideration for services. The fair value of the shares, totaling approximately $140,000 was estimated based on the publicly quoted trading price and recorded as expense.

In connection with the engagement of the CEO and Chief Financial Officer (“CFO”) on January 31, 2017 (the “Grant Date”), the Company agreed to enter into Restricted Stock Purchase Agreements (the “Restricted Shares”) with the CEO and CFO to provide 15,000,000 and 5,000,000 shares of common stock, respectively, at a per share price of $0.0001. On September 29, 2017, and in connection with the increase in the authorized shares, the Company issued the Restricted Shares. The shares are restricted and are not able to be sold or otherwise transferred by the CEO or CFO until such time the Restricted Shares vest. The Restricted Shares vest only upon achieving one of several performances thresholds. As of September 30, 2017, none of the performance thresholds have been met. Accordingly, no compensation expense has been recorded in connection with the issuance of these Restricted Shares. Compensation expense associated with these Restricted Shares will be recorded based on the fair value of the shares on the date it is determined that it is probable that one or more of the performance thresholds will be met in the near term.

Warrants

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

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

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

Stock Options

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

In connection with the engagement of the CEO and Chief Financial Officer (“CFO”) on January 31, 2017, the Company granted the CEO and CFO stock options to acquire 15,000,000 shares and 5,000,000 shares of common stock of the Company respectively at an exercise price of $0.10 per share for a period of ten years. Additionally, the Company granted one employee stock options to acquire 1,000,000 shares of common stock at an exercise price of $0.29 per share for a period of ten years.

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

Expected Volatility – 85%

Expected Term – 5.0 Years

Risk Free Rate – 1.92%

Dividend Rate – 0.00%

Activity related to stock options for the nine months ended September 30, 2017 is summarized as follows:

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

Stock option expense for the three and nine months ended September 30, 2017 was approximately $625,000 and $4,892,000, respectively, and for the corresponding periods ended September 30, 2016 was $654,000 and $6,806,000, respectively. The three and nine months ended September 30, 2017, included approximately $61,000 and $1,565,000, respectively of non-employee stock compensation. As of September 30, 2017, there was approximately $3,652,000 of unrecognized compensation costs related to stock options outstanding which will be expensed through 2020.

NOTE 10 – 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 were installed and operational and when the lease commenced. The term of the rental contract is ten years at an approximate monthly rental of $11,900. The lease has the option at the end of the lease term to purchase each unit for approximately $40. The term of the lease approximates the expected economic life of the kiosks. The lease was accounted for as a direct financing lease.

The Company has recorded the transaction as it’s net investment in the lease and will receive monthly payments of $11,856 before estimated executory costs, or $142,272, annually, to reduce investment in the lease and record income associated with the related amount due. Executory costs are estimated to be $1,677 monthly and initial direct costs are not considered significant. The transaction resulted in incremental revenue in the nine months ended September 30, 2017 of approximately $56,000.

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

NOTE 11 – LEASE OBLIGATION PAYABLE

The Company entered into a lease in March 2017 for the rental of its printer for its secured plastic and credential card products business under an arrangement that is classified as a capital lease. The leased equipment is amortized on a straight line basis over its lease term including the last payment (61 payments) which would transfer ownership to the Company. Total amortization related to the lease equipment as of September 30, 2017 is $18.752. 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, 2017. The interest rate related to the lease obligation is 12% and the maturity date is March 31, 2022. Future cash payment related to this capital lease are as follow for the three-month period remaining in 2017 and the calendar years ending from 2018-2022 and thereafter. 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time, Company may be involved in legal proceedings in the ordinary course of business, which could result in litigation. While any litigation contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company. 

Other

The Company entered into an Agency Agreement dated September 13, 2017 pursuant to which a former officer and director agreed to be engaged as a non-exclusive sales agent for the Company’s products on an as needed basis for a term of three years in consideration of sales commissions including a monthly non-refundable minimum commission to be paid for 24 months. The minimum commitment during the term of the agreement is approximately $335,000.

In September 2017, the Company entered into a consulting agreement and agency agreement with an organization to provide ongoing business development and marketing analysis/support beginning October 1, 2017 for a period of 24 months but is cancelable at the end of the first year. The minimum commitment for the first year is $180,000 payable monthly at a rate of $15,000. The agreement also provides a one-time payment of $75,000 upon the Company meeting a performance target. The agency agreement provides for additional compensation to be paid upon successful customer acquisition and cash collection from introduced new customers.

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

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

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

Overview

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

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

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

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

Key Trends

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

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

Going concern

As of September 30, 2017, the Company had an accumulated deficit of approximately $63.5 million. For the nine months ended September 30, 2017 the Company earned revenue of approximately $1.8 million and incurred a loss from operations of approximately $9.3 million.

