Form 10-Q Intellicheck, Inc. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to ________________
Commission
File No.:
(Exact name of Registrant as specified in its charter)
| (State
or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| ||
| (Address of Principal Executive Offices) (Zip Code) | ||
Registrant’s
telephone number, including area code:
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller
reporting company |
Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Number of shares outstanding of the issuer’s Common Stock:
| Class | Outstanding at August 15, 2022 | |
| Common Stock, $.001 par value |
INTELLICHECK, INC.
Index
| Exhibits | ||
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
| 32 18 | U.S.C. Section 1350 Certifications | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTELLICHECK, INC.
BALANCE SHEETS
(in thousands except share amounts)
| June 30 | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts
receivable, net of allowance of $ | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| PROPERTY AND EQUIPMENT, net | ||||||||
| GOODWILL | ||||||||
| INTANGIBLE ASSETS, net | ||||||||
| OTHER ASSETS | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Equity awards liability | ||||||||
| Liability for shares withheld | ||||||||
| Deferred revenue, current portion | ||||||||
| Total current liabilities | ||||||||
| OTHER LIABILITIES: | ||||||||
| Deferred revenue, long-term portion | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to financial statements.
| 3 |
INTELLICHECK, INC.
STATEMENTS OF OPERATIONS
(In thousands except shares and per share amounts)
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME | ||||||||||||||||
| Gain on forgiveness of unsecured promissory note | ||||||||||||||||
| Interest and other income | ||||||||||||||||
| Total other income | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| PER SHARE INFORMATION | ||||||||||||||||
| Loss per common share - | ||||||||||||||||
| Basic/Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares used in computing per share amounts - | ||||||||||||||||
| Basic/Diluted | ||||||||||||||||
See accompanying notes to financial statements.
| 4 |
INTELLICHECK, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except number of shares)
(Unaudited)
| Three months ended June 30, 2022 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| BALANCE, March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity compensation | - | |||||||||||||||||||
| Issuance of shares for vested restricted stock grants | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| BALANCE, June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Three months ended June 30, 2021 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| BALANCE, March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity compensation | - | |||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Issuance of shares for vested restricted stock grants | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| BALANCE, June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| 5 |
INTELLICHECK, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except number of shares)
(Unaudited)
| Six months ended June 30, 2022 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| BALANCE, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity compensation | - | |||||||||||||||||||
| Issuance of shares for vested restricted stock grants | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| BALANCE, June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Six months ended June 30, 2021 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| BALANCE, December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity compensation | - | |||||||||||||||||||
| Exercise of stock options, net of cashless exercise of shares and shares withheld | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Issuance of shares for vested restricted stock grants | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| BALANCE, June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to financial statements.
| 6 |
INTELLICHECK, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used | ||||||||
| in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Equity compensation | ||||||||
| Bad debt expense | ||||||||
| Forgiveness of unsecured promissory note | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| Decrease (increase) in other current assets | ( | ) | ||||||
| (Decrease) increase in accounts payable and accrued expenses | ( | ) | ||||||
| Increase in deferred revenue | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Return of repayment on unsecured promissory note | ||||||||
| Net proceeds from issuance of common stock from exercise of stock options | ||||||||
| Proceeds from issuance of common stock from exercise of warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Reclassification of stock option awards | $ | $ | ||||||
See accompanying notes to financial statements.
| 7 |
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are rounded to thousands, except share data)
(Unaudited)
1. NATURE OF BUSINESS
Business
Intellicheck, Inc. (the “Company” or “Intellicheck”) is a prominent technology company that is engaged in developing, integrating and marketing identity verification solutions to address challenges that include commercial retail and banking fraud prevention. Intellicheck’s products include solutions for preventing identity fraud across any industry delivered via smartphone, tablet, POS integration or other electronic devices. Intellicheck continues to develop and release innovative products based upon its rich patent portfolio consisting of seventeen (17) U.S. and one Canadian patents, as well as two U.S. patents pending.
Liquidity
For
the six months ended June 30, 2022, the Company incurred a net loss of $
As of the filing of this Form 10-Q, the COVID-19 pandemic, which first began affecting the Company in the first quarter of 2020, has impacted the Company’s business by a temporary decline in revenues from its customers. The Company’s total revenues decreased for the six months ended June 30, 2022 compared to the same period of 2021, primarily due to lower equipment revenues in the current period. Though the Company has had an increase in SaaS revenues for the six months ended June 30, 2022 compared to the same period of 2021, the COVID-19 pandemic may continue to impact our business directly and/or indirectly for the foreseeable future. Although many of the restrictions previously imposed by local and national governmental authorities have been lifted or eased, should cases increase, these restrictions could be re-implemented, especially given the emergence of more transmissible variants such as Omicron BA.5. The Company is further unable to accurately predict the full impact that the COVID-19 pandemic will have on its results of operations or financial condition due to numerous factors that are not within its control, including the duration and severity of further outbreaks together with any potential statewide or local closures or restrictions if cases increase, the spread of COVID-19 variants, including, but not limited to, the Delta, Omicron, BA.2 and BA.5 variants, and the widespread adoption of vaccination measures including booster regimens and the effectiveness of preventing further spread or limiting acute sickness or hospitalizations.
