IDEX Biometrics ASA [IDBA] Filings

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
American Depositary Shares, each representing 75 Ordinary Shares, nominal value NOK 0.15 per share		IDBA		The Nasdaq Capital Market
Ordinary Shares, nominal value NOK 0.15 per share*		*		The Nasdaq Capital Market*

*	Not for trading, but only in connection with the registration of the American Depositary Shares.

Large accelerated filer		☐		Accelerated filer		☐		Non-accelerated filer		☒
								Emerging growth company		☒

†	The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

U.S. GAAP  ☐		International Financial Reporting Standards as issued				Other  ☐
		by the International Accounting Standards Board ☒

				Page
INTRODUCTION					1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS					2
PART I					3
Item 1.		Identity of Director, Senior Management and Advisers			3
Item 2.		Offer Statistics and Expected Timetable			3
Item 3.		Key Information			3
Item 4.		Information on the Company			39
Item 4A.		Unresolved Staff Comments			61
Item 5.		Operating and Financial Review and Prospects			61
Item 6.		Directors, Senior Management and Employees			75
Item 7.		Major Shareholders and Related Party Transactions			88
Item 8.		Financial Information			94
Item 9.		The Offer and Listing			96
Item 10.		Additional Information			96
Item 11.		Quantitative and Qualitative Disclosures About Market Risk			104
Item 12.		Description of Securities Other than Equity Securities			105
PART II					108
Item 13.		Defaults, Dividend Arrearages and Delinquencies			108
Item 14.		Material Modifications to the Rights of Security Holders and Use of Proceeds			108
Item 15.		Disclosure Controls and Procedures			108
Item 16A.		Audit Committee Financial Expert			109
Item 16B.		Code of Conduct and Code of Ethics			109
Item 16C.		Principal Accountant Fees and Services			109
Item 16D.		Exemptions from the Listing Standards for Audit Committees			110
Item 16E.		Purchases of Equity Securities by the Issuer and Affiliated Purchasers			110
Item 16F.		Change in Registrant’s Certifying Accountant			110
Item 16G.		Corporate Governance			110
Item 16H.		Mine Safety Disclosure			110
Item 16I.		Disclosure Regarding Foreign Jurisdictions that Prevent Inspections			110
PART III					111
Item 17.		Financial Statements			111
Item 18.		Financial Statements			111
Item 19.		Exhibits			111
SIGNATURES					113
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS					F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM					F-2

20-F

The wordmarks “IDEX” and “TrustedBio,” the IDEX logo, and other trademarks or service marks of IDEX Biometrics ASA appearing in this Annual Report are the property of IDEX Biometrics ASA. Solely for convenience, the trademarks, service marks, and trade names referred to in this Annual Report are listed without the and symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their right thereto. All other trademarks, trade names, and service marks appearing in this Annual Report are the property of their respective owners. We do not intend to use or display other companies’ trademarks and trade names to imply any relationship with, or endorsement or sponsorship of us by, any other companies.

Our audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, and IFRS as adopted by the European Union. Our financial statements included in this Annual Report are presented in U.S. Dollars and, unless otherwise specified, all monetary amounts are in U.S. Dollars. All references in this Annual Report to “$,” “U.S. Dollars,” “Dollars” and “USD” mean U.S. Dollars and all references to “NOK” mean Norwegian Krone, the currency of our home country.

Throughout this Annual Report, references to “ADSs” mean the Company’s American Depositary Shares, issued by our “Depositary,” The Bank of New York Mellon, and listed for trading on The Nasdaq Capital Market (“Nasdaq”). Each ADS represents 75 of the Company’s “Ordinary Shares,” our single class of outstanding shares, held by the Depositary. Our Ordinary Shares are listed for trading on the “Oslo Børs,” a unit of EURONEXT N.V.

Also, throughout this Annual Report, references to the “Securities Act” mean the Securities Act of 1933, as amended, references to the “Exchange Act” mean the Securities Exchange Act of 1934, as amended, and references to the “SEC” mean the U.S. Securities and Exchange Commission.

 

1

20-F,

 

 

 

 

 

 

 

 

 

 

 

 

 

forward-looking

You should read this Annual Report and the documents referenced herein and filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from those we currently expect. Accordingly, we qualify all of our forward-looking statements by these cautionary statements.

This Annual Report contains market data and industry forecasts obtained from industry publications and related sources we consider credible. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates, given the pace at which industry conditions and market circumstances may change. We have not independently verified any third-party information presented herein. While we believe the market statistics and related information included are accurate as of the date of this Annual Report, you are cautioned that such information is subject to change and, as such, inherently imprecise.

 

2

 

Not applicable.

 

Not applicable.

 

Not applicable.

Not applicable.

In summary, these risks are:

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

Our efforts to execute our strategy successfully may cost more and take longer than we anticipate. We generated revenue of $2.8 million and recorded a net loss of $32.6 million for the year ended December 31, 2021. We generated revenue of $1.1 million and recorded a net loss of $26.8 million for the year ended December 31, 2020.

 

4

We are not certain whether or when we will generate sufficient cash flow to fully fund our costs and accelerate the expansion of our business, or whether or when we will generate sufficient revenue to achieve or maintain profitability. Although we have established customer relationships with innovators and early adopters sharing our vision for the potential of fingerprint authentication in smart card applications, our forecasts of when we will generate revenue and cash flow sufficient to meet its funding requirements are based on complex assumptions regarding demand, products, costs, and other considerations that are subject to rapid change. As stated, these assumptions involve uncertainties and evolving circumstances, many of which are outside of our influence or control.

Our customers primarily are manufacturers of smart cards, although a critical element of demand for our solutions originates with these manufacturers’ own customers (e.g., the demand for financial payment cards with fingerprint authentication originates with a bank issuer interested in offering such cards). As such, we focus our marketing and sales efforts on smart card manufacturers, as well as their customers and other influential participants in the smart card industry (e.g., payment card networks).

Fingerprint authentication applications in the market segments we target are in the early stages of development. Because of this, we have experienced uncertain and lengthy sales cycles, as potential customers and other influential participants in the smart card industry have required, and likely will continue to require, exposure to, and education about, fingerprint authentication technologies, our solutions, and our value proposition. To address this, we expanded our marketing and sales staff in 2021 and our marketing budget for 2022. We expect our enhanced demand creation efforts will shorten sales cycles, but we cannot offer any assurances regarding the success of these efforts or the amounts and timing of customer orders.

Given recent inflationary pressures, primarily in the semiconductor supply chain, we expect our costs and expenses to increase, which could negatively influence cash flow and profitability, even if we are able to significantly increase our revenue. As a “fabless” developer of semiconductor-based products, our manufacturing costs for the products we currently sell are most influenced by the discounts our vendors offer for sustained, high-volume production orders. We may not achieve the necessary volume of production orders to obtain advantageous pricing for the manufacture of our current products. If we are not able to pass on increased costs to customers by increasing the prices of our products, our profitability could decline, harming our business, operational performance, and financial position.

We believe our advances in fingerprint authentication technologies are an important competitive differentiator. As such, we intend to maintain research and development spending at current levels. While we intend to continue development of new products, with improved performance, greater functionality, and broadened applications, with lower costs, we cannot accurately predict whether or when these new products will be introduced or the level of customer acceptance they will achieve in the market segments we target.

Our operating cost structure is largely fixed, reflecting our business model and strategic focus on development of highly differentiated biometric technologies. Variable costs are associated primarily with production volumes. Accordingly, we anticipate our profitability could improve as revenue increases, as our forecasts for operating expenses are based on our assumed ability to increase revenue without proportional increases in our operating cost structure. However, because of the uncertainties associated with accurately forecasting revenue levels and achieving operational economies of scale, we cannot offer any assurances regarding our ability to, or the timing of when we might, achieve profitability.

We are not certain whether or when we will generate sufficient operational cash flow to offset our costs and accelerate the expansion of our business, nor whether or when we will generate sufficient revenue to achieve or

 

5

re-investing

While we previously have been able to raise capital through private placements of our Ordinary Shares, additional financing in any form may not be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to maintain or expand our revenue, which could harm our business, operational results, and financial position, and, in turn, the value of an investment in our equity securities could decline. We continuously review all alternatives, financial and strategic, for meeting our future capital requirements. However, because our future funding decisions will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future funding from investors, lenders, or strategic partners.

We are a developer of fingerprint authentication solutions and focus on use cases based on smart cards. The specific applications we are targeting with our fingerprint authentication solutions are in the early stages of their development and are characterized by the extended and unpredictable sales cycles associated with new, innovative technologies, a limited number of early adopting customers, immature supply chains, and evolving application requirements and industry-specific standards.

ID-1

 

 

 

 

6

 

Because of these and other challenges encountered in developing opportunities in the financial payment market segment, accurately forecasting demand within the market segment has been, and likely will continue to be, difficult, with forecasts based on complex assumptions that have been, and likely will continue to be, subject to rapid change. These assumptions involve uncertainties and evolving circumstances, many of which are outside of our influence or control.

value-add

 

 

 

 

We believe the opportunity for us in our third targeted market segment, digital currency storage, also referred to as digital wallets, holds great promise, given the applicability of our fingerprint authentication solutions. However, this market segment is the least developed of the three we are targeting.

 

7

e-CNY

The timing of and the rate of demand growth in each market segment we target are difficult to accurately predict, as the drivers of demand differ. Competitive conditions and solution requirements also differ, contributing to difficulty in accurately predicting revenue, profitability, and the timing thereof. Accordingly, we offer no assurances regarding whether or when our revenue growth will accelerate in any of the three targeted segments, nor can we offer assurances regarding whether or when we will reach profitability, if at all, in any such segment.

Our value proposition is based on the highly-differentiated functionality and performance of our fingerprint authentication solutions and our comprehensive approach to offering integrated solutions addressing multiple customer needs. These customer needs may vary among the market segments we target, but generally are associated with the creation of cost-effective competitive advantages for our customers (e.g., highly-differentiated end products).

We believe the primary customer requirement across the market segments we target is a compelling economic rationale for implementing fingerprint authentication in a smart card. We believe the absence of such a rationale, largely the consequence of the historically high costs associated with manufacturing and deploying such smart cards, has inhibited demand to date and, if we cannot further reduce these costs, likely will continue to inhibit demand and, in turn, harm our business, operational performance, and financial position.

low-cost

longer-term

 

8

end-customers

While our efforts have significantly reduced the difference between the costs of manufacturing and deploying smart cards incorporating fingerprint authentication and those associated with manufacturing and deploying less complex smart cards, this cost difference remains an obstacle to widespread adoption. We may not be able to achieve our objectives for additional cost reductions through further component integration and through development of software-based enrolment solutions, as the engineering challenges associated with both are substantial and characterized by uncertainties.

If we are not able to achieve additional cost reductions in support of our value proposition, our fingerprint authentication solutions may not achieve widespread adoption and our opportunities may be constrained, thereby harming our business, operational performance, and financial position.

Fingerprint authentication integrated into a smart card remains a novel solution for enhancing security. In addition to addressing costs and supporting the economic rationale for customer use of our fingerprint authentication solutions, we must address the other uncertainties and concerns of potential customers and users if our solutions are to achieve widespread acceptance. Although recently escalating concerns about fraud losses, identify theft, data breaches, and other security risks have increased general awareness of the need for improved electronic security systems and data protection procedures, and fingerprint authentication has achieved widespread acceptance among manufacturers and users of smart phones, widespread acceptance of fingerprint authentication in smart cards, if it occurs, likely will depend on a wide range of variables and outcomes, including:

 

 

 

 

 

 

9

For these reasons, we are uncertain whether or when fingerprint authentication in smart cards will achieve widespread acceptance in any commercial markets or that demand for our solutions will be sufficient to create a market large enough to produce significant revenue or earnings. If widespread acceptance is not achieved, our business, operational performance, and financial position may be harmed, and the value of an investment in our securities may decline.

pre-sale

pre-sale

Our forecasts, based on assumptions and estimates, are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described herein. We utilize third-party data sources and analysis, which we generally do not independently verify, in our business planning and the development of our forecasts. Inaccuracies or errors in such third-party information likely could contribute to inaccuracies or errors in our business planning and forecasting. We also collect our own market data and competitive information, from which we develop certain assumptions and estimates used in our business plans and forecasts. If we make errors in developing the assumptions and estimates used in our business plans and forecasts, or the assumptions are inaccurate due to rapidly changing circumstances, our growth rate may be limited, as we may incorrectly allocate resources and capital, potentially harming our business, operating performance, and financial position.

If the size of one or more of our targeted market segments expands as we have estimated, our revenue may not expand at a similar rate, if at all. Growth of our revenue is subject to many risk factors, including those described herein. Accordingly, forward-looking statements regarding expected or forecast demand levels, market segment size, market shares, revenue levels, and growth rates included in this Annual Report or in other disclosures should be considered estimates, characterized by uncertainty and subject to change.

We have historically generated limited total revenue, and most of that revenue has been associated with a limited number of customers. During 2021, 2020, and 2019, one customer accounted for approximately 85%, 81%, and 72% of our revenue, respectively.

