Intellicheck, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (All dollar amounts are rounded to thousands, except per share data) 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. 19 Table of Contents 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 granted under our stock-based 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, stock-based 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. Valuation of long-lived assets Our long-lived assets include property and equipment, goodwill, and intangible assets. As of December 31, 2022, the balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization and impairments, were $749, $8,102 and $273, respectively. As of December 31, 2021, the balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization and impairments, were $737, $8,102 and $378, respectively. Reference Note 2, “Significant Accounting Policies”; Note 4, “Property and Equipment”; and Note 5, “Goodwill and Intangible Assets” in the Notes to Financial Statements for details on the Company’s valuations of our long-lived 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. 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 our services as they are performed. Substantially all customer contracts provide that we are compensated for services performed to date. Reference Note 2, “Significant Accounting Policies,” in the Notes to Financial Statements for details on the Company’s recognized and deferred revenue. Stock-based 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 9, “Stockholders’ Equity,” in the Notes to Financial Statements for details on the Company’s equity compensation plans. 20 Table of Contents 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 December 31, 2022 and 2021, due to the uncertainty of the realizability of those assets. Reference Note 8, “Income Taxes,” in the Notes to Financial Statements for details on the Company’s deferred 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. Reference Note 10, “Commitments and Contingencies,” in the Notes to Financial Statements for details on the Company’s commitments and contingencies. The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases, the accounting treatment of a 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. Results of Operations COMPARISON OF THE YEAR ENDED DECEMBER 31, 2022 TO THE YEAR ENDED DECEMBER 31, 2021 REVENUES . Revenues for the year ended December 31, 2022 decreased $427, or 3% to $15,966 compared to $16,393 for the year ended December 31, 2021. The decrease in 2022 revenues is primarily the result of lower non-recurring equipment revenues in the current period. SaaS revenues, which consists of software licensed on a subscription basis, increased $2,758 or 21% to $15,728 for the year ended December 31, 2022 compared to $12,970 for the year ended December 31, 2021. GROSS PROFIT . Gross profit increased by $1,809, or 14%, to $14,691 for the year ended December 31, 2022 from $12,882 in the year ended December 31, 2021. Our gross profit, as a percentage of revenues, was 92.0% and 78.6% for the years ended December 31, 2022 and 2021, respectively. The increase in gross profit percentage over the prior year is primarily due to the continued growth of our SaaS revenue and the absence of the non-recurring hardware revenue of 2021, which contained lower margins. Excluding hardware sales and related costs, our gross profit as a percentage of revenues was 92.9% and 93.2% for the years ended December 31, 2022 and 2021, respectively. OPERATING EXPENSES. Operating expenses, which consist of selling, general and administrative expenses and research and development expenses, decreased by $1,962, or 10% to $18,413 for the year ended December 31, 2022 from $20,375 for the year ended December 31, 2021. Selling, general and administrative expenses decreased by $2,496, or 17%, to $12,399 for the year ended December 31, 2022 from $14,895 for the year ended December 31, 2021. The decrease in selling, general and administrative expenses was primarily attributed to lower stock-based compensation and headcount-related expenses, offset by an increased focus on investment in growing SaaS-related revenues. Research and development expenses increased $534, or 10%, to $6,014 for the year ended December 31, 2022 from $5,480 for the year ended December 31, 2021. This increase is primarily due to higher personnel costs and their related stock-compensation expenses. INTEREST (EXPENSE) AND OTHER (EXPENSE) INCOME . Interest expense was $(5) for the year ended December 31, 2022, compared to interest income of $5 during the year ended December 31, 2021. INCOME TAXES . We had taxable income in some state jurisdictions for the year ended December 31, 2022 where there were not sufficient net operating losses to offset the taxable income resulting in a tax expense of $124. Tax losses for the year ended December 31, 2021 resulted in nominal income taxes paid. 21 Table of Contents NET LOSS . As a result of the factors noted above, we had net losses of $(3,851), or $(0.20) per share, for the year ended December 31, 2022 as compared to a net loss of $(7,478), or $(0.40) per share, for the year ended December 31, 2021. Liquidity and Capital Resources As of December 31, 2022, we had cash and cash equivalents of $5,196, short-term investments of $4,880, working capital (defined as current assets minus current liabilities) of $9,373, total assets of $22,453 and stockholders’ equity of $18,504. For the year ended