authID Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

In the opinion of Management, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2023. The results of operations for the three and nine months ended September 30, 2024 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 authID Inc. and its wholly-owned subsidiaries MultiPay S.A.S., ID Solutions, Inc., FIN Holdings Inc., Ipsidy Enterprises Limited and authID Gaming Inc. (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Going Concern

As of September 30, 2024, the Company had an accumulated deficit of approximately $169.2 million. For the three and nine months ended September 30, 2024, the Company earned revenue from continuing operations of approximately $0.25 million and $0.69 million, used approximately $2.7 million and $8.5 million to fund its operations, and incurred a net loss of approximately $3.4 million and $9.7 million.

The continuation of the Company as a going concern is dependent upon financial support from the Company’s stockholders, the ability of the Company to obtain additional debt or 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 acquiring new clients to generate revenues and cash flows. In June 2024, the Company raised approximately $10.0 million after expenses from existing and new stockholders through the sale of Common Stock pursuant to a registered direct offering. Going forward, the Company plans to raise additional funds to support its operations and investments as it seeks to create a sustainable organization. Our growth-oriented business plan to offer products to our customers will require continued capital investment and there is no guarantee that such financing will be available, or available on acceptable terms.

There is no assurance that the Company will ever be profitable. 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. As there can be no assurance that the Company will be able to achieve positive cash flows (become cash flow positive) and raise sufficient capital to maintain operations, there is substantial doubt about the Company’s ability to continue as a going concern.

Reclassification

Certain prior year expenses have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the previously reported loss from continuing operations and management does not believe that this reclassification is material to the consolidated financial statements taken as a whole. Specifically, for the three and nine months ended September 30, 2023, we reclassified approximately $48,000 and $141,000, respectively, in expenses from research and development expenses to general and administrative expenses.

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, 2024 and 2023 because their effect was antidilutive:

Revenue Recognition

Software License– The Company recognizes revenue based on the identified performance obligations over the performance period for fixed consideration and / or variable fees generated. Variable fees are typically earned over time based on monthly users, transaction volumes or a monthly flat fee rate. We allocate the selling price in a contract which has multiple performance obligations based on the contract selling price that we believe represents a fair market price for the service rendered based on estimated standalone selling price. Transaction fees are billed monthly and are constrained to transactions incurred within the month.

For contracts with minimum annual fees, the Company generally recognizes the amount of revenue ratably over the contract year and records contract assets for the amount in excess of monthly contract billings relating to variable contract consideration. For certain contracts, the Company enters into an agreement which stipulates a minimum annual fee which is generally due at the end of the contract year, in excess of the amount of monthly billings. The Company may also require milestone payments of the minimum annual fee. The amount of any billed fees in excess of revenue recognized is recorded as deferred revenue. The company accounts for any price concessions granted to a customer as reductions to consideration under each respective contract and subsequently recognizes revenue up to the amount of the revised consideration after the concession is provided.

Any usage-based fees in excess of the minimum contract amount are charged to the customer and allocated to the annual period in which they are earned under the contract. At the beginning of each annual period in the contract, the Company estimates the variable amounts for the annual period subject to the constrained variable consideration (usage-based fees) and recognizes that amount on a time-elapsed basis over the annual period. At each reporting date within an annual period, the Company reassesses its estimate of the excess variable amounts for the annual period and updates the amount recognized on a time-elapsed basis over the remainder of the annual period.

The Company had deferred revenue contract liabilities of approximately $329,000 and $132,000 as of September 30, 2024 and December 31, 2023, respectively, for certain revenue that will be earned in future periods.

Concentration of Revenue and Accounts Receivable

For the nine months ended September 30, 2024, two customers represented 64% of revenue. For the nine months ended September 30, 2023, one customer represented 49% of revenue. For the three months ended September 30, 2024, three customers represented 84% of revenue. For the three months ended September 30, 2023, one customer represented 53% of revenue. As of September 30, 2024, three customers accounted for 71%, of accounts receivable. As of December 31, 2023, two customers accounted for 67%, of accounts receivable.

Remaining Performance Obligations

As of September 30, 2024, the Company’s Remaining Performance Obligation (RPO) was $3.83 million, of which $0.33 million is recorded as deferred revenue and $3.50 million is related to other non-cancellable contracted amounts. The Company expects approximately 27% of the RPO to be recognized as revenue over the twelve months ending September 30, 2025, based on contractual commitments and expected usage patterns. However, the amount and timing of revenue recognition are generally dependent upon customers’ future consumption, which is inherently variable at customers’ discretion. Furthermore, the Company does not have sufficient historical information to estimate the recognition of revenue due to its current operations and has approximated such amount based on discussions with the contracted parties.

In July 2024, the Company evaluated the rollout timelines for several customers who have delayed go-live adoption dates due to their respective corporate processes and timelines. The Company expects to amend an agreement with certain customers (who comprises $1.4 million of the Company’s RPO as of September 30, 2024) to modify the terms of their contract and defer the timing of their minimum payment obligations. The Company expects these modification agreements to be finalized during the quarter ending December 31, 2024, resulting in a reduction in the future periodic recognition of the revenue associated with this performance obligation through the end of the modified contract period, December 31, 2027. The proposed modifications are not expected to affect the overall RPO associated with the customer contracts.