See Part II, Item 1A for more information.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s financial position at June 30, 2022 and the results of operations, stockholders’ equity and cash flows for the six months ended June 30, 2022 and 2021. All such adjustments are of a normal and recurring nature. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements. Results of operations for the six-month period ended June 30, 2022, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2022.
| 8 |
The balance sheet as of December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.
References in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”).
For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2021.
Equity Compensation Accounting
On May 16, 2022, management in concurrence with the Company’s Audit Committee of our Board of Directors (the “Audit Committee”), concluded that that the financial statements previously issued for the third quarter of 2020, for each quarter ended 2021 and for the years ended December 31, 2021 and 2020 should no longer be relied upon due to errors in accounting for certain option awards. Accordingly, we have restated our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, Statements of Cash Flows and the related notes for the third quarter of 2020 and subsequently, for each quarter thereafter ended 2021, and as of and for the years ended December 31, 2021 and 2020.
Specifically, the Company determined that a cashless withholding to satisfy personal income tax obligations from certain option awards exercised commencing in the third quarter of 2020 and the first quarter of 2021, caused the underlying options to no longer qualify as equity awards and should have instead been classified as liability awards commencing on the date of exercise. The change in the classification of the awards to liability classified awards requires the Company to remeasure the fair value of the awards at the end of each reporting period they remain outstanding, with the increase or decrease in fair value correspondingly charged or credited to selling, general and administrative expenses in arriving at net income. Furthermore, the Company failed to sell the shares surrendered and did not remit the equivalent amount of funds to the tax authorities for the 2021 exercise. To date, the Company has not returned the shares or otherwise reimbursed the effected individuals for the shares withheld during 2021. The Company is currently in the process of arranging payment to individuals, which is expected to be completed during 2022.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to measure credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company does not expect this standard will have a material impact on its financial statements.
Use of Estimates
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, allowance for doubtful accounts, revenue recognition (including breakage revenue) and the fair value of stock options under the Company’s equity compensation plan. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates.
Research and Development
The Company’s research and development efforts are mainly concentrated in the identity sector. We develop new software solutions and make improvements to existing software platforms, which are funded internally.
| 9 |
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect customers’ ability to pay.
Cash and Cash Equivalents
We classify as cash equivalents time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase. Our cash and cash equivalents consist primarily of cash on deposits with banks and is maintained with major financial institutions in the United States.
Property and Equipment
Property
and equipment are recorded at cost and are depreciated over their estimated useful lives ranging from to
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Pursuant to ASC 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform step one of the quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price.
The Company performed its annual impairment test of goodwill in the fourth quarter for the year ended December 31, 2021. For the six months ended June 30, 2022 and 2021, the Company determined no impairment charge was required.
Intangible Assets
Intangible assets include patents, copyrights, and developed technology. The Company amortizes these assets on a straight-line basis over their estimated useful lives, as it represents the pattern of economic benefits consumed. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC 360. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. There were no impairment charges recognized during either of the six months ended June 30, 2022 and 2021.
Advertising Costs
Advertising
costs, which are charged to expense as incurred, were $
Retirement Plan
The
Company has a retirement savings 401(k) plan. The plan permits eligible employees to make voluntary contributions to a trust, up to a
maximum of
| 10 |
Shipping Costs
The Company’s shipping and handling costs related to sales are included in cost of revenues for all periods presented. All other shipping and handling costs are included as a component of selling, general and administrative expenses on the Statements of Operations.
Income Taxes
The Company accounts for income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as of June 30, 2022 and December 31, 2021, due to the uncertainty of the realizability of those assets.
Fair Value of Financial Instruments
The Company adheres to the provisions of ASC 820, “Fair Value Measurement” which requires the Company to calculate the fair value of financial instruments and include this additional information in the notes to financial statements when the fair value of those financial instruments is different than the book value. The Company’s financial instruments include cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses. At June 30, 2022 and December 31, 2021, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature. Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
| ● | Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities. With the exception of the Company’s liability classified stock options, all of the Company’s financial instruments are categorized as Level 1 within the fair value hierarchy. | |
| ● | Level
2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets
or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation
methodologies. The Company had $ | |
| ● | Level 3—Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when the fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. The Company had no Level 3 assets or liabilities as of June 30, 2022 and 2021. |
| 11 |
Revenue Recognition and Deferred Revenue
General
Most license fees and services revenue are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with the Company’s software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access the Company’s software. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company measures revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of the Company’s services as they are performed. Substantially all customer contracts provide that the Company is compensated for services performed to date.
During 2021, the Company adopted an additional revenue model where customers purchase a predetermined number of transactions for the term of the contract. Revenue for these transactions is recognized on a per transaction basis. The Company estimates the number of transactions that will be unused by the end of each contract period and recognizes a portion of that revenue as breakage revenue each reporting period. If the Company expects the customer to use all transactions in the specified service period, the Company will recognize the transaction price as revenue in the specified service period as the promised units of service are transferred to the customer. Alternatively, if the Company expects that the customer cannot or will not use all transactions in the specified service period (referred to as “breakage”), the Company will recognize the estimated breakage amount as revenue ratably over the service period in proportion to the revenue that the Company will recognize for actual transactions used by the customer in the service period. Actual results could differ from estimates and as such differences may be material to the financial statements.
Invoicing is based on schedules established in customer contracts. Payment terms are generally established from 30 to 60 days from the invoice date. Product returns are recorded as a reduction to revenue.
Revenue is measured based on the consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Furthermore, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:
Software as a Service (SaaS)
Software as a service (SaaS) for hosted subscription services and licensed software allows customers to access a set of data for a predetermined period of time. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time, under the fixed pricing model, based on the usage of the hosted subscription services and licensed software, which can vary from month to month. Under the per-scan revenue model, revenue is recognized each time the customer scans an identity document.
Equipment Revenue
Revenue from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the equipment is received.
| 12 |
Other Revenue
Other Revenues consist primarily of revenues from other subscription and support services, non-recurring services, and extended warranties. The Company’s revenues from other subscription and support services includes jurisdictional updates to certain commercial customers and support services particularly to its Defense ID® customers. These subscriptions require continuing service or post contractual customer support and performance. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of locations in a given month multiplied by a fee per location.
Non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as it is provided, and the Company’s performance obligation has been satisfied.
Extended warranty revenues are generated when a warranty is provided to the customer separately of other performance obligations when the equipment is sold. As the customer obtains access at a point in time and continues to have access for the remainder of the warranty term, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs. The related revenue is recognized ratably over the specified term of the warranty period. The extended warranty is separate to the Company’s standard warranty of usually one year that it receives from its vendor.
Disaggregation of revenue
In the following tables, revenue is disaggregated by product and service and the timing of revenue recognition.
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Products and services | ||||||||
| Software as a Service (SaaS) | $ | $ | ||||||
| Equipment | ||||||||
| Other | ||||||||
| $ | $ | |||||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | $ | ||||||
| Services transferred over time | ||||||||
| $ | $ | |||||||
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Products and services | ||||||||
| Software as a Service (SaaS) | $ | $ | ||||||
| Equipment | ||||||||
| Other | ||||||||
| $ | $ | |||||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | $ | ||||||
| Services transferred over time | ||||||||
| $ | $ | |||||||
| 13 |
Contract balances
The
current portion of deferred revenue at June 30, 2022, December 31, 2021 and January 1, 2020 was $
The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods.
Accounts Receivable
Accounts
Receivable, net of allowance for doubtful accounts, at June 30, 2022, December 31, 2021 and January 1, 2020 was $
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:
| Remainder | ||||||||||||||||
| 2022 | 2023 | 2024 | Total | |||||||||||||
| Software as a Service (SaaS) | $ | $ | $ | | $ | |||||||||||
| Other | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
All consideration from contracts with customers is included in the amounts presented above.
