What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-14 · 48 added, 62 removed, 71 unchanged (61% of the section changed)

6 unchanged sentences

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 nine-month period ended September 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.

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.

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 for the year ended December 31, 2022.

We are 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.

Critical Accounting Policies and the Use of Estimates

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These policies and our procedures related to these policies are summarized below and described in further detail in the Notes to Financial Statements.

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.

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 concluded that the adoption of this standard did not have a material impact on its financial statements because of the short-term nature of it's outstanding accounts receivable and there have been no significant forward-looking economic conditions identified by the company that would impact its short-term investments.

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 September 30, 2022.

For the year ended December 31, 2021, the Company performed its annual impairment test of goodwill in the fourth quarter on December 31st.

Under authoritative guidance, goodwill is not amortized, but rather it is periodically reviewed for impairment.

We had goodwill of $8,102 as of March 31, 2023.

For the year ended December 31, 2022, the Company performed its annual impairment test of goodwill in the fourth quarter of the fiscal year.

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 nine months ended September 30, 2022 that would more likely than not reduce the fair value of the Company below its carrying amounts.

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 three months ended March 31, 2023 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.

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Our intangible assets consist of patents and a software license.

We determined that no events occurred, or circumstances changed during the nine months ended September 30, 2022 that would more likely than not reduce our intangible assets below our carrying amounts.

We determined that no events occurred, or circumstances changed during the three months ended March 31, 2023 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.

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This pronouncement establishes fair value as the measurement objective in accounting for stock-based compensation payment arrangements and requires all companies to apply a fair value-based measurement method in accounting for all stock-based compensation payment transactions with employees.

Reference Note 8, “Stock-based Compensation,” in the Notes to Financial Statements for details on the company’s stock-based compensation plans.

Reference Note 2, “Significant Accounting Policies,” for a discussion of the 2021 stock-based compensation accounting oversights and remediations.

Reference Note 9, “Stockholders' Equity,” in the Notes to Financial Statements for details on the Company’s stock-based compensation plans.

Deferred Income Taxes

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Deferred tax assets and liabilities are measured using enacted 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 September 30, 2022, due to the uncertainty of our ability to realize those assets.

We have recorded a full valuation allowance for our net deferred tax assets as of March 31, 2023, due to the uncertainty of our ability to realize those assets.

Reference Note 8, “Income Taxes,” in the Notes to Financial Statements for details on the Company’s income taxes.

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(All dollar amounts are rounded to thousands, except shares and per share data)

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2022

TO THE THREE MONTHS ENDED SEPTEMBER 30, 2021

Revenues for the three months ended September 30, 2022 decreased $819, or 17%, to $4,012 compared to $4,831 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 September 30, 2022 increased $612, or 18%, compared to the same period of 2021.

SaaS revenue, which consists of software licensed on a subscription basis, increased $725 or 22% to $3,970 for the three months ended September 30, 2022 compared to $3,245 for the same period of 2021.

Gross profit increased $333, or 10%, to $3,654 for three months ended September 30, 2022 from $3,321 for the same period of 2021.

Our gross profit, as a percentage of revenues, was 91% and 69% for the three months ended September 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 were 92% and 93% for the quarters ended September 30, 2022 and 2021, respectively.

Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $32, or 1%, to $4,378 for the three months ended September 30, 2022 compared to $4,346 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 $724 for the three months ended September 30, 2022 as compared to a net loss of $1,026 for the three months ended September 30, 2021.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2022

TO THE NINE MONTHS ENDED SEPTEMBER 30, 2021

Revenues for the nine months ended September 30, 2022 decreased $1,076, or 9% to $11,415 compared to $12,491 for the same period of 2021.

The decrease in revenues in the nine months ended September 30, 2022 is primarily the result of lower equipment revenues in the nine months ended September 30, 2022 compared to the same period of 2021.

Excluding equipment sales, revenues for the nine months ended September 30, 2022 increased $1,701 or 14%, compared to the same period of 2021.

SaaS revenue increased $1,994 or 22% to $11,249 for the nine months ended September 30, 2022 compared to $9,255 for the same period of 2021.

Gross profit increased by $1,086, or 12%, to $10,377 for nine months ended September 30, 2022 from $9,291 for same period of 2021.Our gross profit, as a percentage of revenues, was 91% and 74% for the nine months ended September 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 nine months of 2021.