December 31, 2022, our cash decreased by $8,455. This was primarily due to the purchase of short-term investments, specifically "held-to-maturity" U.S. Treasury notes. These U.S. Treasury notes have a maturity of July 31, 2023 and therefore do not qualify as a cash equivalent. While not considered a cash equivalent, the Company does not have any concerns in funding the short-term operations of the business. Cash used in operating activities was $(3,480) for the year ended December 31, 2022 as compared to cash provided by operating activities of $1,116 for the year ended December 31, 2021. Cash used in investing activities for the year ended December 31, 2022 was $(5,072) compared to $(662) for the year ended December 31, 2021. Cash provided by financing activities was $97 for the year ended December 31, 2022 as compared to cash provided by financing activities of $76 for the year ended December 31, 2021. On February 6, 2019, we entered a revolving credit facility with Citi Personal Wealth Management that allows for borrowings up to the lesser of (i) $2,000 or (ii) the collateralized balance in our existing fixed income investment account with Citi Personal Wealth Management. The facility bears interest at a rate consistent of Citi Personal Wealth Management’s Base Rate (7.50% at December 31, 2022) minus 2% subject to certain limitations. Interest is payable monthly and as of December 31, 2022, there were no amounts outstanding under this facility and unused availability under this facility was $2,000. On June 17, 2022 we entered a financing arrangement related to insurance premiums totaling $319 with an interest rate of 4.05%. The monthly loan payments of $32 are paid to HUB International New England for a total of 10 months. As of December 31, 2022, we had a remaining commitment of $97 which is expected to be paid by March 17, 2023. 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, though in the year ended December 31, 2022, such disruptions were not as severe, 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. On December 27, 2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“the Economic Aid Act”) which relieves companies of its obligation to repay its EIDL advance. Prior to the passing of the Economic Aid Act, we repaid the $10 advance in December 2020. As a result of this ruling, the SBA returned this advance, plus interest, to the Loan Servicer in February 2021, which was immediately returned to us and included in Other Income on the Statement of Operations. We currently anticipate that our available cash, expected cash from operations and availability under the revolving credit agreement 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. 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. We have filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which became effective June 4, 2020. Under the shelf registration statement, we may offer and sell, from time to time in the future in one or more public offerings, our common stock, preferred stock, warrants, and units. 22 Table of Contents 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. The shelf registration statement is designed to give us the flexibility to access additional capital at some point in the future when market conditions are appropriate. Adjusted EBITDA and Use as a Non-GAAP Measure We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adjusting net loss for certain reductions such as gains on debt forgiveness and interest and other income (expense) and certain addbacks such as provisions for income taxes, impairments of long-lived assets and goodwill, depreciation, amortization and stock-based compensation expense. 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 gains on debt forgiveness, impairments of long-lived assets and goodwill, amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and provisions for 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, provisions for income taxes, interest and other (expense) income, impairments of long-lived assets and goodwill, stock-based compensation expense, 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. The reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA is as follows: Year Ended December 31, 2022 2021 Net loss $ (3,851) $ (7,478) Reconciling items: Non-restructuring severance expenses 58 — Provision for income taxes 124 — Gain on forgiveness of unsecured promissory note — (10) Interest and other expense (income) 5 (5) Depreciation and amortization 285 169 Stock-based compensation including liability classified awards 2,455 6,400 Adjusted EBITDA $ (924) $ (924) Net Operating Loss Carry Forwards Our available net operating loss (“NOL”) as of December 31, 2022 was approximately $20.8 million, of which $10.9 million expires between 2035 and 2037. In accordance with the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), U.S. NOLs arising in a tax year ending after 2017 will not expire. 23 Table of Contents Recently Issued Accounting Pronouncements Except as discussed below, we do not expect the impact of the future adoption of recently issued accounting pronouncements to have a material impact on our financial statements. 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. We do not expect this standard will have a material impact on our financial statements. Off-Balance Sheet Arrangements We have never entered any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered 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.