Business Concentrations and Credit Risk
During
the three and six-month period ended June 30, 2022, the Company made sales to three customers that accounted for approximately
Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive effect of outstanding options, warrants and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net loss per share excludes all anti-dilutive shares. In periods of a net loss, all common stock equivalents are considered anti-dilutive.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average common shares – | ||||||||||||||||
| Basic/Diluted | ||||||||||||||||
| Net Loss per share – | ||||||||||||||||
| Basic/Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 14 |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Stock options | ||||||||||||||||
| Restricted stock | ||||||||||||||||
| Performance stock units | ||||||||||||||||
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
| June
30, 2022 | December
31, 2021 | |||||||
| Computer equipment and software | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Office equipment | ||||||||
| Less – Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense for the six months ended June 30, 2022 and 2021 amounted to $
4. INTANGIBLE ASSETS
The changes in the carrying amount of intangible assets for the six months ended June 30, 2022 were as follows:
| Net balance at December 31, 2021 | $ | |||
| Deduction: Amortization expense | ( | ) | ||
| Net balance at June 30, 2022 | $ |
| 15 |
The following tables set forth the components of intangible assets as of June 30, 2022 and December 31, 2021:
| As of June 30, 2022 | ||||||||||||||||
| Estimated | Adjusted | |||||||||||||||
| Useful | Carrying | Accumulated | ||||||||||||||
| Life | Amount | Amortization | Net | |||||||||||||
| Patents and copyrights | $ | $ | ( | ) | $ | |||||||||||
| Developed technology | | ( | ) | |||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
| As of December 31, 2021 | ||||||||||||||||
| Estimated | Adjusted | |||||||||||||||
| Useful | Carrying | Accumulated | ||||||||||||||
| Life | Amount | Amortization | Net | |||||||||||||
| Patents and copyrights | $ | $ | ( | ) | $ | |||||||||||
| Developed technology | | ( | ) | |||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
The following summarizes amortization of intangible assets included in the accompanying statements of operations:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cost of sales | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
5. DEBT
Promissory Note
On
April 15, 2020 the Company received an advance of $
Revolving Line of Credit
On
February 6, 2019, the Company entered into a revolving credit facility with Citi Personal Wealth Management that allows for borrowings
up to the lesser of (i) $
| 16 |
6. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Professional fees | $ | $ | ||||||
| Payroll and related | ||||||||
| Incentive bonuses | ||||||||
| Other | ||||||||
| $ | $ | |||||||
7. INCOME TAXES
Our
available net operating loss (“NOL”) at December 31, 2021 was approximately $
8. EQUITY COMPENSATION
The Company accounts for the issuance of equity awards to employees in accordance with ASC Topic 718, which requires that the cost resulting from all equity payment transactions be recognized in the financial statements. This pronouncement establishes fair value as the measurement objective in accounting for equity payment arrangements and requires all companies to apply a fair value based measurement method in accounting for all equity payment transactions with employees. All equity compensation is included in operating expenses as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Compensation cost recognized: | ||||||||||||||||
| Selling, general & administrative | $ | $ | $ | $ | ||||||||||||
| Research & development | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Stock Options
The Company uses the Black-Scholes option pricing model to value the stock options on the grant date. The table below presents the weighted average expected life of the stock options in years. The Company uses the simplified method for all grants to estimate the expected life of the option and assumes that stock options will be exercised evenly over the period from vesting until the awards expire. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect on the grant date. Options, generally, vest from one to four years. The compensation expense is recognized over the service period on a straight-line basis and reduced by forfeitures when they occur.
As noted in Note 2, certain option awards no longer qualify as equity awards and instead are classified as liability awards. The fair value of these awards are determined at each reporting period utilizing a Black-Scholes option pricing model, and the associated compensation expense for the reporting period is recorded. The Company reduced equity compensation expense by approximately $ and $for the three and six months ended June 31, 2021 as a result of the change in fair value of these awards.
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Number of Shares Subject to Issuance | Weighted- average Exercise Price | Weighted- average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||
| Outstanding at December 31, 2021 | $ | | years | $ | | ||||||||||||
| Granted | - | - | |||||||||||||||
| Forfeited | ) | - | - | ||||||||||||||
| Outstanding at June 30, 2022 | $ | years | $ | ||||||||||||||
| Exercisable at June 30, 2022 | $ | years | $ | ||||||||||||||
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on June 30, 2022. This amount changes based upon the fair market value of the Company’s stock.
Restricted Stock Units
The Company issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of common stock of the Company. During the six months ended June 30, 2022, the Company issued RSUs to certain directors as compensation. RSU agreements can vest immediately or with the passage of time. The vesting of all RSUs is contingent on continued board and employment services.
The compensation expense incurred by the Company for RSUs is based on the closing market price of the Company’s common stock on the date of grant, is amortized on a straight-line basis over the requisite service period and charged to operating expenses with a corresponding increase to additional paid-in capital, reduced by forfeitures when they occur.
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( | ) | ||||||
| Vested and settled in shares | ( | ) | ||||||
| Outstanding at June 30, 2022 | $ | |||||||
Performance Stock Units
On August 7, 2020, the Company issued Performance Stock Units (PSUs) to its officers and certain employees as compensation. % of the PSUs were to vest based on the Company’s market price and % were to vest based on the Company’s Adjusted EBITDA. Both the conditions were to occur over a specified time and were contingent on continued employment services.
