Intellicheck, Inc. 10-Q/A

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations References made in this Quarterly Report on Form 10-Q/A 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 three-month period ended March 31, 2021. 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, 2020. Overview 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. Our products include ID Check®, a solution for preventing identity fraud across any industry delivered via smartphone, tablet, POS integration or other electronic devices. We continue to develop and release innovative products based upon our rich patent portfolio consisting of nineteen issued patents and four pending patents. We also continue to expand our customer base as we completed four customer implementations for the three months ended March 31, 2021. 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 and the fair value of stock options granted under the Company’s 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 described in detail below. 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 $8,101,661 as of March 31, 2021. This goodwill resulted from the acquisitions of Mobilisa, Inc. and Positive Access Corporation. These entities were merged into one company under Intellicheck on December 31, 2018. For the year ended December 31, 2020, we performed our annual impairment test of goodwill in the fourth quarter. Under authoritative guidance, we can use industry and Company specific qualitative factors to determine whether it is more likely than not that impairment exists, before using a two-step quantitative analysis. 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 performed the first step of the goodwill impairment test in order to identify potential impairment by comparing our fair value of the Company to our carrying amount, including goodwill. The fair value was determined using the weighting of certain valuation techniques, including both income and market approaches which include a discounted cash flow analysis, similar public company financial comparisons, along with market capitalization. The market capitalization is sensitive to the volatility of our stock price. Although we believe that the factors considered in the impairment analysis are reasonable, changes in any one of the assumptions used could have produced a different result which may have led to an impairment charge. Any future impairment loss could have a material adverse effect on our long-term assets and operating expenses in the period in which impairment is determined to exist. 20 For the year ended December 31, 2020, we determined that the fair value was more than our carrying amount and therefore the second step of the goodwill impairment test was not required. We determined that no events occurred or circumstances changed during the three months ended March 31, 2021 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 2021 annual test for goodwill impairment in the fourth quarter, or at such time where an indicator of impairment appears to exist. Intangible Assets Our intangible assets consist of patents and a software license. We determined that no events occurred or circumstances changed during the three months ended March 31, 2021 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. Revenue Recognition and Deferred Revenue 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 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 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. 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. 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 a 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 we expect to be entitled to in exchange for those goods or services. Furthermore, we recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. Equity Compensation We account 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. 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 March 31, 2021, due to the uncertainty of our ability to realize those assets. 21 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. Results of Operations (All figures have been rounded to the nearest $1,000) Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020 Revenues for the three months ended March 31, 2021 decreased 8% to $2,863,000 compared to $3,115,000 for the previous year. The decrease in revenues for the three months ended March 31, 2021 is primarily the result of one-time hardware orders totaling approximately $784,000 in the prior year. Software as a Service (“SaaS”) revenue, which consists of software licensed on a subscription basis, increased $538,000 or 24% to $2,776,000 for the three months ended March 31, 2021 compared to $2,238,000 for the three months ended March 31, 2020. Gross profit increased by $220,000 to $2,642,000 for three months ended March 31, 2021 from $2,422,000 for the three months ended March 31, 2020. Our gross profit, as a percentage of revenues, was 92.3% and 77.8% for the three months ended March 31, 2021 and 2020, respectively. The increase in percentage is primarily due to higher hardware sales in the prior period which contain lower than usual margins. Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $4,883,000 or 204% to $7,281,000 for the three months ended March 31, 2021 compared to $2,398,000 for the three months ended March 31, 2020. This increase is primarily due to higher equity compensation costs, increased headcount and expanded research and development efforts. Included in this increase is $3,564,000 of additional equity compensation costs resulting from the restatement discussed in Note 2 to the financial statements. Interest and other income was insignificant in the three-month periods ended March 31, 2021 and 2020. We have paid nominal income taxes for the three months ended March 31, 2021 and 2020. As a result of the factors noted above, the Company had a net loss of $4,624,000 for the three months ended March 31, 2021 as compared to net income of $27,000 for the three months ended March 31, 2020. Liquidity and Capital Resources (All figures have been rounded to the nearest $1,000) As of March 31, 2021, we had cash of $12,612,000, working capital (defined as current assets minus current liabilities) of $11,550,000, total assets of $24,168,000 and stockholders’ equity of $20,277,000. During the three months ended March 31, 2021, we used net cash of $471,000 in operating activities as compared to net cash used of $461,000 in the three months ended March 31, 2020. Cash used in investing activities was $48,000 for the three months ended March 31, 2021 compared to cash used in investing activities of $115,000 for the three months ended March 31, 2020. Cash generated by financing activities was $10,000 for the three months ended March 31, 2021 as compared to cash provided by financing activities of $235,000 for the three months ended March 31, 2020. 22 On April 15, 2020 we received an advance of $10,000 from the U.S. Small Business Administration (“SBA”) as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We repaid this EIDL advance on December 7, 2020. We did not impute interest on this advance as the rate was determined to be a below-market rate due to the scope exception in ASC 835-30-15-3(e) for government-mandated interest rates. 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 their obligations to repay EIDL advances. As a result of this ruling, the SBA returned this advance, plus interest to the Loan Servicer on February 18, 2021, which was immediately returned to us and included in Other Income on the Statements of Operations. On June 23, 2020, we completed a public offering of 1,769,230 shares of our common stock, offered to the public at $6.50 per share. Our net proceeds from this offering were approximately $10,710,000 after deducting underwriting discounts and commissions paid by us. Direct offering costs totaling approximately $141,000 were recorded as a reduction to the net proceeds and included in additional paid-in-capital on the statement of stockholders’ equity. On February 6, 2019, we entered into a revolving credit facility with Citibank that allows for borrowings up to the lesser of (i) $2,000,000 or (ii) the collateralized balance in our existing fixed income investment account with Citibank subject to certain limitations. The facility bears interest at a rate consistent of Citibank’s Base Rate (4.75% at March 31, 2021) minus 2%. Interest is payable monthly and as of March 31, 2021, there were no amounts outstanding and unused availability under this facility was $2,000,000. 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 continue to have a decline in revenues from our customers disruptions through March 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 including the effect on the pandemic of variants of the original COVID-19 strain coupled with the speed, adoption and effectiveness of the ongoing widespread vaccination roll out. 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 July 19, 2010. 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. The aggregate initial offering price of all securities sold by us will not exceed $25,000,000. We renewed this registration with the SEC on June 1, 2020 and it was declared effective June 4, 2020. 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. 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, 2020 was approximately $17 million. The federal and state NOLs are available to offset future taxable income and begin to expire in 2021. 23 Adjusted EBITDA We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adjusting net (loss) income for certain reductions such gains on debt forgiveness and interest and other income and certain addbacks such as income taxes, impairments of long-lived assets and goodwill, depreciation, amortization and equity 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 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, interest and other income, impairments of long-lived assets and goodwill, equity 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) income 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) income 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) income to Non-GAAP Adjusted EBITDA follows: Three Months Ended March 31, 2021 2020 Net (loss) income $ (4,624,000 ) $ 27,000 Reconciling items: Gain on forgiveness of unsecured promissory note (10,000 ) - Interest and other income (5,000 ) (2,000 ) Depreciation and amortization 43,000 34,000 Equity compensation including liability classified awards 4,545,000 86,000 Adjusted EBITDA $ (51,000 ) $ 145,000 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. 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk Financial instruments, which subject us to concentrations of credit risk, consist primarily of cash. We maintain cash in two financial institutions. We perform periodic evaluations of the relative credit standing of these institutions.