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

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

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

Adjusted EBITDA

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

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

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

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

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

Reconciliation of Net Loss to Adjusted EBITDA 

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

Three and Nine Months Ended September 30, 2017 and September 30, 2016

Revenues, net

During the three and nine months ended September 30, 2017, the Company had revenues of approximately $0.6 million and $1.8 million, respectively, compared to $0.6 million and $1.4 million in the three and nine months ended September 30, 2016, respectively. The increase in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 is principally related to Cards Plus and ID Solutions which were acquired on February 8, 2016.

Cost of sales

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

Operating Expenses

During the three month and nine months ended September 30, 2017 general and administrative expenses were $2.3 million and $10.3 million, respectively, compared to general and administrative expenses of $2.2 million and $10.7 million for the three and nine months ended September 30, 2016, respectively. Stock compensation was approximately $.1 million and $1.9 million less in the three and nine months in 2017 compared to 2016. The increase in expenses in 2017 other than the decrease in stock compensation was principally due to higher staff compensation expense and consulting services as resources were added to support the current and future operations.

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

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

Other Income (Expense)

Derivative Liability and Net Loss on Modification of Debt

The derivative liability is associated with potential adjustments in the conversion price associated with certain convertible debentures and warrants that were used to finance the business. As a result of the valuation of these provisions as of September 30, 2016, the Company experienced an increase in the derivative liability of approximately $1.6 million in the three months and a reduction in the derivative liability of approximately $16.1 million in the nine months. The decline in the derivative liability for the nine months is associated with the lower stock price.

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

Interest expense

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

Liquidity and Capital Resources

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of September 30, 2017, the Company had approximately $1.4 million of cash and had $0.8 million of net working capital. Stockholders’ equity was approximately $10.5 million as of September 30, 2017.

Cash used in operating activities was approximately $4.9 million in the nine months ended September 30, 2017 compared to $3.1 million in the nine months ended September 30, 2016 as the Company invested in staff and consulting services to support current and future operations.

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

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

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

The combination of the above events effectively refinanced the Company’s financial position in the first nine months of 2017 and provided the current period financing requirements. The Company anticipates additional financing will be required beyond the current actions and the amounts will be dependent on current operations and investments the Company may pursue. We are expecting to raise capital in the fourth quarter of 2017.

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

Off-Balance Sheet Arrangements

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

Recent Accounting Policies

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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

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

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

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

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

On January 31, 2017, in connection with the issuance of the Stern Note an aggregate of 4,500,000 shares of Common Stock, the Company issued Network 1, a registered broker-dealer 1,200,000 shares of common stock of the Company in conjunction with its services.

On September 29, 2017, the Company issued to the CEO and CFO in connection with their Restricted Stock Purchase Agreements 15,000,000 and 5,000,000 shares of common stock.   

During 2017, the Company issued approximately 594,000 shares of common stock issued in consideration of certain technical services.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable to our operations. 

ITEM 5. OTHER INFORMATION

Annual Meeting

The Company held its Annual Meeting on September 28, 2017 in Long Beach, New York. Of the 336,565,097 shares of Common Stock outstanding on August 29, 2017, the record date, 281,040,309 shares were represented at the Annual Meeting, in person or by proxy, constituting a quorum. The proposals considered at the Annual Meeting are described in detail in the Proxy Statement. The proposals described below were voted upon at the Annual Meeting and the number of votes cast with respect to each proposal was as set forth below:

(1) Elect five (5) directors until his successor is duly elected and qualified, or until his earlier death, resignation or removal. The five directors receiving the highest vote were appointed to the board. The following directors were elected to the board.

(2) Ratify the appointment of Cherry Bekaert LLP as the Company’s independent auditors for the fiscal year ending December 31, 2017. This matter was determined based on majority of the shares cast.

(3) Approving the 2017 Incentive Stock Plan and to authorize 70,000,000 shares of Common Stock for issuance thereunder. This matter was determined based on majority of the shares cast.

(4) Approving the amendment of the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 500,000,000 to 1,000,000,000. This matter was determined based on majority of the shares outstanding.

(5) Approving 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-25, with the exact ratio to be set within that range at the discretion of our board of directors before December 31, 2018 without further approval or authorization of our stockholders. This matter was determined based on majority of the shares cast.

Amendment to the Certificate of Incorporation

As detailed above, on September 28, 2017, the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation, increasing the number of authorized shares of common stock from 500,000,000 to 1,000,000,000. The increase in authorized shares was effected pursuant to a Certificate of Amendment to the Certificate of Incorporation filed with the Secretary of State of the State of Delaware.

Other

On December 30, 2016, LATAM, a wholly owned subsidiary of the Company, entered into a Contract for the Provision of Cash Collection Services (the “Contract”) with Recaudo Bogota S.A.S. (“RB”), a Colombian company, pursuant to which the Company agreed to supply, maintain and provide platform services for 740 unattended payment collection and fare ticketing kiosks, in consideration of approximately $30 million dollars (excluding VAT) payable over the ten year period of the Contract. The parties are currently re-negotiating the terms of the Contract, including a potential termination of the Contract by mutual consent. There is no guarantee that the parties will be able to enter a definitive agreement pertaining to the re-negotiation or cancellation of the Contract.

ITEM 6. EXHIBITS