On November 4, 2021, the Company amended its PSU Plan so that % of the PSUs will be subject to vesting based on the Company’s market price as the sole vesting criteria. As a result of this amendment, the adjusted EBITDA performance metric from the previous plan is no longer a criteria performance metric.
| 18 |
Compensation expense is based on a Geometric Brownian Motion valuation model based on the closing market price of the Company’s common stock on the date of grant and is amortized ratably on a straight-line basis over the requisite period, reduced by forfeitures when they occur. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for this performance metric is amortized over the anticipated service period. If these criteria are not met, no compensation cost is recognized, and any previously recognized compensation cost would be reversed. Compensation expense is charged to operating expenses with a corresponding increase to additional paid-in capital.
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Forfeited | ( | ) | ||||||
| Outstanding at June 30, 2022 | $ | |||||||
As of June 30, 2022, total unrecognized compensation cost was $, net of estimated forfeitures, related to all unvested stock options, RSUs and PSUs, which is expected to be recognized over a weighted average period of approximately years.
The Company had shares available for future grants under the Plan at June 30, 2022.
9. COMMITMENTS AND CONTINGENCIES
The Company is not aware of any infringement by the Company’s products or technology on the proprietary rights of others.
The Company is not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material effect on its business.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (All dollar amounts are rounded to thousands, except shares and per share data)
References made in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “Intellicheck,” or the “Company,” refer to Intellicheck, Inc.
The following discussion and analysis of our financial condition and results of operations constitutes management’s review of the factors that affected our financial and operating performance for the six-month period ended June 30, 2022. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K/A for the year ended December 31, 2021.
Overview
We are a prominent technology company that is engaged in developing, integrating and marketing identity authentication and threat identification solutions to address challenges that include bank and retail fraud prevention, law enforcement threat identification, and mobile and handheld access control and security for the government, military and commercial markets.
Critical Accounting Policies and the Use of Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, allowance for doubtful accounts, revenue recognition (including breakage revenue), and the fair value of stock options under our equity compensation plans. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates.
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, equity compensation, deferred taxes, goodwill and intangible asset valuation and impairment, and commitments and contingencies. These policies and our procedures related to these policies are summarized below and described in further detail in the Notes to Financial Statements.
Goodwill
The excess of the purchase consideration over the fair value of the assets of acquired businesses is considered goodwill. Under authoritative guidance, purchased goodwill is not amortized, but rather it is periodically reviewed for impairment. We had goodwill of $8,102 as of June 30, 2022.
For the year ended December 31, 2021, the Company performed its annual impairment test of goodwill in the fourth quarter. Under authoritative guidance, the Company can use industry and Company specific qualitative factors to determine whether it is more likely than not that impairment exists before performing step one of the quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price.
We determined that no events occurred or circumstances changed during the six months ended June 30, 2022 that would more likely than not reduce the fair value of the Company below its carrying amounts. We will, however, continue to monitor our stock price and operations for any potential indicators of impairment. We will conduct the 2022 annual test for goodwill impairment in the fourth quarter, or at such time where an indicator of impairment appears to exist.
| 20 |
Intangible Assets
Our intangible assets consist of patents and a software license. We determined that no events occurred, or circumstances changed during the six months ended June 30, 2022 that would more likely than not reduce our intangible assets below our carrying amounts. We will, however, continue to monitor any potential indicators of impairment. See Note 4, “Intangible Assets,” in the Notes to Financial Statements for details on the company’s intangible assets.
Revenue Recognition and Deferred Revenue
Most license fees and service revenues are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with our software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access our software. In certain instances, customization services are determined to be essential to the functionality of the delivered software. Under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. We measure revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. The Company adopted an additional revenue model where customers purchase a predetermined number of transactions for the term of the contract, where revenue for these transactions is recognized on a per transaction basis. The Company estimates the number of transactions that will be unused by the end of each contract period and recognized a portion of that revenue as breakage revenue each reporting period. Reference Note 2, “Significant Accounting Policies,” in the Notes to Financial Statements for additional details on the company’s recognized and deferred revenue.
Equity Compensation
We account for the issuance of equity awards to employees in accordance with ASC 718, “Compensation – Stock Compensation”, which requires that the cost resulting from all equity payment transactions be recognized in the financial statements. This pronouncement establishes fair value as the measurement objective in accounting for equity payment arrangements and requires all companies to apply a fair value-based measurement method in accounting for all equity payment transactions with employees. Reference Note 8, “Equity Compensation,” in the Notes to Financial Statements for details on the company’s equity compensation plans.
Reference Note 2, “Significant Accounting Policies,” for a discussion of the 2021 equity compensation accounting oversights and remediations.
Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We have recorded a full valuation allowance for our net deferred tax assets as of June 30, 2022, due to the uncertainty of our ability to realize those assets. Reference Note 7, “Income Taxes,” in the Notes to Financial Statements for details on the company’s income taxes.
Commitments and Contingencies
We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.