 

10

While we pursue new customers and business opportunities as we maintain our relationships with our current customers, we have had limited success in diversifying our customer base. Excessive customer concentration, now and in the future, could cause any fluctuations in revenue and profitability to be more severe and could contribute to greater difficulty in resource allocation, inventory planning, and revenue forecasting. The loss of a major customer, an unanticipated decrease in demand for our products from a major customer, or our failure to diversify our customer base could harm our business, operational performance, and financial position.

The success of our business depends on retaining current customers, while expanding and diversifying our customer base, and relies on our ability to develop, communicate, and deliver a compelling value proposition to our customers. Our ability to attract new customers and retain existing customers depends in large part on our ability to be collaborative, responsive, and flexible in the timely delivery of fingerprint authentication solutions to customers, meeting their current and future needs. As enabling technologies evolve, manufacturing processes and requirements change and demand drivers shift within market segments, we are required to continually improve our existing products and introduce new, innovative products, thereby maintaining our competitive position as a leading developer of highly-differentiated fingerprint authentication solutions. If we fail to anticipate technological advances, fail to develop high-performance, lower-cost products incorporating those advances, and fail to deliver compelling, highly-differentiated solutions meeting customer requirements, our competitive position likely will suffer, harming our business, operational performance, and financial position.

Although we have completed the development of multiple generations of our fingerprint authentication solutions, they have not yet been deployed in high volumes. Despite extensive testing during development and third-party certifications, our solutions may contain undetected design flaws, coding errors, and material or manufacturing defects that are discovered only after high volume deployment and extensive use. Any such flaw, error, or defect in current or new solutions could cause product release delays, design modifications, customer delays, and product recalls, any of which could be costly and disruptive, with potentially adverse effects on customer relationships and our competitive position and, in turn, harm our business, operational performance, and financial position.

An important element of our strategy is collaboration with well-positioned partners, leveraging their expertise and resources. We have entered, and we anticipate that we will continue to enter, into strategic alliances and collaborations. We continually evaluate strategic partnership opportunities designed to enhance or complement our technologies, to provide necessary expertise, components, or supplies, to facilitate and accelerate our access to customers and geographies, and to develop, introduce, and distribute solutions integrating our products and intellectual property with those of the partner. Certain strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as we expect. The failure of these alliances to achieve their objectives may impede our ability to introduce new products and enter new markets, meeting our growth and performance expectations. Furthermore, our partners may possess, obtain, or retain rights in intellectual property they developed independently or as part of an alliance. In the event of a dispute with a partner, the partner may attempt to withhold or assert rights in intellectual property that we developed or sought access to for the purpose of enhancing or complementing our technologies.

 

11

We compete with both established companies and early-stage businesses providing identification and authorization solutions, as well as larger providers of broader, more traditional security solutions. Some of our competitors have substantially greater financial, engineering, marketing, customer support and manufacturing resources than us, and may independently develop superior technologies and solutions, which may result in our technologies and solutions becoming less competitive or obsolete.

In some circumstances, competitors may be able to aggressively compete on price in a manner we may not. Current and potential competitors also may have greater name recognition, more extensive market presence, larger installed bases, and long, established relationships with many of their customers and partners.

In the market segments we target, authentication solutions utilizing powered mobile devices (e.g., smart phones) are achieving broadening acceptance and represent a significant competitive threat. We believe the demonstrable vulnerabilities of such alternative solutions, most notably to hacking (i.e., the unauthorized access to and misuse, for fraudulent or criminal purposes, of private information stored on a networked electronic device), afford us a meaningful competitive advantage. However, we may not be able to successfully communicate this and other competitive advantages to those potential customers for which a networked, mobile device, albeit vulnerable to security risks, might be an acceptable alternative solution.

If we are unable to enhance our existing technologies or develop new technologies in a timely manner in response to technological and marketplace changes, our ability to compete in our targeted market segments likely will suffer. In addition, if one or more other biometric technologies, such as voice, face, iris, hand geometry, or blood vessel recognition offered by competitors, are widely adopted, the potential opportunities for our fingerprint authentication solutions could be reduced.

Our ability to compete successfully depends on a number of competitive factors, which may be outside our influence or control. These competitive factors include the following:

 

 

 

 

 

Additional competitors may enter the market segments we have targeted, with fingerprint authentication solutions or solutions based on other technologies or approaches, increasing competition and increasing risks to our business, operational performance, and financial position.

Early-stage markets are susceptible to consolidation of participants and entry into the market by larger, established companies that acquire or form joint ventures with participants. Our position in the market segments we target could be harmed if the competitive landscape were to change due to consolidation or entry by a company with substantial resources through a merger, acquisition, or joint venture with a competitor. Increased competition within any of our targeted market segments could result in price reductions, reduced gross margins, and lost opportunities, potentially harming our business, operational performance, and financial position.

 

12

We currently rely on Taiwan Semiconductor Manufacturing Company, Limited (“TSMC”), the leading producer of semiconductor wafers, for production of our proprietary application specific integrated circuit (“ASIC”) designs. We also rely on a limited number of providers of assembly and test services, including Amkor Technology, Inc. and Silicon Precision Industries Limited (a unit of ASE Technology Holding Co., Ltd.), both of which are leaders in outsourced semiconductor assembly and test services.

We enjoy collaborative, supportive relationships with these suppliers. While we have experienced lengthened delivery lead times, we have not experienced significant delays in delivery of wafers or completed products. However, broader supply chain uncertainties have contributed to, and likely will continue to contribute to, difficulties in accurately planning capacity utilization, inventory provisioning, and inventory levels.

We also have experienced increased costs and expect further cost increases if supply chain conditions remain for a prolonged period, which we anticipate. Numerous industries dependent on the semiconductor and electronics supply chains have experienced supply shortages and delays, contributing to lower production, higher costs, and reduced efficiencies. We expect, based on the research of industry analysts and information from our suppliers, uncertainties associated with capacity utilization, lead times, delivery schedules, and costs will continue through 2022 and, possibly, into 2023. However, we cannot accurately predict when conditions in our supply chains will normalize or what the consequences for our business might be if such normalization does not occur when expected.

The TSMC facility producing our semiconductor wafers is located in China, which exposes us to risks associated with international trade policy, tariffs, and related policy matters, all of which are outside of our influence or control. While TSMC facilities in other countries offer the fabrication processes we require, transition of production of our wafers to such a facility would require significant effort, time, and costs, which could harm our business, operational performance, and financial position.

Our ability to successfully execute our growth strategy depends on our ability to attract, motivate, and retain our personnel. Competition for well-qualified employees across critical disciplines, is intense. Our continued ability to compete effectively depends on our ability to attract new, well-qualified candidates and to retain and motivate existing staff. If we do not succeed in attracting well-qualified candidates or retaining and motivating existing staff, our business, operational performance, and financial position could be adversely affected.

We believe our success has depended, and will continues to depend, on the talents and efforts of our executives and our highly skilled staff, including our engineering, sales, and administrative personnel. We believe we provide compensation, in the form of salaries, benefits, and share-based awards, consistent with comparable technology companies of our size, development stage, and industry focus. We also maintain a yearly performance-based, variable compensation plan, in which all full-time employees participate, directly tied to company-wide, departmental, and individual performance goals. However, total variable compensation paid for the last three years has not been a significant portion of cash compensation, representing, in aggregate, approximately 5%, 4%, and 10% of employee salaries paid for the years ended December 31, 2021, 2020, and 2019. Until we achieve certain levels of sustained revenue and profitability, such amounts of variable compensation likely will not be a significant portion of total compensation. As such, our variable compensation plan may not have the intended effects associated with motivating and retaining our employees.

 

13

As of December 31, 2021, all of our full-time staff (i.e., employees and permanent individual contractors) held subscription rights for the purchase of our Ordinary Shares. Our executives and other key contributors receive a significant portion of their total annual compensation in the form of subscription rights awards or, from time to time, other forms of share-based compensation. If the quoted price of our Ordinary Shares does not appreciate from the prices per share associated with the subscription rights outstanding, the value, if any, of those subscription rights, if and when exercised, may not be meaningful to holders of those subscription rights. If the quoted price of our Ordinary Shares does not increase, the holder’s perception of the potential value of his or her subscription rights may be insufficient to retain that holder as an employee or contractor. The loss of one or more important contributors, due to the perception that the current or future value of subscription rights awards is not sufficiently compelling to remain with us, could adversely affect our ability to execute our strategy, and we may not be able to find adequate replacements in a timely manner. Accordingly, we can provide no assurances that we will be able to retain the services of our executives or key contributors.

the COVID-19 pandemic,

COVID-19

the COVID-19 pandemic

Additionally, the pandemic could negatively impact the performance of our customers, which could cause reduced orders from them or delays in renewing or entering into contracts with us. We believe the pandemic has had an adverse influence on the timing of activities of smart card manufacturers and issuers, including delaying product development and the initiation of trials and pilots involving smart cards incorporating our fingerprint authentication solutions. Such negative impact on the performance of our customers could slow the collection of accounts receivable or expose us to inventory obsolescence, either of which, if significant, could harm our business, operational performance, and financial position.

increase end-user awareness

COVID-19

 

14

Because we sell an innovative technology solution for emerging applications in market segments in early stages of development, we are particularly vulnerable to a sustained decline in economic conditions, which likely would be accompanied by a decline in confidence within our targeted market segments. Heightened risk aversion within our targeted market segments could inhibit demand for our solutions, which have yet to achieve wide adoption.

We believe global economic conditions are subject to the following short- and long-term exogenous risks, individually and with combined effect:

 

 

 

 

These and other risks to economic activity could make it difficult for our customers and other market participants to accurately forecast and plan business activities, leading to lower confidence and the possibility of reduced or delayed on new initiatives, such as the deployment of products incorporating our fingerprint authentication solutions. If economic conditions deteriorate or are characterized by greater uncertainty or volatility, we may not meet our revenue forecasts or our expectations for when profitability will be achieved may be delayed, which could have an adverse impact on our business, operational performance, and financial position.

Additionally, if economic conditions were to deteriorate, valuations in the capital markets likely would decline, independent of our performance or disclosed outlook, potentially resulting in lower quoted market prices for our equity securities. As such, our ability to access additional capital through the capital markets could be diminished or significantly delayed.

We market our solutions worldwide. Our global marketing and sales personnel are assigned to offices in the United Kingdom, the United States, and China, and focus on demand creation and customer support. We also have sales and marketing personnel residing across Europe, North America, and Asia, addressing opportunities across our three targeted markets in those regions. Employing and managing personnel across disparate international domiciles, with differing employment and tax laws, has been, and likely will continue to be, a source of organizational complexities and costs that have been, and likely will continue to be, disproportionally high for a company of our size and stage of development.

 

 

15

COVID-19

Our international activities may expose us to a number of other risks including, but not limited to:

 

 

 

 

 

 

 

 

 

These and other risks associated international activities could contribute to reduced demand from, or disruptions of our relationships with, international customers operating in any of our three targeted markets, with a potentially adverse influence on our business, operational performance, and financial position.

Our terms and conditions of sale provide for pricing our products and invoicing our customers in U.S. Dollars, and our suppliers of outsourced product manufacturing and assembly and test services invoice us in U.S. Dollars. However, we incur expenses for employee compensation, property leases, and other operating expenses in the local currencies of the countries in which we operate. To date, we have not engaged in any currency hedging strategies, and any such strategies, such as forward contracts, currency options, and foreign exchange swaps, we may implement to mitigate this risk may not eliminate, or may increase, our exposure to foreign exchange fluctuations.

 

16

Semiconductor-based products such as those we develop and sell may contain errors or defects, especially when first introduced, when new versions are released, or when first integrated with other technologies, either by us or our customers. Product errors, including those resulting from third-party suppliers, could affect the performance or interoperability of our products, could delay the development or release of enhanced or new products and solutions, with potentially adverse consequences for our reputation, market acceptance of our products and solutions, and our ability to compete. Any errors or delays in releasing enhanced or new products and solutions could cause us to lose customers, subject us to liability for damages, and divert our resources from other tasks, any one of which could materially and adversely affect our business, operational performance, and financial position. Although we have insurance to cover product liability claims, the amount of coverage may not be sufficient.

third-party

cyber-attacks,

Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain

 

17

COVID-19

Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our products or services. The failure of our information security infrastructure, procedures, and controls to protect us from an expanding variety of cybersecurity threats could have a material adverse effect on our business, operational performance, financial position, and damage to our reputation as a provider of solutions for information security.

We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and sensitive information.

To date, we have not experienced a security incident or similar event. Although we have implemented information security infrastructure, procedures, and controls to address these threats, there can be no assurance that these measures will be effective. Our systems remain vulnerable to an expanding variety of cybersecurity threats, including data theft, financial fraud, ransomware and similar third-party criminal activity, and computer viruses or similar operationally disruptive problems, given the pace at which such threats evolve. We may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Despite our efforts to identify and address vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities.

Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may include: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our products or services, deter new customers from using our products or services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain certain third-party insurance coverage to address the consequences of failure of our information security infrastructure, procedures, and controls to adequately protect us, the policy is limited in scope and may not fully reimburse our costs or fully indemnify us from liabilities in the event of a claim against such insurance. Additionally, such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.

 

18

We may pursue strategic transactions in the future. Risks associated with mergers, acquisitions, investments, asset purchases, joint ventures, and related strategic transactions include:

 

 

 

 

 

 

 

 

 

 

 

These and other risks may prevent us from realizing the expected strategic and financial benefits from completion of the strategic transaction, and, if the full economic value of the strategic transaction is not realized, we may be required to incur an impairment charge to reduce the carrying value of any goodwill or intangible assets recorded at the time of the strategic transaction.

If we fail to properly evaluate and successfully execute any strategic transaction, our business, operational performance, and financial position may be harmed.

Companies that have experienced declines in the quoted prices of their shares, leading to investor losses, have been the subject of securities class action litigation, principally associated with allegations of material misstatements or omissions in disclosures required under SEC rules. Any such lawsuit to which we are a party, with or without merit, may result in an unfavorable judgment, or we and our insurance carriers may decide to settle litigation on unfavorable terms. Any such negative outcome could result in substantial damages or fines, damage to our reputation, or require modification of our business practices, all of which could harm our business, operational performance, and financial position. Defending litigation is costly and time-consuming and could

 

19

divert management’s attention and our resources. Furthermore, negative public announcements associated with the litigation could have a negative effect on the quoted prices of our ADSs or Ordinary Shares.

We protect our proprietary technology and confidential information through the use of patents, trade secrets, trademarks, confidentiality agreements, and other contractual instruments and provisions.

The wordmark ‘IDEX’ and the IDEX logo are registered trademarks of IDEX Biometrics ASA and are owned by our company. There can be no assurance we will obtain protective registrations of our trademarks in key markets. Failure to obtain registrations could compromise our ability to fully protect our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands.

Effective intellectual property protection may be unavailable or limited in some foreign countries in which we operate. For example, the validity, enforceability, and scope of protection of intellectual property in China, where we operate, are still evolving and do not protect our intellectual property rights to the same extent as the laws in the other countries in which we operate.

We rely upon written agreements with our customers, suppliers, manufacturers, and other recipients of our technologies and products, in which our intellectual property is used, setting forth requirements for the treatment of confidential information, including our intellectual property. However, such agreements may not be adequate to protect our intellectual property and other proprietary information. Our customers, suppliers, manufacturers, and other recipients of our technologies and products may seek to use our intellectual property or proprietary information in violation of the terms of such written agreements.

Unauthorized parties may attempt to copy or otherwise use elements of intellectual property or proprietary information. Other parties, including our competitors, may independently develop technologies and products that are similar to or replicate features and functions of our technologies and products, potentially infringing on our intellectual property rights. If our efforts to protect and enforce our intellectual property rights are ineffective, we may engender increased competition in the market segments we target or in other markets in which fingerprint authentication applications are appropriate.

We may pursue and, from time to time, defend litigation to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, operating performance, and financial position.

 

20

third-party

other non-infringing intellectual

non-infringing products,

Our success is dependent, in part, upon protecting our intellectual property rights. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our intellectual property rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours.

We hold numerous patents in the United States and in other countries, covering multiple elements of our highly-differentiated technologies and products. There can be no assurance we will continue to develop

 

21

proprietary technologies and products that are patentable, that any issued patent will provide us with any competitive advantages or will not be challenged by third-parties, or that patents of others will not limit our ability to effectively compete. Although we have patented the intellectual property that we believe provides us with competitive advantages, our competitors offer products for fingerprint authentication applications, employing different technologies and processes.

including re-examination,

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related patents, patent applications and trademark filings at risk of being invalidated, not issuing or being cancelled. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our existing products, impair the functionality of our products, delay introductions of new products, result in our substituting inferior or more costly technologies into our products, or harm our reputation or brand. In addition, we may be required to license additional technology from third-parties to develop and market new products, and we may not be able to license that technology on commercially reasonable terms or at all. Our inability to license this technology could harm our ability to compete.

We are incorporated in and registered under the laws of Norway, with staffed subsidiaries in Norway, the United Kingdom, the United States, and China. We also have personnel in various other countries in which we operate. As a result of this organizational structure and the scope of our operations, we are subject to a complex variety of laws and regulations across different countries. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting. If we establish operations in, or have

 

22

customers domiciled in, other countries, we likely will become subject to the laws and regulations of those countries. It is difficult to accurately predict how existing laws and regulations may be applied to our business, or what new laws and regulations may come into effect.

We are subject to various laws and regulations regarding how we conduct our business. Such laws and regulations include, but are not limited to, labor, advertising and marketing, real estate, taxation, user privacy, data collection and protection, intellectual property, anti-corruption, anti-money laundering, tariffs and customs regulations, export controls, economic sanctions, foreign exchange controls, antitrust and competition, electronic contracts, telecommunications, sales procedures, credit card processing procedures, and consumer protections. We cannot guarantee we have been or will be fully compliant in every country in which we operate, as existing laws and regulations governing issues such as intellectual property, privacy, taxation, and consumer protection, among others, are complex and subject to constant change. The adoption or modification of laws or regulations relating to our technologies and products, and the use thereof, could limit or otherwise adversely affect the manner in which we currently conduct our business. Further, compliance with laws, regulations, and other requirements imposed upon our business may be onerous and expensive, and such compliance may be inconsistent from jurisdiction to jurisdiction, further increasing costs and risk of noncompliance.

Noncompliance with applicable laws, regulations, or requirements could subject us to investigations, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, injunctions, or other consequences. Our response to any legal action or a government enforcement action or sanction likely would result in a significant diversion of management attention, an unproductive redirection of resources, and an increase in costs. If our response is ineffective, our business, operational performance, and financial position could be materially adversely affected.

In the ordinary course of business, we process personal data and other sensitive information, including proprietary and confidential business data, trade secrets, intellectual property, sensitive third-party data, and biometric identification information, although we do not copy or store any such data or sensitive information. Our data processing activities may subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of personal data by us and on our behalf.

Many governments have adopted or are considering adopting laws and regulations regarding the processing of personal data, including biometric information, and notification procedures in the event of a breach of data security or other unintentional disclosure of such information. For example, the European Union’s General Data Protection Regulation (“EU GDPR”), the United Kingdom’s GDPR (“UK GDPR”), and China’s Personal Information Protection Law (“PIPL”) impose strict requirements for processing personal data. For example, under the EU GDPR, government regulators may impose temporary or definitive bans on data processing, as well as fines of up to 20 million euros or 4% of annual global revenue, whichever is greater. Further, individuals may initiate litigation related to processing of their personal data. We also target customers in Asia and have an office in China, and, as such, may be subject to new and emerging data privacy regimes in Asia, including China’s PIPL, Japan’s Act on the Protection of Personal Information, and Singapore’s Personal Data Protection Act.

We, our card manufacturer customers, and their issuing customers are subject to evolving laws and regulations limiting the circumstances under which certain personal data can be obtained, transferred, received, and processed between countries or jurisdictions. Many jurisdictions in which we operate have established data security and legal frameworks specifically applicable to the collection and storage of biometric information.

 

23

European countries and the European Union (the “EU”) have been early and active in the development of such frameworks, but the terms and provisions of such frameworks are not uniform and are subject to change. As such, we are exposed to increased costs associated with compliance, as well as increased risks caused by evolving regulatory requirements and uncertainties.

Complying with the GDPR and the ePrivacy Regulation, when enacted, may cause us to incur additional costs or require us to modify our strategy, business practices, and solutions, as many of our current and targeted customers are domiciled in the EU. Norway, the domicile of our company, is not an EU member state, although it is associated with the EU through its membership in the European Economic Area (“EEA”). Through Norway’s adoption of the Personal Data Act in 2018, the GDPR was incorporated into Norway’s EEA agreement, thus binding Norway to the terms of the GDPR in the same manner as an EU Member State.

In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act). For example, the California Consumer Privacy Act of 2018 (“CCPA”) imposes obligations on covered businesses. These obligations include, but are not limited to, providing specific disclosures in privacy notices and affording California residents certain rights related to their personal data. The CCPA allows for statutory fines for noncompliance (up to $7,500 per violation). In addition, it is anticipated that the California Privacy Rights Act of 2020 (“CPRA”), effective January 1, 2023, will expand the CCPA. Additionally, the CPRA establishes a new California Privacy Protection Agency to implement and enforce the CPRA, which could increase the risk of enforcement. Other states have enacted data privacy laws. For example, Virginia passed the Consumer Data Protection Act, and Colorado passed the Colorado Privacy Act, both of which become effective in 2023. Additionally, several states and localities have enacted statutes banning or restricting the collection of biometric information. Furthermore, data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts.

Additionally, there are U.S. state laws and regulations governing the collection and use of biometric information, such as fingerprints. For example, the Illinois Biometric Information Privacy Act regulates the collection, use, safeguarding, and storage of “biometric identifiers” and “biometric information” by private entities and provides a private right of action for persons who are aggrieved by violations of the law, which have resulted in a number of class action lawsuits. These regulations could have a significant impact on our business.

In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may become applicable to us. For example, certain privacy laws, such as the GDPR and the CCPA, require our customers to impose specific contractual restrictions on their service providers. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our fingerprint authentication solutions. If so, in addition to the possibility of fines, lawsuits, and other claims, we could be required to change our business activities and practices or to modify our products and solutions, which could have an adverse effect on our business, operational performance, and financial position.

Certain jurisdictions have enacted data localization laws and cross-border personal data transfer laws, which could make it more difficult to transfer information across jurisdictions (such as transferring or receiving personal data that originates in the EU or in other foreign jurisdictions). Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the EU GDPR generally restricts the transfer of personal data to countries outside of the EEA that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”) that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these Standard Contractual Clauses are a valid mechanism to transfer personal data outside of the EEA, but there exists some uncertainty regarding whether the SCCs will remain a valid mechanism.

 

24

at-issue

If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limiting our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or requiring us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense.

Obligations related to data privacy and security are quickly changing in an increasingly stringent fashion, creating some uncertainty as to the effective future legal framework. Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations requires significant resources and may necessitate changes to our information technologies, systems, and practices and to those of any third parties that process personal data on our behalf. Although we endeavor to comply with all applicable data privacy and security obligations, we may at times fail (or be perceived to have failed) to do so. Moreover, despite our efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations, which could negatively impact our business operations and compliance posture. For example, any failure by a third-party processor to comply with applicable law, regulations, or contractual obligations could result in adverse effects, including inability to or interruption in our ability to operate our business and proceedings against us by governmental entities or others.

If we fail or are perceived to have failed to adequately address privacy concerns or comply with applicable privacy or data protection laws, regulations and policies, we could face significant consequences. These consequences may include, but are not limited to, government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar); litigation (including class-related claims); additional reporting requirements and/or oversight; bans on processing personal data; and orders to destroy or not use personal data. Any of these events could have a material adverse effect on our reputation, business, or financial position, including but not limited to: loss of customers; interruptions in our business operations; inability to process personal data or to operate in certain jurisdictions; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or revision or restructuring of our operations.

Given our international operating structure, with our parent company domiciled in Norway and subsidiaries domiciled in the United Kingdom, the United States, and China, we can be subject to taxation on sales, profits, and assets, as well as payments of social security obligations, in several worldwide jurisdictions. Tax laws are complex, difficult to interpret accurately, and subject to change. Accordingly, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax laws and regulations, including increased tax rates or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our business, operating performance, and financial position. Moreover, we generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are and will continue to be subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Additionally, tax authorities in the jurisdictions in which we operated could review our prior and future tax returns and impose additional tax, interest, and penalties.

 

25

As of December 31, 2021, the Company has a tax loss carryforward balance in Norway of $251.1 million, representing a potential deferred tax asset, if recognized and calculated at the current corporate tax rate of 22.0%, of $55.2 million. The Company has a tax loss carryforward balance in the United Kingdom of $1.9 million, representing a potential deferred tax asset, if recognized and calculated at the current corporate tax rate of 19.0%, of $361 thousand. The Company also has a tax loss carryforward balance in China of $771 thousand, representing a potential deferred tax asset, if recognized and calculated at the current corporate tax rate of 2.5%, of $18 thousand. While there are no restrictions as to the length of time tax losses may be carried forward in Norway and the United Kingdom, we cannot guarantee we will generate sufficient taxable profit in future periods that would allow us to recognize the value of the deferred tax asset on our Consolidated Statement of Financial Position or ultimately realize the tax benefit of the application of such deferred tax assets against taxable income in any country in which he have tax loss carryforwards.

Forecasts of our income tax position and effective tax rate for financial accounting purposes are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination, or other reorganization or financing transaction.

our pre-tax profits

The countries in which we operate may have broad authority to issue regulations and interpretative guidance that may significantly impact how we apply tax laws and influence the presentation of our financial statements for the period issued. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we perform additional analysis on the application of tax laws, we refine estimates used in our tax calculations. As such, assumptions and estimated for current tax calculations for the most recent period completed may differ from assumptions and estimated used for prior tax calculations, causing reported tax expense or benefits to differ from period to period. These differences could be material to the tax expense or benefit reported and to comparisons of effective tax rates for the periods.

We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, (“FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the United Kingdom Bribery Act 2010, and other anti-corruption laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. We use third-party law firms, accountants, and other representatives for regulatory compliance, sales, and other purposes in different countries. We can be held liable for the corrupt or other illegal activities of our employees, contractors, and other agents, regardless of whether we explicitly authorized such activities. In addition, although we have implemented policies and procedures to ensure compliance with anti-corruption laws, there can be no assurance all of our employees, contractors, or agents will comply with these laws at all times.