Deferred Contract Costs – We defer the portion of sales commission that is considered a cost of obtaining a new contract with a customer and amortize these deferred costs over the period of benefit. We expense the remaining sales commissions as incurred. Reversals recorded in the nine months ending September 30, 2024 reflect commission clawbacks for certain bookings that were adjusted in the quarter, per our corporate policy. The following table summarizes deferred contract cost activity for the nine months ended September 30, 2024:

NOTE 2 – OTHER CURRENT ASSETS

Other current assets consisted of the following at September 30, 2024 (unaudited) and December 31, 2023:

NOTE 3 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)

The Company’s intangible assets primarily consist of acquired and developed software that is being 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, 2024 (unaudited):

The following is a summary of intangible assets as of September 30, 2024 (unaudited):

Amortization expense totaled approximately $131,000 and $212,000 for the nine months ended September 30, 2024, and 2023, respectively.

Future expected amortization of intangible assets is as follows:

There were no impairment indicators noted with respect to the Company’s long-lived assets, including intangible assets, as of September 30, 2024.

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following as of September 30, 2024 (unaudited) and December 31, 2023:

NOTE 5 – RELATED PARTY TRANSACTIONS

Board of Directors

On February 15, 2024, Mr. Joe Trelin tendered his resignation as Chairman and a Director of the Company, effective immediately. On February 20, 2024, the board of directors of the Company (the “Board”) accepted his resignation and agreed to vest the unvested portion of an option granted to Mr. Trelin on June 28, 2023, amounting to 6,511 shares.

On March 25, 2024, Mr. Kunal Mehta was appointed as a Director of the Company, upon the standard terms for non-employee Directors. On May 20, 2024, Mr. Mehta was granted an option to purchase 13,282 shares of common stock at an exercise price of $7.78 per share.12,500 of the shares vest annually in equal amounts over a three-year period commencing in 2025 and 782 shares vested monthly in equal amounts over a three-month period commencing March 2024.

On August 13, 2024, the Company granted 15,627 options each at the exercise price of $8.67 per share to Messrs. Michael Koehneman, Michael Thompson, Ken Jisser, Kunal Mehta and Ms. Jacqueline White, in accordance with the Company’s compensation policy for non-employee directors. Each such option vests over a period oftwelve months.

Commercial Agreements

On June 6, 2023, the Company entered into a services agreement with The Pipeline Group, Inc. (“TPG”). Ken Jisser, a director of the Company, is the founder and CEO of TPG, a technology-enabled services company that aims to deliver business results for companies looking to build a predictable and profitable pipeline. As of September 30, 2024, the Company held a balance of approximately $117,000 in prepaid expenses related to this service agreement. In June 2024, the agreement with TPG was renewed for an additional year at a reduced fee rate of $70,000 per month. Total expense incurred under this contract during the three and nine months ended September 30, 2024 was approximately $210,000 and $752,000, respectively. Total expense incurred under this contract during the three and nine months ended September 30, 2023 was approximately $141,000 and $260,000, respectively.

Employment Agreement

Since June 2023, the Company has employed Dale Daguro, the brother of our CEO, Rhon Daguro as a VP Sales. Dale Daguro’s employment is at will and may be terminated at any time, with or without cause. Dale’s compensation is commensurate with other executives employed by the Company at a similar level of seniority and experience. During the nine months ended September 30, 2024, Dale Daguro earned approximately $201,000 in base salary and sales commission.

Issuance of Common Stock

On June 27, 2024, Michael Thompson, a Director of the Company purchased 12,254 shares of the Company’s common stock at an aggregate price of $100,000, as part of the Company’s Registered Direct offering (See Note 6 – Stockholders’ Equity).

NOTE 6 –STOCKHOLDERS’ EQUITY

Common Stock

On June 27, 2024, pursuant to Securities Purchase Agreements in a Registered Direct Offering, the Company issued 1,464,965 shares of common stock for cash gross proceeds of approximately $11.0 million (or approximately $10.0 million, net of offering costs).

During the nine months ended September 30, 2024 the Company issued 5,724 shares of common stock, upon the cashless exercise of stock options.

During the nine months ended September 30, 2023, shares of common stock were issued as a result of the following transactions:

Warrants

On June 27, 2024, in connection with their placement agent services, the Company issued 102,547 common stock warrants to the placement agent, with a term of 5 years and an exercise price of $7.50 per share.

During the nine months ended September 30, 2023, warrants were issued as a result of the following transactions:

The following is a summary of the Company’s warrant activity for the nine months ended September 30, 2024 (unaudited):

Stock Options

During the nine months ended September 30, 2024,

The Company determined the grant date fair value of options granted for the nine months ended September 30, 2024, using the Black Scholes Method, as applicable, with the following assumptions:

Activity related to stock options for the nine months ended September 30, 2024 (unaudited), is summarized as follows:

The following table summarizes stock option information as of September 30, 2024 (unaudited):

During the nine months ended September 30, 2024, the Company recognized approximately $2.1 million of stock option-based compensation expense. As of September 30, 2024, there was approximately $2.6 million of unrecognized compensation costs related to stock options outstanding that will be expensed through 2027.

On May 24, 2024, the Board of Directors adopted the 2024 Equity Incentive Plan (the “2024 Plan”). On June 26, 2024, the stockholders approved and ratified the 2024 Plan and the allocation of 395,000 shares of Common Stock to the 2024 Plan, in addition to the remaining shares not allocated to awards under the 2021 Equity Incentive Plan and any shares, which become available as a result of the forfeiture, or cancellation of any previous awards. As of September 30, 2024, there were 447,523 shares allocated to and available for issuance of awards under the 2024 Plan.

During the nine months ended September 30, 2024, the Company also issued 140,000 options to purchase common stock and agreed to grant 100,000 options to newly hired employees as inducement grants under Nasdaq Listing Rule 5635(c)(4), which are not included in the totals for the 2024 Plan.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time the Company is a party to various legal or administrative proceedings arising in the ordinary course of our business. While any litigation contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company.