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Results of Operations
(All dollar amounts are rounded to thousands, except shares and per share data)
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2022
TO THE THREE MONTHS ENDED JUNE 30, 2021
Revenues for the three months ended June 30, 2022 decreased $789, or 16%, to $4,008 compared to $4,797 for the same period of 2021. The decrease in revenues is primarily the result of lower equipment revenues in the current period. Excluding equipment sales, revenues for the three months ended June 30, 2022 increased $556, or 16%, compared to the same period of 2021. SaaS revenue, which consists of software licensed on a subscription basis, increased $694 or 21% to $3,928 for the three months ended June 30, 2022 compared to $3,234 for the same period of 2021.
Gross profit increased $316, or 9%, to $3,644 for three months ended June 30, 2022 from $3,328 for the same period of 2021. Our gross profit, as a percentage of revenues, was 91% and 69% for the three months ended June 30, 2022 and 2021, respectively. The increase in gross profit percentage is primarily due to lower equipment revenues in the current period. Excluding equipment sales, our gross profit as a percentage of revenues was 93% for both quarters ended June 30, 2022 and 2021.
Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $577, or 14%, to $4,742 for the three months ended June 30, 2022 compared to $4,165 for the same period of 2021. The increase in operating expenses was driven by higher personnel expenses, professional fees and marketing expenses.
As a result of the factors noted above, the Company had a net loss of $1,098 for the three months ended June 30, 2022 as compared to a net loss of $836 for the three months ended June 30, 2021.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2022
TO THE SIX MONTHS ENDED JUNE 30, 2021
Revenues for the six months ended June 30, 2022 decreased $257, or 3%. to $7,403 compared to $7,660 for the same period of 2021. The decrease in revenues in the six months ended June 30, 2022 is primarily the result of lower equipment revenues in the six months ended June 30, 2022 compared to the same period of 2021. Excluding equipment sales, revenues for the six months ended June 30, 2022 increased $1,088 or 18%, compared to the same period of 2021. SaaS revenue increased $1,272 or 21% to $7,281 for the six months ended June 30, 2022 compared to $6,009 for the same period of 2021.
Gross profit increased by $752, or 13%, to $6,723 for six months ended June 30, 2022 from $5,971 for same period of 2021.Our gross profit, as a percentage of revenues, was 91% and 78% for the six months ended June 30, 2022 and 2021, respectively. The increase in gross profit as a percentage of revenues was due to the lower sales of equipment, which have lower gross profit margins, in the first six months of 2021. Excluding equipment sales, our gross profit as a percentage was 92% and 93% for the six months ended June 30, 2022 and 2021, respectively.
Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $2,158 or 19% to $9,289 for the six months ended June 30, 2022 compared to $11,447 for the six months ended June 30, 2021. This decrease is primarily due to lower equity compensation expenses in the current period, driven by the liability award reclassification adjustments recorded during the first six months of 2021.
During the six months ended June 30, 2021, the Company recorded a $10 gain on the forgiveness of an unsecured promissory note.
As a result of the factors noted above, the Company incurred a net loss of $2,566 for the six months ended June 30, 2022 compared to a net loss of $5,461 for the six months ended June 30, 2021.
| 22 |
Liquidity and Capital Resources
As of June 30, 2022, we had cash and cash equivalents of $11,957, working capital (defined as current assets minus current liabilities) of $9,121, total assets of $24,194 and stockholders’ equity of $18,360.
During the six months ended June 30, 2022, we used net cash of $1,538 in operating activities as compared to net cash used of $1,075 in the six months ended June 30, 2021. Cash used in investing activities was $156 for the six months ended June 30, 2022 compared to cash used in investing activities of $182 for the six months ended June 30, 2021. Cash generated by financing activities was zero for the six months ended June 30, 2022 compared to cash generated by financing activities of $76 for the six months ended June 30, 2021.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and including how it may impact our customers, employees and vendors. We did incur disruptions during the year ended December 31, 2021 from COVID-19 and we are unable to predict the impact that this pandemic will have on us going forward, including our financial position, results of operations and cash flows, the impact on our customers and the related demand for our services due to numerous uncertainties.
We currently anticipate that our available cash, expected cash from operations and availability under the revolving line of credit, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months from the date of filing. Reference Note 5, “Debt,” in the Notes to Financial Statements for details on the Company’s revolving line of credit.
We keep the option open to raise additional funds to respond to business contingencies which may include the need to fund more rapid expansion, fund additional marketing expenditures, develop new markets for our technology, enhance our operating infrastructure, respond to competitive pressures, or acquire complementary businesses or necessary technologies. There can be no assurance that we will be able to secure the additional funds when needed or obtain such on terms satisfactory to us, if at all.
The specific terms of any future offering, including the prices and use of proceeds, will be determined at the time of any such offering and will be described in detail in a prospectus supplement which will be filed with the SEC at the time of the offering.
We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material effect on our business.
Net Operating Loss Carry Forwards
Our available net operating loss (“NOL”) at December 31, 2021 was approximately $18.0 million. The federal and state NOLs are available to offset future taxable income and begin to expire in 2021.
Adjusted EBITDA
We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adjusting net loss for certain items such gains on debt forgiveness and other income and certain addbacks such as income taxes, depreciation, amortization and equity compensation expenses. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing our financial results with other companies that also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as impairments of long-lived assets and goodwill, amortization, depreciation and equity compensation, as well as non-operating charges for interest and income taxes, investors can evaluate our operations and can compare the results on a more consistent basis to the results of other companies. In addition, Adjusted EBITDA is one of the primary measures management uses to monitor and evaluate financial and operating results.
We consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful measure of our historical operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes gains on debt forgiveness, other income, impairments of long-lived assets and goodwill, and equity compensation, all of which impact our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit multiple periods. We believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net loss presented in accordance with GAAP. Adjusted EBITDA as defined by us may not be comparable with similarly named measures provided by other entities.
| 23 |
A reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA follows:
| (Unaudited) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss | $ | (1,098 | ) | $ | (836 | ) | $ | (2,566 | ) | $ | (5,461 | ) | ||||
| Reconciling items: | ||||||||||||||||
| Gain on forgiveness of unsecured promissory note | - | - | - | (10 | ) | |||||||||||
| Interest and other income | - | (1 | ) | - | (5 | ) | ||||||||||
| Depreciation and amortization | 69 | 41 | 139 | 84 | ||||||||||||
| Equity compensation including liability classified awards | 446 | 749 | 1,038 | 5,294 | ||||||||||||
| Adjusted EBITDA | $ | (583 | ) | $ | (47 | ) | $ | (1,389 | ) | $ | (98 | ) | ||||
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Forward Looking Statements
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, loss from operations and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments, which subject us to concentrations of credit risk, consist primarily of cash and cash equivalents. We maintain cash and cash equivalents in two financial institutions and perform periodic evaluations of the relative credit standing of these institutions.
| 24 |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, as of March 31, 2022, due to the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the reports required to be filed or submitted under the Securities Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management identified the following material weaknesses in our internal control over financial reporting related to its accounting for shares surrendered to cover personal income tax liabilities, the calculation of shares issued and outstanding, and weighted-average shares outstanding. The Company did not maintain a compliment of accounting personnel with sufficient knowledge, experience and training in the application of US. GAAP as it relates to accounting and reporting for equity compensation. This material weakness contributed to a failure to maintain effective controls over the accounting and reporting for stock options.
Remediation Plan
Historically, the Company managed the administration and recordkeeping of the Company’s equity compensation in-house. Managing this complex process was unduly burdensome and directly contributed to the material weakness.
During the second half of 2022, the Company will no longer maintain the administration and recordkeeping of its equity compensation plans internally but instead will outsource this function to a third-party brokerage firm specializing in these tasks. This specialization will improve the accuracy of reporting and the Company’s legal and regulatory compliance around equity compensation.
The Company has also engaged a professional services firm to oversee the implementation of a global broker-dealer firm specializing in equity compensation platforms, as well as provide recommendations on best practices, processes, and internal controls going forward.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than the changes described above related to the material weakness related to the accounting for equity compensation.
Part II - Other Information
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. Risk Factors
Current economic conditions including the ongoing COVID-19 pandemic may cause a decline in business and consumer spending which could adversely affect our business and financial performance.
Our operating results may be impacted by the overall health of the North American economy. Our business and financial performance, including collection of our accounts receivable and recoverability of assets, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession, etc.
| 25 |
In December 2019, it was first reported that there had been an outbreak of a novel strain of COVID-19, in China. Since then, COVID-19 has continued to spread outside of China, including throughout the United States and other parts of the world, becoming a global pandemic. Since then, the pandemic has seen waves of increases and decreases of infections due to the emergence of variants to the original COVID-19 strain such as the Delta variant and Omicron variant. For the period covered by this Form 10-Q, the COVID-19 pandemic has impacted our business and will likely continue to impact our business directly and/or indirectly for the foreseeable future. While we are hopeful that widespread vaccinations from COVID-19, together with increases in immunity within the population, will usher in a new sense of normalcy, we are unable to accurately predict the full impact that the COVID-19 pandemic will have on our results of operations or financial condition due to numerous factors that are not within our control.
Governments in affected regions have implemented and may continue to implement safety precautions, including stay-at-home orders, travel restrictions, business closures, cancellations of public gatherings, and other measures. Other organizations and individuals are taking additional steps to avoid or reduce infection, including limiting travel and having employees work remotely. These measures have disrupted normal business operations both in and outside of affected areas. While many of the original restrictions levied by governments in 2020 have recently been removed at local and national levels, additional variants, such as the Omicron BA.5 variant, have emerged causing increases in cases, together with some resistance to vaccinations, including recurring cases, which could cause governments to reinstitute some or all of the previously implemented restrictive measures in order to curtail the increase in the number of reported cases and associated hospitalizations. We continue to monitor our operations and government recommendations and have made appropriate modifications to our operations because of COVID-19, including transitioning to a remote work environment, substantial reductions in employee travel, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. These decisions may delay or reduce sales and harm productivity and collaboration. The cancellation of industry events nationwide reduces our ability to meet with existing and potential new customers. Our customers’ businesses could be disrupted, or they could seek to limit technology spending, either of which could foreclose future business opportunities, could negatively impact the willingness of our customers to enter into or renew contracts with us, and ultimately adversely affect our revenues. Although we are unable to predict the precise impact of COVID-19 on our business, our business depends to a large extent on the willingness of customers to enter into or renew contracts with us.
In addition, while the long-term economic impact and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which could reduce our ability to access capital and could negatively affect our liquidity and the liquidity and stability of markets for our common stock.
The conflict in Ukraine could have an adverse effect on our business, results of operations, financial condition, and cash flow in the future.
The ongoing conflict in the Ukraine raises a host of potential risk factors to consider even though the Company does not conduct business in the Ukraine or Russia. Recent sanctions brought against Russia will impact the import, export, sale, and supply of goods and services with companies located in the US and other regions. This will likely have a negative impact on the global economy and effect economic and capital markets. A downturn in the economy caused by these measures could result in a reduction in our revenue.
In light of the above-described sanctions, we are aware of the possibilities of increased cyber-attacks. The US Cyber-security and Infrastructure Security Agency (“CISA”) has recently issued a warning of the risk of Russian cyber-attacks on US networks and critical infrastructure. While we do not currently believe that we are a likely target of a cyber-attack, we continue to be diligent in our controls over our information technology, systems and data. If we do fall victim to such attack, it could have an adverse effect on our business operations.
Our operations and financial results are subject to various other risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our annual report on Form 10-K for fiscal year 2021 filed March 24, 2022 as amended June 9, 2022, for further information concerning other risks and uncertainties that could negatively impact us.
| 26 |
We have identified a material weakness in our internal control over financial reporting, and this or other material weaknesses, or inadequate remediation measures, could impair our ability to report accurate financial information in a timely manner, which could adversely affect our business and results of operations.
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). As disclosed in Part I, Item 4. “Controls and Procedures”, our management identified a material weakness relating to certain administrative errors accounting for shares surrendered in option exercises to cover personal income tax liabilities, the calculation of shares issued and outstanding, and weighted-average shares outstanding as well as in our treatment of certain equity awards as liabilities which results in an increase in our selling, general and administrative expenses in certain prior periods. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of March 31, 2022. If our remedial measures described in Part I, Item 4 are insufficient to address the above described weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and may not be available in a timely manner and we could be required to restate our financial statements which could lead to substantial additional costs for accounting and legal fees. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
None
Item 6. Exhibits
| (a) | The following exhibits are filed as part of the Quarterly Report on Form 10-Q: |
| Exhibit No. | Description | ||
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | ||
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | ||
| 32 | 18 U.S.C. Section 1350 Certifications | ||
| 101.INS | XBRL Instance Document | ||
| 101.SCH | XBRL Taxonomy Extension Schema | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | ||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
| 27 |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | August 15, 2022 | Intellicheck, Inc. | |
| By: | /s/ Bryan Lewis | ||
| Bryan Lewis | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| By: | /s/ Jeffrey Ishmael | ||
| Jeffrey Ishmael | |||
| Chief Financial Officer | |||
| 28 |
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bryan Lewis, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Intellicheck, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15I and 15d-15I) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: | August 15, 2022 | /s/ Bryan Lewis | |
| Name: | Bryan Lewis | ||
| Title: | Chief Executive Officer and Director | ||
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey Ishmael, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Intellicheck, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15I and 15d-15I) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: | August 15, 2022 | /s/Jeffrey Ishmael | |
| Name: | Jeffrey Ishmael | ||
| Title: | Chief Financial Officer | ||
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Intellicheck, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the period ended June 30, 2022 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | August 15, 2022 | /s/ Bryan Lewis | |
| Name: | Bryan Lewis | ||
| Title: | Chief Executive Officer and Director | ||
| Dated: | August 15, 2022 | /s/ Jeffrey Ishmael | |
| Name: | Jeffrey Ishmael | ||
| Title: | Chief Financial Officer | ||
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.
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