 

26

Noncompliance with these laws could subject us to whistleblower complaints, investigations, government enforcement actions, prosecution, litigation settlements, disgorgement of profits, fines, damages, other civil and criminal penalties or injunctions, suspension or prohibition from contracting with certain parties, the loss of export privileges, reputational harm, adverse media coverage, and other consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operational performance, and financial position could be materially harmed. Our response to any event or action likely would result in a significant diversion of management’s attention and resources and a significant increase in legal costs and other professional fees. Enforcement actions and sanctions could further harm our business, operational performance, and financial position.

As an issuer of securities, we also are subject to the accounting and internal controls provisions of the FCPA. These provisions require us to maintain accurate books and records and a system of internal controls sufficient to detect and prevent corrupt conduct. Failure to abide by these provisions could have an adverse effect on our business, operational performance, and financial position.

Our sales are subject to laws and regulations governing exports and imports, including the U.S. Export Administration Regulations, U.S. Customs regulations, and the economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our technologies and products must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including fines and loss of export or import privileges for us and fines or imprisonment for certain employees.

In addition, changes in our products or solutions or changes in applicable export or import laws and regulations may create delays in the introduction and sale of such products and solutions in certain international markets, prevent our customers from deploying our products and solutions or, in some cases, prevent the export or import of our products and solutions to certain countries or customers. Any change in export or import laws and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons, or technologies targeted by such laws and regulations could result in a substantial reduction of revenue, with potentially adverse effects on our business, operational performance, and financial position.

election, re-election, and

 

 

 

27

 

 

Form 10-Q containing

Form 8-K upon

Form 20-F until

As a result of these exemptions, investors in our ADSs or Ordinary Shares may not have protections and safeguards afforded to investors holding the equity securities of companies that are not considered foreign private issuers. As such, investors may find our equity securities less attractive.

As a foreign private issuer listed on Nasdaq, we are subject to corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer to follow the corporate governance practices of its home country in lieu of certain Nasdaq corporate governance listing standards. Corporate governance practices in Norway, which is our home country, may differ significantly from Nasdaq corporate governance listing standards.

Notably, Norwegian independence requirements for our Board are less stringent than the Nasdaq requirements applicable to domestic issuers. In Norway, we are required to comply with the Oslo Børs Issuer Rules, published by Oslo Børs ASA, which operates the stock exchange on which our Ordinary Shares are listed. These rules require at least two of the shareholder-elected members of our Board to be independent of material business relationships with us and any of our significant shareholders. Also, our Board may not include members of our executive management. Subject to these home country requirements, our Board may have members who are not considered independent, and holders of our equity securities may not be afforded the same protections otherwise required under Nasdaq corporate governance listing standards applicable to domestic issuers. See “Item 6. Section C. Board Practices—Corporate Governance” for the exemptions to the Nasdaq corporate governance rules applicable to foreign private issuers.

 

28

As a foreign private issuer, we are not required to comply with certain periodic disclosure and current reporting requirements of the Exchange Act applicable to domestic issuers. Although we do not anticipate losing foreign private issuer status for the foreseeable future, if we were to lose such status, we would be required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers, beginning with the next fiscal year after loss of such status.

In order to maintain our status as a foreign private issuer, either:

 

 

(ii) more than 50% of our assets must be located outside the United States, and

(iii) our business must be administered principally outside the United States.

If we lose our status as a foreign private issuer, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We also will be required to make changes in our corporate governance practices in accordance with applicable SEC and Nasdaq rules.

If we lose our status as a foreign private issuer, the compliance and regulatory filing costs and commitments of management time we would likely incur under SEC and Nasdaq requirements could be higher than those we currently incur as a foreign private issuer, potentially increasing our uncertainty regarding whether or when we will achieve profitability.

We are an emerging growth company (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we continue to meet the definition of an emerging growth company, we may utilize exemptions from various SEC reporting requirements applicable to other public companies, including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We may take advantage of these exemptions until we are no longer qualify as an EGC.

We will maintain our EGC status until the earliest of:

 

 

 

 

We cannot determine whether investors consider our Ordinary Shares or ADSs less attractive because of our utilization of EGC exemptions, but if they do, we could have reduced demand for our equity securities, resulting in less active trading, reduced liquidity, and greater volatility in quoted prices.

 

 

29

Our Ordinary Shares have been traded on Oslo Børs since 2010, and we listed our ADSs on Nasdaq on March 1, 2021. Each ADS represents 75 Ordinary Shares. The average daily trading volume for our Ordinary Shares for the period from October 1, 2021, through December 31, 2021, was 7,827,827 shares (64 trading days). In contrast, the average daily trading volume for our ADSs for the same period was 1,277 shares (41 trading days), representing 95,826 Ordinary Shares.

There can be no assurance an active trading market for the ADSs will develop or be sustained, and the lack of active trading could limit investor interest in our ADSs. If active trading of our ADSs were to develop on Nasdaq, we cannot predict how such trading would influence the quoted prices for our ADSs, nor can we predict the extent to which trading volumes and quoted prices for ADSs, on Nasdaq, and trading volumes and quoted prices for our Ordinary Shares, on the Oslo Børs, may or may not be correlated.

The quoted prices and trading volumes of our equity securities are influenced by the research and reports, published by equity research analysts, setting forth opinions about our company, our estimated financial performance, estimated future prices for our equity securities, and many other matters such analysts consider important.

We do not have any control over the analysts, or the content and opinions included in their reports. The quoted price of our equity securities could decline if one or more analysts expresses unfavorable opinions or lowers a previously published estimate of future prices of our equity securities. If one or more analysts ends coverage of us or fails to publish reports on us on a regular basis, demand for our equity securities could decrease, which in turn could cause the trading price or trading volume of our equity securities to decline.

The quoted prices of our ADSs and our Ordinary Shares may be volatile, with sudden changes to quoted prices and trading volumes, due to numerous factors, some of which are outside of our influence or control. Limited liquidity for investors holding our ADSs is a significant source of price volatility, given a relatively small trading float (i.e., the total number of ADSs held by investors).

In addition to other risk factors discussed herein, such sources of volatility include investor reactions to:

 

 

 

 

30

 

 

 

 

We caution investors to thoughtfully consider the sources and context of information encountered regarding or describing us, particularly if that information is found on social media, Internet investment forums, and other unreliable outlets. While we communicate regularly with investors, securities analysts, the investment press, and trade publications, employ a dedicated investor relations professional supporting the investor communications efforts of our executives, and maintain an active investor relations program coordinated by a third-party professional services firm, we cannot offer assurances regarding our ability, through our communications and investor outreach, to offset the negative influence of rumors, speculative statements, and other unreliable information, which may be associated with those engaged in speculative trading activities.

We cannot accurately predict whether or when the nature of these and other factors may cause the quoted prices or trading volumes of our ADSs or Ordinary Shares to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from selling their ADSs or Ordinary Shares at or above the price paid for such securities and may otherwise negatively affect the liquidity of those securities.

An investment in ADSs should not be made to provide dividend income to the investor. Under current Norwegian law, a public limited liability company may only distribute dividends to the extent it will have net assets covering the company’s share capital and other restricted equity after the dividend distribution has been made. We have never declared or paid a dividend on our Ordinary Shares, and we intend to retain our future net earnings, if any, to fund the expansion of our business. As a result, capital appreciation, if any, will be an investor’s sole source of return for the foreseeable future.

The price of our Ordinary Shares is quoted on the Oslo Børs in Norwegian Krone, while the price of our ADSs is quoted on Nasdaq in U.S. Dollars. Fluctuations in the exchange rate between the U.S. Dollar and the Norwegian Krone may result in differences between the value of our ADSs (each of which represents 75 Ordinary Shares) and the value of our Ordinary Shares, which may result in high trading volumes, as investors seek to exploit such differences.

As a result of fluctuations in the exchange rate between the U.S. Dollar and the Norwegian Krone, the U.S. Dollar equivalent of the proceeds a holder of ADSs would receive upon the sale on the Oslo Børs, for Norwegian Krone, of Ordinary Shares withdrawn from the Depositary may fluctuate. Similarly, the U.S. Dollar equivalent of any cash dividends paid by us in Norwegian Krone to holders of Ordinary Shares or Ordinary Shares represented by ADSs held, could also fluctuate.

 

31

We are not certain whether or when we will generate sufficient cash flow to offset our costs and accelerate the expansion of our business, nor whether or when we will generate sufficient revenue to achieve or maintain profitability. Because we intend to continue pursuing our strategy in order to achieve expected rapid revenue growth, we anticipate additional capital likely will be required to fund such revenue growth (e.g., funding of increased working capital requirements). However, if we do not meet our current performance forecast, we likely will require additional funding to support future operating losses.

If we raise capital through issuance of equity securities or convertible debt securities, such issuance will result in dilution of the ownership interests of then-current holders of our equity securities. Also, new investors could gain rights, preferences, and privileges senior to those of then-current holders of our equity securities.

Debt financing and preferred equity financing, if available, could result in fixed payment obligations, and we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity ratios or other financial ratios, or restrict our ability to pay dividends or make acquisitions.

If we raise additional funds through strategic partnerships or alliances, or through marketing, distribution, or licensing arrangements with third parties, we may be required to relinquish valuable rights to our intellectual property, future revenue streams, and development activities, or to grant licenses on terms that may not be favorable to us. In addition, we could also be required to seek funds through arrangements with partners or others at an earlier stage than otherwise would be desirable. If we raise funds through government research grants, as we have, we may be subject to certain requirements limiting our discretionary use of the funds provided or require us to share information from our research and development.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development or future sales and marketing efforts or grant rights to a third-party to develop and market products or software solutions that we would otherwise prefer to develop and market ourselves. Raising additional funds through any of these or other means could adversely affect the rights of the holders of our equity securities and may cause the quoted price of our equity securities to decline.

We are incorporated under Norwegian law. The rights of holders of Ordinary Shares and, therefore, certain rights of holders of our ADSs, are governed by Norwegian law, including the provisions of the Companies Act and our Articles of Association. These rights differ in certain respects from the rights of shareholders in a corporation domiciled in the United States.

The following summarizes certain important differences in shareholder rights between Norway and the United States:

 

 

 

32

 

 

 

 

For additional information on these and other aspects of Norwegian corporate law and our Articles of Association, see Exhibit 2.4 (Description of Share Capital and Articles of Association) filed herewith.

As a result of the differences between Norwegian corporate law and our Articles of Association, on the one hand, and United States federal and state laws, on the other hand, in certain instances, an investor could receive less protection as a holder of our equity securities than would be available as a shareholder of a company domiciled in the United States and chartered under the corporate laws of a particular state.

A single ADS represents a claim on 75 Ordinary Shares held on deposit by the Depositary. Holders of ADSs (and the beneficial owners thereof) do not have the same rights as holders of Ordinary Shares and may only exercise their voting rights with respect to the underlying Ordinary Shares in accordance with the provisions of our deposit agreement with the Depositary and the holders of ADSs (the “Deposit Agreement”). An ADS holder is not able to call for a meeting of shareholders.

The following is an incomplete summary of the procedure to be followed if an ADS holder seeks to exercise his or her voting rights. As this procedure is complex and time-consuming, an ADS holder may encounter difficulties and delays in exercising his or her voting rights, and such delays could result in an ADS holder being unable to do so.

be re-registered in

 

33

shareholders. In giving voting instructions to the Depositary as provided in the Deposit Agreement, ADS holders may be required to agree to the temporary restriction of transfer of their ADSs until after the meeting of shareholders and the disclosure of the identity of the ADS holder.

When a meeting of shareholders is convened, an ADS holder may not receive sufficient notice beforehand to allow the holder to instruct the Depositary to take the actions required in the time available. We will make all commercially reasonable efforts to cause the Depositary to extend voting rights to ADS holders, as described, in a timely manner, but we cannot assure ADS holders they will receive voting materials in time to instruct the Depositary to vote. It is possible that persons who hold their ADSs through securities brokers or other third-parties will not have the opportunity to exercise a right to vote. Furthermore, the Depositary will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, an ADS holder may not be able to exercise his or her right to vote and may lack recourse if his or her ADSs are not voted as requested.

Investors should review the Deposit Agreement, specifically Section 4.7. Voting of Deposited Shares, which sets forth this procedure in detail. The Deposit Agreement is presented as Exhibit 2.2 to this Annual Report and is archived on the SEC website.

The Depositary is entitled to charge ADS holders for various administrative services, including for the issuance of ADSs upon deposit of Ordinary Shares, cancellation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends, distributions of securities other than ADSs, and annual service fees.

In the case of ADSs held through The Depository Trust Company (“DTC”), the fees will be charged by the DTC participant (e.g., a securities broker) to the account of the applicable beneficial owner in accordance with the procedures and practices of the DTC participant as in effect at the time.

Although we do not have any present plans to declare or pay any dividends to holders of Ordinary Shares, in the event we do so, the Depositary has agreed to pay to ADS holders the dividends it (or its custodian) receives on Ordinary Shares, after deducting its fees and expenses. An ADS holder will receive such dividends, in proportion to the number of Ordinary Shares underlying the ADSs held, after conversion of the dividend’s value in Norwegian Krone to U.S. Dollars.

The provisions of the Deposit Agreement associated with distributions of cash, securities, subscription rights, and other property are complex and afford the Depositary discretion in decision making, particularly regarding the determination that a distribution is unlawful or impractical. We have no obligation to register with the SEC any ADSs, Ordinary Shares, rights, or other securities received through such distributions. The Depositary may determine a distribution made to the holders of Ordinary Shares may be unlawful or impractical if made to ADS holders, and we have no obligation to take any other action to permit such distribution to ADS holders. As such, an ADS holder is exposed to the risk he or she may not receive distributions we make on our Ordinary Shares, or any value from such distributions, if it is unlawful or impractical to make them available to an ADS holder. These restrictions may have an adverse effect on the value of ADSs.

 

34

a pre-emptive subscription

against non-cash contributions

Such pre-emptive subscription

of two-thirds of

pre-emptive

pre-emptive

pre-emptive

pre-emptive

pre-emptive

pre-emptive

such pre-emptive rights

Under the Internal Revenue Code of 1986, as amended (“IRC”), we will be a passive foreign investment company(“PFIC”), for any taxable year in which (i) 75% or more of our gross income consists of passive income, or (2) 50% or more of the of the gross value our assets (determined on the basis of a weighted quarterly average) consists of assets that produce, or are held for the production of, passive income (including cash). For purposes of these tests, passive income includes dividends, interest, gains from the sale or exchange of investment property, and certain rents and royalties. In addition, for purposes of the above calculations, a foreign domiciled corporation that directly or indirectly owns at least 25%, by value, of the shares of another corporation is treated as if it held its proportionate share of that corporation’s assets and received, directly from that corporation, a proportionate share of its income.

If we are deemed a PFIC for any taxable year during which a “U.S. Holder” (as defined herein in “Item 10. Section E. Taxation”) holds our ADSs, the U.S. Holder may be subject to adverse tax consequences, regardless of whether we continue to qualify as a PFIC, including ineligibility for any preferred tax rates on capital gains or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements.

 

35

Based on our analysis of our income, assets, activities, and market capitalization, we do not believe we met the tests to be deemed a PFIC for our taxable year ended December 31, 2021. However, no assurances regarding our PFIC status can be provided for any past, current, or future taxable years, as the determination of whether we are a PFIC is a fact-intensive determination, made on an annual basis, and the applicable IRC provisions are subject to varying interpretation. In particular, the characterization of our assets as active or passive may depend in part on our current and intended future business plans, which are subject to change. In addition, for our current and future taxable years, the total value of our assets for PFIC testing purposes may be determined in part by reference to the market price of our Ordinary Shares or ADSs from time to time, which may fluctuate considerably. Under the income test, our status as a PFIC depends on the composition of our income, which will depend on the transactions we enter into in the future, our corporate structure, and other considerations. The composition of our income and assets is also influenced by how, and at what pace, we spend the cash we raise through issuance of securities or borrowing. Even if we determine that we are not a PFIC for a taxable year, there can be no assurance that the Internal Revenue Service (“IRS”), will agree with our conclusion and that the IRS would not successfully challenge our position. Accordingly, our U.S. counsel expresses no opinion with respect to our PFIC status for any prior, current, or future taxable year.

For further discussion of the PFIC rules and the adverse federal income tax consequences in the event we are deemed a PFIC, see the section herein under “Item 10. Section E. Taxation.”

Economic Co-Operation and

A tax authority may disagree with tax positions we have taken, which could result in increased tax liabilities. For example, a tax authority could challenge our allocation of income by tax jurisdiction and the amounts paid between our affiliated companies, pursuant to our intercompany arrangements and transfer pricing policies, including amounts paid with respect to our intellectual property development. Similarly, a tax authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a ‘‘permanent establishment’’ under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions.

A tax authority may take the position that material income tax liabilities, interest, and penalties are payable by us, which may occur due to complex and changing tax laws and regulations may be contradictory, as new laws and regulations have not been subject to extensive review or interpretation. We may negotiate tax obligations with tax inspectors of a particular jurisdiction, which may be costly, time-consuming, and subject to an unpredictable outcome.

 

36

We are subject to the Norwegian Securities Trading Act (the “STA”), as it applies to an offer made by a third-party to acquire the equity securities of a Norwegian public company with securities trading on a regulated Norwegian exchange. The STA provides a framework within which takeovers of certain companies organized in Norway are regulated and conducted. The provisions of the STA may materially differ from the provisions of other such frameworks (e.g., the takeover provisions of the Delaware General Corporate Law).    

The following is a limited summary of important rules of the STA:

 

 

 

 

 

 

 

37

We are incorporated under Norwegian law. Certain Directors and executive officers are not residents of the United States, and all or a substantial portion of our assets and the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process in the United States upon us or such persons or to enforce judgments obtained in courts in the United States against them or us, including judgments predicated upon the civil liability provisions of the federal securities laws.

The United States and Norway currently do not have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment given by a court in the United States, whether or not predicated solely upon the securities laws of the United States, may not automatically be recognized or enforceable in Norway. In addition, uncertainty exists as to whether the courts in Norway would entertain original actions brought in Norway against us, our Board , or Executive Officers predicated upon the securities laws of any state in the United States.

As a result, United States investors may not be able to enforce any judgments against us or certain Directors and our Executive Officers obtained in courts of the United States in civil and commercial matters, including judgments under the federal securities laws.

The Deposit Agreement provides that ADS holders irrevocably waive the right to a trial by jury in any legal proceeding arising out of or relating to the Deposit Agreement. We are not aware of a specific federal decision addressing the enforceability of a jury trial waiver in the context of federal securities laws, and we have been advised by counsel that jury trial waivers are generally enforceable in the United States. Moreover, insofar as the Deposit Agreement is governed by the laws of the State of New York, such laws recognize the validity of jury trial waivers in appropriate circumstances. In determining whether to enforce a jury trial waiver provision, New York courts and federal courts likely will consider whether the visibility of the jury trial waiver provision within the agreement in question is sufficiently prominent, such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the Deposit Agreement.

 

38

Because an ADS holder may not be entitled to a jury trial with respect to his or her claims arising under the Deposit Agreement against us or the Depositary, lawsuits against us or the Depositary may be discouraged or limited. If a lawsuit is brought against us or the Depositary under the Deposit Agreement, the proceedings may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures than a jury trial and may result in different outcomes than a jury trial, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.

 

We were incorporated as a public limited company under the laws of Norway on July 24, 1996. Our Ordinary Shares have been listed for trading in Norway on the Oslo Børs under the symbol “IDEX” since March 12, 2010, and our ADSs have been listed for trading on Nasdaq under the symbol “IDBA” since March 1, 2021.

Since IDEX was founded, our strategy has been based on the development and commercialization of differentiated solutions for fingerprint authentication. Our technologies originated within SINTEF, the largest research organization in Scandinavia, which is affiliated with the Norwegian Institute of Technology. The Company’s initial focus was on the development and sale of swipe sensors for fingerprint authentication, targeting consumer applications such as user authentication for personal computers, personal digital assistants, and the then-emerging market for smart phones. We also pursued a licensing strategy, which would enable others to create and market their own products based on our intellectual property.

Our early products were based on proprietary innovations in fingerprint imaging, processing, and matching. However, we achieved limited success in a rapidly commoditizing market in which silicon image sensors of limited functionality were popular due to their low cost. Such limited functionality was acceptable, notably in the fast-growing mobile phone market, as the devices in which they were being used possessed robust processing resources for performing biometric functions. Also, power consumption and efficiency were not critical considerations in these applications, given their use of large capacity batteries or access to electric power.    

In 2013, IDEX acquired the assets and operations of PicoField Technologies, Inc., obtaining important intellectual property associated with touch (i.e., full fingerprint) sensors and adding biometric industry veterans to our design team. In 2015, we acquired the patent portfolio of Metadyne Software, a developer of highly-efficient fingerprint algorithms. Both acquisitions contributed to advancing our development of fingerprint authentication solutions with differentiated characteristics.

In the latter half of the last decade, IDEX undertook a strategic pivot toward market segments and applications for which these differentiated characteristics provided demonstrable and sustainable competitive advantages. Our focus today is on smart cards, which present challenging form factors, demanding performance requirements, and extreme power limitations, for which our fingerprint authentication solutions are ideally suited. This strategic pivot toward differentiation of a comprehensive solution is embodied in our latest offering, the TrustedBio family of fingerprint authentication modules.

We do not own or operate industrial manufacturing facilities, but operate as a “fabless” manufacturer, utilizing third parties for outsourced manufacturing, assembly, and test capabilities. Our capital expenditures for the years ended December 31, 2021, 2020, and 2019 were $141 thousand, $152 thousand, and $850 thousand, respectively. As a fabless manufacturer, our capital expenditures primarily are for purchases of laboratory and test equipment related to product development, although, as was the case in 2019, we will acquire production equipment for use by our contract manufacturing service providers.

 

 

39

During 2021, 2020, and 2019, we raised, through private placements of our Ordinary Shares, gross proceeds of $47.1 million, $18.0 million, and $34.2 million. As of December 31, 2021, our accumulated losses (i.e., our cumulative tax loss carryforward) totaled $251.1 million. For further financial information, see “Item 5. Operating and Financial Review and Prospects.”

We have locations in Oslo, Norway (sales and marketing, finance, and group administration), Farnborough, United Kingdom (systems engineering, quality, supply chain management, and human resources), Rochester, New York, United States (hardware engineering), Wilmington, Massachusetts, United States (software engineering, circuit design, and administration), and Shanghai, China (customer support and applications engineering).

16, NO-0191 Oslo,

 

Our current product portfolio consists of fingerprint authentication modules, related software, and cardholder enrolment solutions. Our latest generation of fingerprint authentication device, introduced in 2020, the TrustedBio family of modules, is a single package solution consisting of our most advanced fingerprint imaging sensor and a proprietary application specific integrated circuit (“ASIC”), which is a multi-purpose microprocessor executing image processing, biometric processing, and power management functions. Our cardholder enrolment solutions currently are based on an innovative, reusable sleeve, which provides secure, convenient smart card enrolment.

 

40

Our current product portfolio is targeted at three applications, which we refer to as “market segments,” within the smart card market: financial payments (i.e., credit, debit, and stored value transaction cards), cyber authentication (i.e., devices for identification and authorization of users for access to high-value electronic networks or sensitive physical facilities), and digital currency storage (i.e., devices for highly-secure authorized access to cryptocurrency trading platforms and the secure storage of digital currencies, both private and government-sponsored). The financial payments market segment is the largest of the three we target, and it is the most developed. The cyber authentication and digital currency storage segments currently are far smaller, and application-specific form factors, performance requirements, and standards are evolving.

Our customer focus primarily is on manufacturers of smart cards. Other customers include integrators of authentication technologies and developers and vendors of security systems, across a broad market for identification-based authorization solutions. We also have individual corporate customers that design authentication solutions for their own consumption. Our products are not limited to use in smart cards, but also are applicable to a range of applications across varying form factors.

Because a critical element of demand for our solutions originates with these manufacturers’ own customers (e.g., the demand for financial payment cards with fingerprint authentication originates with a bank issuer interested in offering such cards), we also direct our marketing and demand creation efforts toward the education of customers of smart card manufacturers, as well as other influential participants in the smart card industry.

We utilize a direct sales force and have customers around the world. At the present time, we do not sell our products through stocking distributors. Given the early-stage characteristics of the market segments we are targeting, including the extended and unpredictable sales cycles frequently associated with marketing new and innovative technology-based products, we expanded our marketing and sales staff in 2021 and increased our marketing budget for 2022.

We do not own or operate capital-intensive manufacturing facilities, but operate as a fabless manufacturer, utilizing third parties for outsourced manufacturing and product assembly capabilities. We currently rely on Taiwan Semiconductor Manufacturing Company, Limited (“TSMC”), the leading producer of semiconductor wafers, as the sole source of wafers for our proprietary ASIC designs. We also rely on a limited number of providers of outsourced semiconductor packaging, design, and test services, including Amkor Technology, Inc., and Silicon Precision Industries Limited , both of which are leaders in outsourced semiconductor assembly and test services.

Every individual has unique, immutable fingerprints. A fingerprint consists of a series of ridges and valleys on the surface of a finger. The uniqueness of a fingerprint is established by each finger’s distinctive pattern of ridges, valleys, and minutiae points, which are specific ridge characteristics occurring at either the point at which a fingerprint ridge bifurcates or ends.

Biometric technologies are automated methods for identifying individuals based on a comparison of stored biological and behavioral characteristics with the current presentation of such characteristics. Of all biometric techniques, fingerprint-based identification is the oldest and most established. Fingerprint identification has been successfully used in numerous applications for over a century.

A fingerprint authentication solution, in summary, is an electronic system, combining hardware and software, that captures an image of these unique fingerprint characteristics, transforms that image into a mathematical representation, and then compares that representation with a valid representation. If the results of the comparison exceed a predefined verification threshold, the identity of the presenting individual is authenticated.

 

41

The following summarizes the primary elements of fingerprint authentication, addressing our approach to each:

Scanning is the process of recognizing and capturing the necessary characteristics of an individual’s fingerprint using an electronic device. Ink and paper were originally used to capture fingerprint images. Optical scanning was an early method for electronic capture of a fingerprint, and remains common in certain high-volume applications, primarily in law enforcement. Other scanning technologies for the detection of fingerprint variances include those based on sensing variances in heat, pressure, and ultrasound.

Our scanning technology is based on capacitive sensing, which utilizes an electrical field to detect fingerprint characteristics such as ridges, valleys, and minutiae by measuring miniscule variances in current associated with those varying characteristics. The surface of the sensor, the platen, acts as one plate of a capacitor, and the finger acts as the other. Capacitive sensing, the most appropriate technology for resource-constrained applications, was the area in which the Company pioneered the signal processing innovations that remain foundational to our strategy.

More recently, we have developed a differentiated approach to capacitive image capture, using a polymer substrate (i.e., a flex circuit) in which a capacitive sensing array (i.e., a fine-pitched wire mesh, with each wire intersection representing an electrode) is embedded. Compared to conventional semiconductor-based capacitive sensors, for which the sensing array is on the surface of a rigid integrated circuit, our flexible sensor is relatively inexpensive to manufacture and allows for a larger sensor surface area, more than twice the size of competitive silicon sensors. Our capacitive sensor produces a larger image, yielding more data, which enables superior scanning, feature extraction, and matching performance.

8-bit

We utilize proprietary algorithms to refine the image, allowing for precise identification of patterns, which are transformed into an accurate mathematical representation of the image, referred to as a “template.”

end-user

end-user

Our matching algorithms, which are compact and highly efficient, are well-suited for providing fast results in resource-constrained environments. They are differentiated by patented features such as insensitivity to image rotation and the ability to process incomplete images (i.e., partial touches), enabling high accuracy and reliability.

 

42

Our algorithms also are differentiated by the flexibility of how they may be used. In a smart card implementation, because of security requirements, matching algorithms are typically executed in the SE. However, our TrustedBio is designed to allow matching algorithms to be executed in a distributed (i.e., shared) mode, whereby computationally intensive functions can be executed on our module’s faster ASIC, reducing the computational requirements of the SE. This allows customers the flexibility to optimize designs based on application requirements and available processing resources, reducing overall system costs.

A smart card can be described as a compact microelectronic system, generally with the dimensions of a credit card or driver’s license, in which one or more embedded integrated circuits (“ICs”) enable secure storage, processing, and communication of encrypted data.

“ID-1”

Because we primarily target the financial payments market segment, our fingerprint authentication solutions are designed in compliance with industry standards of EMV Company, LLC (“EMV”), a consortium established by Europay, Mastercard, and VISA to develop and maintain communications, security, and encryption specifications for the use of smart cards across financial payment networks. Because our solutions are used in smart cards utilizing the JavaCard card operating system and Java-based “applets,” we comply with the standards of GlobalPlatform, an independent standards body, for secure channel communications and the use of cryptographic data.

The enabling ICs in a smart card are typically a secure microcontroller (referred to as a secure element (“SE”)), which functions as the system-level processor, and one or more secondary microcontrollers dedicated to functions such as power management or biometric processing. SE processors execute the card operating system and one or more applets, which are compact programs that execute proprietary functions (e.g., an applet for a payment network will coordinate communication of encrypted data using an encryption key only known by that payment network). SEs generally have robust memory blocks for encrypted data storage, with multiple memory types, but separate memory ICs may be necessary, depending on the smart card’s application.

Also embedded in the layers of a smart card are an antenna, for wireless communication and power harvesting, connecting circuitry (referred to as an inlay), and, depending on the design of the smart card, various passive electronic devices. Multi-layer smart cards are generally made of thermoplastics (polyvinyl chloride, or PVC, is the most common material used), although metal and ceramic compounds recently have been introduced.

Contact-only and dual-interface (i.e., contact and contactless functionality) smart cards do not have batteries and are powered, in the case of contact-only and dual-interface designs, through physical contact with a card reader, or, for dual-interface designs in contactless mode, though energy harvesting (i.e., resonant inductive coupling) enabled, most commonly, by near field communications (“NFC”) interface protocols.

 

43

end-user

COVID-19

The defining characteristic of a smart card is the security afforded by the SE and its use of data encryption to secure storage and communications, making it an ideal solution for a very broad range of applications. Smart cards are used worldwide in high volumes across the following applications (in descending order of estimated total unit volumes for 2021): financial payments; government identification (including healthcare and social-security applications); transportation and ticketing; and access control (for logical and physical applications).

The development of widely accepted standards for smart card performance uniformity and cross-vendor compatibility has contributed to the sustained growth of smart cards in circulation, notably for financial payment applications. ABI Research estimates approximately 10.3 billion smart cards, in the form of credit and debit cards, ATM cards, and stored value cards, were in circulation as of December 31, 2021, with 3.4 billion financial payment cards shipped during the year.

ID-1

4

5

end-user

We believe the combination of our broad and substantive intellectual property portfolio, our expertise across a comprehensive range of challenging and complex domains, and our integrated, systems engineering approach represents a significant competitive advantage for IDEX.

 

 

44

Our intellectual property portfolio, as of December 31, 2021, consisted of 146 patents awarded and 66 patents pending, across applicable jurisdictions worldwide. Reflecting our core competencies, we have substantial intellectual property across the following areas: design of biometric sensors, ASICs, and modules; signals and data processing; and a broad range of solution features and functionalities.

Our core competencies, characterized by deep domain expertise and a multi-disciplined, systems engineering approach, are built on organizational strengths in the following domains: biometric imaging and processing; sensor architectures; integrated circuit design; materials, manufacturing, and packaging; algorithm, firmware, and software development; encryption technologies; NFC and power management; and industrial design.

Our value proposition is based on the differentiated functionality and performance of our fingerprint authentication solutions and our distinctive systems engineering approach to offering integrated solutions addressing multiple customer needs. These customer needs may vary among the market segments we target, but generally are associated with the enhancement of our customer’s competitive advantages, based on the differentiated functionality and performance of our solutions, and reduced total cost of ownership (“TCO”), based on our distinctive systems engineering capabilities, enabling comprehensive, integrated solutions.

We believe many customers in the market segments we target could benefit from the TCO element of our value proposition, as only a few global card manufacturers currently have the depth of resources and experience to develop a fingerprint authentication solution on an expedited timeline. Design of a smart card incorporating fingerprint authentication can be challenging, as the interaction between the fingerprint sensor, the smart card electronics, and the environment is complex, particularly given the limitations on power, processing capacity, and form factor, and the stringent requirements for response time and accuracy. As such, we are committed to offering a differentiated, integrated approach to our customers.

An important element of our strategy, linked to our delivery of comprehensive, integrated solutions, is our development and use of strategic partnerships, which are intended to extend the scope of the integration of our TrustedBio modules and related elements of our software across the smart card supply chain, thereby enhancing our value proposition and, potentially, accelerating adoption of fingerprint authentication and demand for our solutions.

end-products,

Recent product and solution announcements are indicative of our strategy and value proposition, as well as the strategic shift we undertook late in the last decade toward market segments and applications for which the differentiated characteristics of our solutions provide a demonstrable and sustainable competitive advantage.

In 2017, we announced a patented solution architecture, which we believe is competitively unique: a small, and lightweight module containing two optimized components, a fingerprint imaging sensor made of a flexible

 

45

polymer substrate for image scanning and a small, yet powerful, ASIC for feature extraction, matching, and a range of other advantageous functions. This architecture is ideal for use in smart cards and similar demanding applications.

 

matching performance. Semiconductor-based sensors can have higher electrode density, but their smaller sensor areas yield meaningfully less data for image processing, while increasing processing challenges to achieve equivalent results. Additionally, the flexibility of the polymer substrate, into which the wire mesh array is embedded, allows the TrustedBio module to easily meet industry specifications for torsion of plastic smart cards.

The ASIC used in a TrustedBio module is mounted on the reverse side of the polymer substrate in which our sensor array is embedded. The ASIC is a proprietary microprocessor executing our third generation scanning and template-creation (i.e., image processing and feature extraction) algorithms, our patented anti-spoofing algorithm, NFC power harvesting and voltage management, and data encryption. Depending on a customer’s design or application requirements, our ASIC also can store and execute our proprietary matching algorithms.

40-nanometer

Cortex-M3

32-bit

low-cost

Also in 2021, we announced a reference design based on integration of the SLC38 security controller, the latest SE released by Infineon Technologies AG, and the latest version of our TrustedBio module. Applicable to implementation of fingerprint authentication in smart card applications across all three of our targeted market

 

46

As stated, last year we announced our intention to market and license certain elements of our proprietary software, including our JavaCard operating system, special-purpose Java applets, biometric algorithms, and, as their development is completed, our software-based enrolment solutions. We believe our expanding capabilities in software development have the potential to meaningfully add to our value proposition, broadening customer engagements and increasing revenue.

multi-use

dual-use

dual-use

co-branded

multi-use

end-products

6

two-factor

 

 

47

 

Using our battery-powered, reusable device, which is delivered to the user along with the smart card, enrollment can be completed in less than a minute, following the instructions on the device, guided by LED indicators. A user can enroll securely without visiting a physical site, such as a bank branch or automated teller machine. Enrollment is completed entirely within the biometric smart card and, importantly, without the need to connect the enrollment device or the smart card itself to a computer, smartphone, or any other device connected to a network.

We also support tablet-based and similar enrolment solutions for use in circumstances involving centralized enrolment of a user population. These electronic data collection devices are manufactured and sold by third parties and incorporate elements of our fingerprint authentication solutions. They most commonly are used in bank branches (for payment card enrolment) and human resources or security offices (for access control card enrolment).

low-cost,

For the full year 2021, the Company recorded consolidated revenue of $2.8 million, compared to $1.1 million for 2020, and $424 thousand for 2019. Product revenue, as a percentage of total revenue, represented 99%, 93%, and 38% for 2021, 2020, and 2019, respectively. Revenue associated with our early-adopting customer in the cyber authentication market segment represented 85%, 81%, and 72% of our total revenue for 2021, 2020, and 2019, respectively. Our TrustedBio module was introduced in 2020 and began shipping in 2021. There was no licensing revenue for 2021, 2020, or 2019.

non-cancellable

 

48

December 31, 2021, 2020, and 2019, respectively. These backlog figures exclude committed deliveries pursuant to a multi-year supply contract we have with our largest customer, as shipment volumes and scheduled delivery dates are subject to change. As of December 31, 2021, the value of these committed deliveries was approximately $1.2 million.

Our customer focus primarily is on manufacturers of smart cards. Other customers include integrators of authentication technologies and developers and vendors of security systems, across a broad market for identification-based authorization solutions. We also have individual corporate customers that design authentication solutions for their own consumption. Our products are not limited to use in smart cards, but also are applicable to a range of applications across varying form factors.

Because a critical element of demand for our solutions originates with these manufacturers’ own customers (e.g., the demand for financial payment cards with fingerprint authentication originates with a bank issuer interested in offering such cards), we also direct our marketing and sales efforts toward the customers of smart card manufacturers, as well as other influential participants in the smart card industry.

Within the cyber authentication market segment, vendors of hardware- and software-based security systems and associated access control solutions represent the majority of our targeted customers, although, to date, the majority of our revenue has been derived from the development and sale of a customized network authentication solution to a single enterprise customer.

Within the digital currency storage market segment, which is less structured than our other targeted market segments, our customers have ranged from large smart card manufacturers addressing emerging digital currency applications to small technology innovators developing devices for secure access to proprietary cryptocurrency exchanges.

We utilize a direct sales force and have customers around the world. At the present time, we do not sell our products through stocking distributors. Given the early-stages of the market segments we are targeting, including the extended and unpredictable sales cycles frequently associated with marketing new and innovative technology-based products, we expanded our sales and marketing staff in 2021 and plan to increase our marketing activities in 2022.

7

With current and potential strategic partners, we have several initiatives underway intended to extend the scope of the integration of our TrustedBio modules and related elements of our software across the smart card

 

 

49

supply chain, thereby enhancing our value proposition and, potentially, accelerating adoption of fingerprint authentication and demand for our solutions. Recent examples of these initiatives include the following, targeted specifically as complements to the TrustedBio-SLC38 reference design:

 

 

 

Other strategic initiatives involve integration projects with numerous developers of SEs and electronic components for financial payment smart card applications, as well as vendors supplying the cyber authentication and digital currency storage market segments. We consider our initiatives to extend the scope of the integration of our fingerprint authentication solutions across the smart card supply chain to be an important element of our strategy, and we intend to expand such initiatives in the future.

Our marketing and sales personnel work closely with our product line management personnel to support strategic sales activities. A broad range of marketing communications activities also help to expose and promote the benefits of our fingerprint authentication solutions to potential customers. We have invested significant time and resources to meet with card and device manufacturers to understand their requirements and performance issues.

We currently target fingerprint authentication applications involving smart cards without batteries (i.e., cards conforming to ISO/IEC standards for electronic identification cards), for which our solutions are especially well-suited. Customers for these and adjacent applications are within three emerging market segments, for which the solutions we offer and the applications served are summarized in the following table:

 

 

50

non-transferable

Demand Drivers

end-users.

COVID-19

end-users,

The shift toward contactless transactions is evidenced by ABI Research estimates of worldwide shipments of dual-interface cards for financial payments, which represented over 75% of the 3.0 billion smart cards shipped in 2021. ABI Research also estimates the worldwide volume of contactless smart card transactions grew by 49% from 2020 to 2021. However, contactless smart card transactions generally are limited by financial institutions and payment processing networks to small value transactions, given the absence of a second authentication factor, such as a user-entered PIN.

end-user

Mobile devices (e.g., cell phones) are considered particularly vulnerable to a wide variety of security threats, primarily because they are connected to public networks. According to recently published research by a provider of fraud prevention solutions, mobile devices account for greater than 60% of reported digital fraud, with mobile digital wallets, cryptocurrency applications, and payment services applications experiencing significant increases in fraudulent transactions.

two-

end-users

end-users,

end-users,

end-user

Fingerprint authentication represents a compelling security solution for smart cards, particularly in the financial payments market segment, as a fingerprint, unlike a password or PIN, cannot be lost, forgotten, transferred, stolen, or easily compromised. Fingerprint authentication:

 

 

52

 

 

 

 

Fingerprint authentication demand drivers for issuers and transaction processors include:

 

 

 

 

 

 

 

 

two-factor

end-users,

end-users

We believe the historically high cost of manufacturing smart cards with fingerprint authentication has impeded their adoption. In response, we have focused on reducing the upfront cost of our products to smart card manufacturers, while developing a value proposition emphasizing our differentiated approach to addressing multiple customer needs. Our approach to providing fingerprint authentication solutions is to contribute to a comprehensive design and bill of materials that should significantly reduce development and manufacturing costs, while accelerating time to market.

low-cost

 

 

53

 

 

For this reference design:

 

 

 

We also have valuable relationships with standards bodies and leading global payment processors, which provide the necessary certifications for a new financial payment card design before that design can be released for production. We have had our fingerprint authentication solutions incorporated into smart card designs approved by Mastercard, VISA, and China UnionPay. We also were the first biometric vendor to have passed a development site security evaluation performed by EMV.

Given our breadth of experience and core competencies, as well as the breadth of our collaborative relationships with vendors across the smart card supply chain, we add value well beyond that associated with the cost of our products. We believe many customers in the market segments we target could benefit from the comprehensive, systems engineering element of our value proposition, as only a few global card manufacturers currently have the depth of resources and experience to develop a fingerprint authentication solution on an expedited timeline. Design of a smart card incorporating fingerprint authentication can be challenging, as the interaction among the fingerprint sensor, the smart card electronics, and the environment is complex, particularly given the limitations on power, processing capacity, and form factor, and the stringent requirements for response time and accuracy.

end-users

end-users

8

 

 

54

According to ABI Research (February 2022), worldwide shipments of dual-interface smart cards, enabling contactless transactions, totaled 2.3 billion units for 2021, representing a record 76% of total smart card shipments. This annual shipment volume of dual-interface smart cards is expected to expand to 3.0 billion units by 2026, representing a five-year CAGR of 5.6%.

ABI Research also estimates the worldwide volume of contactless smart card transactions grew by 49% from 2020 to 2021, forecasting growth for the next five years at a compound annual rate exceeding 27%.

While we believe dual-interface card volumes represent an approximation of our addressable market for payment cards, we do not believe the historical rate of adoption for contactless payments is indicative of a rate of adoption for fingerprint authentication in smart cards.

SE-enabled

end-user

COVID-19

9

Deployment of smart cards with fingerprint authentication has been limited to date, with numerous program trials of various volumes since 2018. In 2021, one major bank in Europe launched a full-scale commercial launch, using a competitor’s silicon image sensor. In aggregate, we estimate fewer than 300,000 smart cards with fingerprint authentication have been deployed to date for financial payment applications. As of December 31, 2021, we are aware of 20 announced programs of various volumes. Of these, eight involve the use of our fingerprint authentication solutions, either through our partnerships with IDEMIA France SAS and Zwipe AS or through our direct relationships with smart card manufacturers. Since we announced in July 2021, with Infineon Technologies, a reference design based on an integration of our TrustedBio fingerprint authentication module with their SLC38 secure controller, we have secured five important design wins with smart card manufacturers, each of which we believe could be in mass production in 2023. Based on these announcements and design wins, we believe the financial payment market segment is moving from the earliest stage of technology adoption, characterized by risk-tolerant innovators, to the early-adopter stage, characterized by visionaries who are willing to accept a degree of risk for the opportunity to lead in their own markets.

 

 

55

For forecasting, we utilize a modified version of the framework published by ABI Research for assessing the types of deployments expected to be associated with an issuer’s introduction of smart cards incorporating fingerprint authentication to its customers:

 

 

 

 

low-cost

The cyber authentication market segment we are targeting shares certain characteristics with the financial payment market segment, but we estimate it to be far smaller. As is the case with the financial payment market segment, we believe the annual unit volume of smart cards shipped for access control applications is a reasonable approximation of our addressable market opportunity. Based on ABI Research estimates and our own assessment of available industry data, we estimate the annual unit volume to be between 200 million and 250 million units. We estimate the five-year compound annual growth rate to be approximately 5%.

As is the case with the financial payment market segment, we also believe measurement of our strategic progress in the cyber authentication market segment could be based on the rate at which our fingerprint authentication solutions are incorporated into the annual volume of smart cards shipped. However, given the characteristics of the broader access control market and the varying nature of our customer engagements to date, our revenue forecasting based on such penetration assumptions is less certain. We have achieved success with a high-profile customer with which we developed a customized network authentication solution for that customer’s own consumption. In 2021, we secured a design win for a government identification card with cyber authorization features, and we also have multiple design wins for cyber authorization solutions with smart card manufacturers. As such, currently estimating any penetration rate for the cyber authorization market segment is difficult.

 

56

Within the digital currency storage market segment, which is very early in its development, accurately estimating the size and growth rate of our opportunity is difficult. We have experienced encouraging success in developing customized solutions with a small number of early innovators. Based on this limited experience, and our assessment of the opportunity, we believe the market segment has the potential to develop into a meaningful contributor to our revenue.

We compete worldwide with many companies offering identification and authentication solutions, and some of these companies have substantially greater financial, engineering, marketing and sales, customer support, and other resources than we do. We compete directly with other companies providing biometric sensors and solutions, including our principal competitors, Fingerprint Cards AB and NEXT Biometrics ASA. On January 25, 2022, Samsung Electronics, a global leader in semiconductors, introduced a device integrating a fingerprint sensor, secure element, and a microprocessor. The device is targeted at the same market segments and applications as our TrustedBio solution. While we have yet to encounter Samsung in the market segments we are targeting, nor can we predict when we will, we consider Samsung’s announcement to be a confirmation of our own positive view of the business opportunity for fingerprint authentication in applications using smart cards.    

The principal competitive factors upon which we compete include breadth of solution, engineering and manufacturing support, solution performance (i.e., accuracy, ease of use, power consumption, reliability, and transaction speed), and total cost of ownership. We maintain our ability to compete effectively primarily through our engineering activities and the ongoing development of new and enhanced technologies, methods, and processes.

We also may face competition from companies that may expand into our industry and introduce additional competitive products. Existing and potential customers and partners are also potential competitors. These customers may internally develop or acquire competitive technologies or comparable products, which may cause them to reduce or end their purchases of our products.

Our research and development activities are conducted primarily in the United Kingdom and the United States. As of December 31, 2021, we had an engineering staff of 77 employees and eight individual contractors, representing approximately 70% of our workforce.

Innovation through research and development is critical for us to remain competitive and to help our customers maintain cost and performance leadership. Our technology roadmap includes:

 

 

 

 

 

Our fabless operational strategy is to maximize efficiency and cost competitiveness by designing our products using industry standard design processes, incorporating verified high-volume components and materials, and utilizing established manufacturing processes. In support of the anticipated demand for our solutions, we have established a supply chain capable of satisfying forecast demand. We currently utilize external partners for the fabrication, assembly, and testing of our products. We believe this strategy provides the best combination of performance, cost, and feature attributes necessary for our products.

 

57

in-house,

Our selected manufacturing partners for sensor production are Amkor Technology, Inc. and Silicon Precision Industries Limited, both of which are leaders in outsourced semiconductor assembly and test services. TSMC, one of the leading semiconductor manufacturers in the world, is our partner for ASIC wafer production. The TSMC relationship gives us access to the newest and most competitive silicon manufacturing processes and geometries, while providing the capacity and cost structure to serve high volume opportunities.

We select our manufacturing partners based on a comprehensive supplier capability analysis, in order to meet the high quality and reliability standards required of our products. Our engineers and supply chain personnel work closely with manufacturing and supply chain partners to increase yield, reduce manufacturing costs, improve product quality, and ensure component sourcing strategies are in place to support our manufacturing needs.

We believe our fabless manufacturing model enables us to focus our resources and expertise on the design, development, sales, marketing and support of our products. We also believe this manufacturing model provides us the flexibility required to quickly respond to new market opportunities and shifts in customer demand. It also simplifies the scope of our operations and administrative processes and significantly reduces our working capital requirements.

Our intellectual property rights cover individual inventions and complete biometric systems ranging from measurement principles, algorithms, sensor design, and system solutions. Our extensive intellectual property portfolio, leveraging 146 patents awarded and 66 patents pending, across applicable jurisdictions worldwide (as of December 31, 2021), is a critical enabler of our strategy and competitive positioning. We maintain a program designed to identify technology appropriate for patent and trade secret protection, and we file patent applications in the United States and certain other countries for inventions we consider significant. We continuously seek to protect aspects of our technology that provide significant competitive advantage.

non-disclosure

know-how,

Companies in the markets in which we operate frequently are sued or receive informal claims of patent infringement or infringement of other intellectual property rights. As we become more successful, we believe it is

 

58

non-infringing

The wordmark “IDEX,” the IDEX logo, and the brand name TrustedBio are registered trademarks of, and owned by, IDEX Biometrics ASA.

Talented, highly-motivated contributors are important to executing the Company’s strategy. In order to maintain our leadership position in fingerprint authentication in a highly competitive employment market, attracting and retaining the best employees and individual contractors worldwide is a priority. Accordingly, we offer compelling compensation and benefits, and seek to foster a culture of innovation in which personnel are empowered to do (and are rewarded for) their best work.

As of December 31, 2021, we had 111 individuals on staff, consisting of 93 employees and 18 individual contractors (individual contractors typically reside in countries in which we do not have business operations). Of this total, 19 were assigned to our Oslo office, 56 were assigned to our two offices in the United States, 27 were assigned to our office in the United Kingdom, and nine were assigned to our office in China.

Certain members of our staff serve on a part-time basis. As such, we assess staffing needs based on a full-time equivalent (“FTE”) basis. As of December 31, 2021, we had 90 FTE employees and eight FTE individual contractors. Of this total of 98 FTEs:

 

 

 

 

None of our employees are represented by a labor union or covered by a collective bargaining agreement.

Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals, and create long-term value for our holders of our equity securities. We provide employees with compensation packages including a competitive base salary and benefits, which may vary from country to country, such as life and health insurance, supplemental insurance, paid time off, paid parental leave, and an Employee Share Purchase Plan in which eligible employee may participate. Generally (and subject to local laws), new employees and individual contractors are awarded subscription rights for the purchase of the Company’s Ordinary Shares. Staff members also generally are eligible to participate in an annual performance-based variable compensation plan, as well as be eligible for periodic awards of subscription rights based on the performance of the Company and that of the staff member. We believe a compensation program with the appropriate balance of short- and long-term incentives aligns the interests of holders of our equity securities and our personnel.

We acknowledge and embrace the importance of Environmental, Social, and Governance (“ESG”) considerations in the development and execution of the Company’s strategy, which must be sustainable and contribute to the well-being of the communities in which we operate.

 

59

Our values are set forth in our Code of Conduct and Code of Ethics (“the Code,” available on our website). The Code states, “The purpose of the Company is to create value for the shareholders, while the business shall also be to the benefit for the Company’s customers, staff, suppliers, other business relations and the society at large.”

non-discrimination,

non-harassment,

end-products

As set forth in our Code, we consider shareholders, staff, customers, business partners, authorities, and society in general to be important stakeholders, with interests to be protected and served. We consider how we interact with and treat our stakeholders to be the most efficient way we can have a meaningful impact on their wellbeing. As such, IDEX is committed to fulfill its obligation to be a responsible member of society through the conduct of its business in an ethical, socially-responsible, and transparent manner.

As of December 31, 2021, women represented 15% of our staff, and two departments are led by women. The composition of our Board meets Norwegian statutory requirements, with women as three of our seven members.

S-K,

non-financial

As our business grows, our operations and the elements of our ESG profile likely will evolve. When our ESG profile evolves to include measurable and material matters, we will supply investors and other stakeholders with decision-useful information regarding our ESG objectives and indicators of our progress toward those objectives.

Regulation related to the provision of services over the Internet is evolving, as federal, state, and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer, and use of data, including biometric data.

In some cases, data privacy laws and regulations, such as the European Union’s General Data Protection Regulation (“GDPR”), which took effect in May 2018, impose new obligations on us as a participant in the technology sector, as well as on our customers. In addition, domestic data privacy laws in the United States, such as the California Consumer Privacy Act (“CCPA”), which took effect in January 2020, continue to evolve and could expose us to further regulatory burdens. Further, laws such as the EU’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes, and the tracking of individuals’ online activities.

 

60

non-compliance.

IDEX Biometrics ASA, the registrant, is the Norwegian-domiciled parent company for wholly-owned subsidiaries in the United States (IDEX Holding Company Inc., which owns 100% of IDEX America Inc.), the United Kingdom (IDEX Biometrics UK Ltd.), and China (IDEX Electronics (Shanghai) Co., Ltd.).

We lease office space in Oslo, Norway, for our corporate headquarters under a lease which currently has a rolling three-month term. We also lease laboratory space and regional offices on three to five year fixed-term agreements in the United States (Rochester, New York, and Wilmington, Massachusetts), the United Kingdom (Farnborough), and China (Shanghai). We believe our existing facilities meet our current needs.

We do not own or operate industrial manufacturing facilities. As a fabless manufacturer, we design our products based on standard, readily available manufacturing techniques and obtaining wafer foundry and semiconductor packaging, design, and test services from leading providers. Our capital expenditures generally are associated with purchases of laboratory and test equipment related to product development.

 

Not applicable.

 

Since the Company was founded, we have generated limited revenue and have incurred significant losses. Previous efforts to commercialize our portfolio of differentiated technologies for fingerprint authentication were not successful, as targeted markets did not develop as anticipated or, once developed, quickly became commoditized, undermining our differentiation and competitive positioning.

Our competitive positioning has been, and is, based on continuous advances in technologies, innovations in design, and achievements in performance, enabled by our focus on research and development. After the commoditization (and subsequent competitive consolidation) of the mobile device market in the latter half of the last decade, IDEX undertook a strategic pivot toward applications for which our differentiated characteristics

 

61

provided demonstrable and sustainable competitive advantages, reducing our exposure to commoditization. Our focus today is on incorporating fingerprint authentication into smart cards, which present the challenging form factors, demanding performance requirements, and extreme power limitations for which our solutions are ideally suited.

IDEX has established customer relationships with innovators and early adopters sharing our vision for the potential of fingerprint authentication in smart card applications, and, over the last two years, we have experienced increasing strategic momentum, successfully attracting new customers and increasing our reported revenue, as of December 31, 2021, for eight consecutive quarters.

With the July 2021 announcement of a reference design integrating our TrustedBio fingerprint authentication module and the SLC38, the latest SE from Infineon Technologies, we began aggressively marketing the reference design to smart card manufacturers. As of the date of this Annual Report, we have five design wins (i.e., contractual commitments) for this reference design with worldwide smart card manufacturers and anticipate these designs could be in full production in 2023.

Customer order volume accelerated across 2021 from both existing customers and, notably, new customers adopting the TrustedBio—SLC38 reference design. Our backlog, consisting of confirmed customer orders scheduled for delivery within the following 12 months (and amounts, if any, of deferred revenue scheduled for recognition during the period), totaled $2.5 million, $1.7 million and $120 thousand as of December 31, 2021, 2020, and 2019, respectively. These backlog figures exclude committed deliveries pursuant to a multi-year supply contract we have with our early-adopting customer in the cyber authentication market segment, as individual shipment volumes and scheduled delivery dates are subject to change. The terms of this supply contract provide for automatic extensions of one year. As of December 31, 2021, the remaining value of these committed deliveries under our supply contract was approximately $1.2 million.

IDEX recorded revenue of $2.8 million for 2021, compared to $1.1 million for 2020, and $424 thousand for 2019. Product revenue, as a percentage of total revenue, represented 99.9%, 92.5%, and 37.5% for 2021, 2020, and 2019, respectively. Revenue associated with our early-adopting customer in the cyber authentication market segment, inclusive of services revenue associated with product development, represented 85.4%, 89.7%, and 72.3% of our total revenue for 2021, 2020, and 2019, respectively. We began to ship production volumes of our TrustedBio solution in 2021 and expect such volumes to represent an increasing percentage of total revenue in the future.

We do not own or operate capital-intensive manufacturing facilities, but operate as a fabless manufacturer, utilizing third parties for outsourced manufacturing and product assembly capabilities. We currently rely on TSMC, the leading producer of semiconductor wafers, as the sole source of wafers for our proprietary ASIC designs. We also rely on a limited number of providers of outsourced semiconductor packaging, design, and test services, including Amkor Technology, Inc., and Silicon Precision Industries Limited , both of which are leaders in outsourced semiconductor assembly and test services. Despite well-publicized disruptions throughout the semiconductor supply chain, in 2021 we did not experience disruptions that were material to our operations or financial results. However, we have ordered, and may continue to order, relatively high values of raw materials and carry relatively large quantities of finished goods so that customer delivery schedules can be met. While inventory levels likely will continue to expand as order backlog increases and expectations of higher orders and shipments increase, we do not believe such quantities of inventory represent, for the foreseeable future, a material risk to our financial position.

Due to recent inflationary pressures, primarily in the semiconductor supply chain, we expect our costs and expenses likely will increase, which could negatively influence cash flow and profitability, even if we are able to significantly increase our revenue. Given our fabless model, our manufacturing costs for the products we currently sell are most influenced by the discounts our vendors offer for sustained, high-volume production

 

62

orders. We may not achieve the necessary volume of production orders to obtain advantageous pricing for the manufacture of our current products. Also, we may not be able to pass on increased costs to customers by increasing the prices of our products.

Variable costs are associated primarily with production volumes. Our operating cost structure is largely fixed, reflecting our business model and strategic focus on research and development. Because we believe the Company’s leadership in fingerprint authentication technologies is an important competitive differentiator, we intend to maintain research and development activities to maintain this leadership.

We utilize a direct sales force and have customers around the world. At the present time, we do not sell our products through distributors. We expanded our marketing and sales staff in 2021 and plan to increase our marketing and sales activities in 2022, as we seek to reduce the extended and unpredictable sales cycles we have encountered. Fingerprint authentication applications in the market segments we target are in the early stages of development, and such extended and unpredictable sales cycles frequently are associated with marketing new and innovative technology-based products.

As a Norwegian public company, with Ordinary Shares listed on the Oslo Børs, and an SEC registrant, with ADSs listed on Nasdaq, we are required to comply with two sets of applicable laws, rules, and regulations. From time to time, this may result in uncertainties regarding compliance, with the consequence being higher costs associated with analysis of dual legal regimes, ongoing revisions to disclosure requirements, and adherence to different governance practices. We devote a substantial amount of time to these compliance initiatives, which has increased our legal and accounting costs. These compliance costs and commitments of management time likely will continue to expand.

Our largest expenses are associated with personnel costs, including salaries, variable, performance-based compensation, sales commissions, benefits, and charges for the recognition of share-based compensation costs. Our total staff, consisting of employees and individual contractors located in countries in which we do not have operations, totaled 111, 102, and 116 as of December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, 19 were assigned to our Oslo office, 56 were assigned to our two offices in the United States, 27 were assigned to our office in the United Kingdom, and nine were assigned to our office in China. While we expect to add personnel to our marketing and sales staff during 2022, we also expect such expansion will be offset largely by staffing reductions through attrition across other areas of the Company.

We anticipate our profitability could improve as revenue increases, as our forecasts for operating expenses are based on our assumed ability to increase revenue without proportional increases in our operating cost structure. However, because of the uncertainties associated with accurately forecasting revenue levels, inventory planning, and achieving operational economies of scale, we cannot predict whether, or when, we might achieve profitability.

Impact of

COVID-19

on-site

on-site

We have not experienced significant delays in our development projects, and we have not incurred additional costs as a result of our response to the pandemic. Disruption of supply chains, particularly the

 

63

semiconductor supply chain, has been attributed to the pandemic. While we did not experience supply chain disruptions that were material to our operations or financial results during 2021, operational planning and management of inventory levels were challenging, given uncertainties associated with vendor capacity availability and allocations to us of such capacity. Because we expect such uncertainties will continue through 2023, we may place orders for, and hold balances of, inventory at higher levels than would be expected if such uncertainties did not exist.

We believe the pandemic has had an adverse influence on the timing of activities of smart card manufacturers and issuers, including delaying product development and the initiation of trials and pilots involving smart cards incorporating our fingerprint authentication solutions.

COVID-19

Our primary source of revenue is derived from the sale of our products and services. We sell directly to customers and do not utilize distributors for the resale of our products.

Ex-works)

 

This category of expense was captioned “Purchases, net of inventory variation” in prior presentations. We have changed the caption to better reflect the nature of the category as representing the costs of goods sold during a period. The costs included, which have not changed, are those costs associated with materials consumed, contract manufacturing, and inbound logistics. Inventory is valued as the lower of cost or market value.

Excluded from this category are costs of personnel assigned to inventory management, procurement, logistics, and other functions typically associated with manufacturing overhead. Also excluded are any charges associated with the depreciation of Company-owned equipment (e.g., tooling) utilized by contract manufacturing vendors. These costs have not been material to date.

 

64

This category of expense was captioned “Payroll expense” in prior presentations. We have changed the caption to better reflect the scope of the category, which includes, for all departments and activities, the following employee-related expenses: salaries, variable, performance-based compensation, sales commissions, benefits, and charges for the recognition of share-based compensation costs.

As of December 31, 2021, we had 18 individuals on staff, out of a total staff of 111, whom we characterize as individual contractors, not employees. These individuals live in countries in which the Company does not have a formal business presence. Compensation of individual contractors is reported as Research and development expenses or Sales and administrative expenses, as applicable, based on the roles assigned to the individuals. While individual contractors may be eligible for awards of subscription rights and may be eligible to participate in variable, performance-based compensation plans, the Company does not provide benefits to individual contractors.

 

Expenses in this category consist primarily of the costs of services and materials used in engineering activities and certain outsourced development activities. Our policy has been to expense research and development costs as incurred, unless the criteria for capitalization of certain development costs have been met. No development costs were capitalized in 2021, 2020 or 2019.

Research and development expenses also include the compensation paid to individual contractors assigned to engineering roles. As of December 31, 2021, eight of our total engineering staff of 85 were individual contractors.

Research and development costs are offset by the earned (i.e., recognized) value, if any, of government grants applicable to research and development activities. Generally, the applications or claims for such grants are submitted after completion of the qualifying activities. When there is reasonable assurance that the application or claim will be successful and the amount can be determined reliably, we credit the value of the grant against research and development expenses for that reporting period. Due to the timing difference between the completion of the qualifying activities, the approval of our grant application or claim, and the receipt of the funds associated with the grant, we may record, pending receipt of funds, the value of the grant as an Account receivable, other. We recorded credits of $0.7 million, $2.3 million, and $0.6 million against research and development expenses in each of 2021, 2020, and 2019, respectively.

 

Expenses in this category consist of costs associated with our marketing and sales activities and costs associated with administrative activities.

Marketing and sales costs include the fees of third-party service providers supporting public relations, advertising, website and social media programs, and related activities. The direct costs of customer engagement (e.g., promotional material and trade show participation) are included. Marketing and sales expenses also include the compensation paid to individual contractors assigned to such roles. As of December 31, 2021, nine of our total marketing and sales staff of 15 were individual contractors.

Administrative costs include fees of third-party service providers supporting auditing, financial reporting, human resources, investor relations, and legal and regulatory activities. Direct administrative costs include those associated with banking and insurance, communications, information systems, occupancy (excluding lease payments), and supplies. Administrative expenses also include the compensation paid to individual contractors assigned to such roles. As of December 31, 2021, one of our total administrative staff of nine was an individual contractor.

 

65

 

period-end,

For the Company:

 

 

The provision for income tax presented in the Consolidated Statements of Profit and Loss consists of the sum of current taxes due and changes in deferred tax. Any portion of income tax expense (benefit) attributable to changes in equity during the period is recognized in the equity section of the Consolidated Statements of Financial Position.

Current taxes due represents the sum of the periodic income tax obligations of our parent company and our individual subsidiaries. Our parent company is subject to tax pursuant to the corporate tax laws of Norway. As our parent company has been in a loss position since inception, no corporate income taxes have been incurred in Norway. Each of our subsidiaries is taxed pursuant to the corporate tax laws of their respective countries of domicile. None of our subsidiaries are considered permanent establishments and, accordingly, their income is taxed on a cost-plus basis.

 

 

66

Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent, in management’s judgment, it is probable sufficient taxable profits will be generated, against which deductible temporary differences can be utilized (i.e., against which a recorded deferred tax asset can be used to reduce future taxes due). We review the potential carrying value of deferred tax assets at the end of each reporting period, based on the balance of tax loss carryforwards at the time. If we conclude there is insufficient convincing evidence of future taxable profits, against which a recorded deferred tax asset can be used to reduce future taxes due, we do not recognize a deferred tax asset.

tax-effected

For further information regarding the calculation of our tax provisions, see Footnote 6 to our Consolidated Financial Statements, which are presented in Part III of this Annual Report.

The following table summarizes the results of our operations for the years ended December 31, 2021, 2020, and 2019.