Excluding equipment sales, our gross profit as a percentage was 92% and 93% for the nine months ended September 30, 2022 and 2021, respectively.

Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $2,126 or 13% to $13,667 for the nine months ended September 30, 2022 compared to $15,793 for the nine months ended September 30, 2021.

This decrease is primarily due to lower stock-based compensation expenses in the current period, driven by the liability award reclassification adjustments recorded during the first nine months of 2021.

During the nine months ended September 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 $3,290 for the nine months ended September 30, 2022 compared to a net loss of $6,486 for the nine months ended September 30, 2021.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2023

TO THE THREE MONTHS ENDED MARCH 31, 2022

Revenues for the three months ended March 31, 2023 increased $859, or 25%, to $4,254 compared to $3,395 for the same period of 2022.

The increase in revenues is primarily the result of higher SaaS revenue growth for the current period.

SaaS revenue, which consists of software licensed as a service on a subscription basis, increased $875 or 26% to $4,228 for the three months ended March 31, 2023 compared to $3,353 for the same period of 2022.

Gross profit increased $843, or 27%, to $3,922 for three months ended March 31, 2023 from $3,079 for the same period of 2022.

Our gross profit, as a percentage of revenues, was 92% and 91% for the three months ended March 31, 2023 and 2022, respectively.

The increase in gross profit percentage was driven by a higher concentration of SaaS revenues, a nominal decrease in hardware revenue, as well as an improved cloud cost structure.

Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $685, or 15%, to $5,232 for the three months ended March 31, 2023 compared to $4,547 for the same period of 2022.

This increase was primarily driven by higher general and administrative costs, specifically headcount related expenses, as well as higher accounting and professional fees.

As a result of the factors noted above, the Company had a net loss of $(1,316) for the three months ended March 31, 2023 as compared to a net loss of $(1,468) for the three months ended March 31, 2022.

Liquidity and Capital Resources

As of September 30, 2022, we had cash and cash equivalents of $11,775, working capital (defined as current assets minus current liabilities) of $9,153, total assets of $24,058 and stockholders’ equity of $18,332.

During the nine months ended September 30, 2022, we used net cash of $1,711 in operating activities as compared to net cash provided of $407 in the nine months ended September 30, 2021.

Cash used in investing activities was $165 for the nine months ended September 30, 2022 compared to cash used in investing activities of $339 for the nine months ended September 30, 2021.

Cash generated by financing activities was zero for the nine months ended September 30, 2022 compared to cash generated by financing activities of $76 for the nine months ended September 30, 2021.

As of March 31, 2023, we had cash and cash equivalents of $5,355, short-term investments of $4,881, working capital (defined as current assets minus current liabilities) of $8,752, total assets of $23,595 and stockholders’ equity of $17,830.

During the three months ended March 31, 2023, we generated net cash of $233 from operating activities as compared to net cash used in $(2,397) in the three months ended March 31, 2022.

Cash used in investing activities was $(17) for the three months ended March 31, 2023 compared to cash used in investing activities of $(131) for the three months ended March 31, 2022.

Cash used in financing activities was $(57) for the three months ended March 31, 2023.

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.

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Net Operating Loss Carry Forwards

Our available net operating loss ("NOL") as of December 31, 2021 was approximately $23.4 million, of which $10.9 million expires between 2035 and 2037.

Our available net operating loss ("NOL") as of March 31, 2023 was approximately $20.3 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.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.

NOLs arising in a tax year ending after 2017 will not expire.

Adjusted EBITDA and Use of 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 items such gains on debt forgiveness and other income and certain addbacks such as income taxes, depreciation, amortization and stock-based compensation expenses.

Adjusted EBITDA is calculated by adjusting net loss for certain reductions such as interest and other income (expense) and certain addbacks such as provisions for income taxes, 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 impairments of long-lived assets and goodwill, amortization, depreciation and stock-based 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.

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, other income, impairments of long-lived assets and goodwill, and stock-based 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.

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.

A reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA follows:

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Adjusted EBITDA as defined by us may not be comparable with similarly named measures provided by other companies.

The reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA is as follows:

Three Months Ended March 31,

Net loss $ (1,316) $ (1,468)

Reconciling items:

Gain on forgiveness of unsecured promissory note — — — (10)

Interest and other income — — — (5)

Provision for income taxes 7 —

Interest and other expense (income) (1) —

Depreciation and amortization 70 69

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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 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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis