Intellicheck, Inc. 10-K/A

Item 9A. 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 December 31, 2021 and 2020, 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. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. Management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021 and 2020 (the end of our fiscal year), based on the framework and criteria established in the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. At the time of our Original Filing, management, including our Chief Executive Officer and our Chief Financial Officer, initially concluded that our internal control over financial reporting was effective as of December 31, 2021 and 2020. As a result of the restatement of the Company’s financial statements and the filing of this Form 10-K/A, our management has reconsidered its assessment and now concludes that we did not maintain effective internal control over financial reporting as of December 31, 2021 and 2020, due to the material weakness in internal control over financial reporting described below that existed as of December 31, 2021 and 2020. 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 equity compensation. Specifically, the Company did not maintain a compliment of accounting personnel with sufficient knowledge, experience and training in the application of U.S. 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. Beginning in the second quarter 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 assist with 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 controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s quarters ended December 31, 2021 and 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 25 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated herein by reference from our 2022 definitive Proxy Statement (which will be filed with the SEC within 120 days after December 31, 2021 in connection with the solicitation of proxies for the Company’s 2022 annual meeting of stockholders) (“2022 Proxy Statement”) under the captions “Proposal 1 – Election of Directors,” “Other Information – Executive Officers,” and “Beneficial Ownership Reporting Compliance under Section 16(a) of the Exchange Act.” Item 11. Executive Compensation The information required by this Item is incorporated herein by reference from our 2022 Proxy Statement under the captions “Executive Compensation” and “Director Compensation.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference from our 2022 Proxy Statement under the captions “Other Information—Security Ownership of Certain Beneficial Owners and Management” and “Other Information – Equity Compensation Plan Information.” Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference from our 2022 Proxy Statement under the captions “Other Information – Related Party Transactions Overview,” “Other Information – Certain Transactions with Related Persons” and “Director Attributes and Independence.” Item 14. Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference from our 2022 Proxy Statement under the caption “Proposal 2 – Ratification of the Selection of Independent Auditors.” Our independent registered public accounting firm is EisnerAmper LLP, Iselin New Jersey, Auditor Firm ID: 274. PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements Balance Sheets as of December 31, 2021 and 2020 Statements of Operations for the years ended December 31, 2021 and 2020 Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020 Statements of Cash Flows for the years ended December 31, 2021 and 2020 26 (b) Exhibits Exhibit No. Description 3.1 Certificate of Incorporation of the Company (1) 3.2 Amendment to the Certificate of Incorporation of the Company (7) 3.3 Certificate of Amendment to the Certificate of Incorporation of the Company (4) 3.4 Certificate of Amendment to the Certificate of Incorporation of the Company (5) 3.5 Amended and Restated By-laws of the Company (8) 4.1 Specimen Stock Certificate (3) 10.2 2015 Omnibus Incentive Plan (9) * 10.3 Bill White Severance Agreement (6) * 10.4 Bryan Lewis Employment Agreement (7) * 10.5 Garrett Gafke Employment Agreement*** 14.1 Code of Business Conduct and Ethics (2) 23.1 Consent of EisnerAmper LLP ** 31.1 Certification of CEO pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 ** 31.2 Certification of CFO pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 ** 32 Certification of CEO and CFO pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 ** 101.INS Inline XBRL Instance Document ** 101.SCH Inline XBRL Taxonomy Extension Schema ** 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase ** 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase ** 101.LAB Inline XBRL Taxonomy Extension Label Linkbase ** 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase ** 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) * Denotes a management contract or compensatory plan, contract or arrangement. ** Filed herewith. (1) Incorporated by reference to Registration Statement on Form SB-2 (File No. 333-87797) filed September 24, 1999. (2) Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 30, 2004. (3) Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 21, 2019. (4) Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 13, 2014. (5) Incorporated by reference to Registrant’s Current Report on Form 8-K filed May 9, 2017. (6) Incorporated by reference to Registrant’s Current Report on Form 8-K filed December 4, 2020. (7) Incorporated by reference to Registrant’s Current Report on Form 8-K filed October 28, 2009. (8) Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 14, 2007. (9) Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A filed March 26, 2021. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: June 9, 2022 INTELLICHECK, INC. By: /s/ Bryan Lewis Bryan Lewis Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. INTELLICHECK, INC. Date: June 9, 2022 By: /s/ Bryan Lewis Bryan Lewis Chief Executive Officer and Director (Principal Executive Officer) Date: June 9, 2022 By: /s/ Jeffrey Ishmael Jeffrey Ishmael Chief Financial Officer, Chief Operating Officer Date: June 9, 2022 By: /s/ Guy L. Smith Guy L. Smith, Chairman and Director Date: June 9, 2022 By: /s/ Emil R. Bedard Lt. Gen. Emil R. Bedard, Director Date: June 9, 2022 By: /s/ Jack A. Davis Jack A. Davis, Director Date: June 9, 2022 By: /s/ William P. Georges William P. Georges, Director Date: June 9, 2022 By: /s/ Dylan Glenn Dylan Glenn, Director Date: June 9, 2022 By: /s/ Amelia L. Ruzzo Amelia L. Ruzzo, Director Date: June 9, 2022 By: /s/ David E. Ullman David E. Ullman, Director 28 EXHIBIT INDEX Exhibit No. Description 23.1 Consent of EisnerAmper LLP * 31.1 Certification of CEO pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 * 31.2 Certification of CFO pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 * 32 Certification of CEO and CFO pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 * 101.INS Inline XBRL Instance Document * 101.SCH Inline XBRL Taxonomy Extension Schema * 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase * 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase * 101.LAB Inline XBRL Taxonomy Extension Label Linkbase * 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase * 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) * Filed herewith. 29 FINANCIAL STATEMENTS (AS RESTATED) INDEX REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 274 ) F-2 FINANCIAL STATEMENTS: Balance Sheets as of December 31, 2021 (As Restated) and 2020 (As Restated) F-4 Statements of Operations for the Years Ended December 31, 2021 (As Restated) and 2020 (As Restated) F-5 Statements of Stockholders’ Equity for the Years Ended December 31, 2021 (As Restated) and 2020 (As Restated) F-6 Statements of Cash Flows for the Years Ended December 31, 2021 (As Restated) and 2020 (As Restated) F-7 NOTES TO FINANCIAL STATEMENTS F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Intellicheck, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Intellicheck (the “Company”) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Correction of a Misstatement As discussed in Note 2 to the financial statements, the 2021 and 2020 financial statements have been restated to correct a misstatement. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F- 2 Goodwill Impairment Analysis As of December 31, 2021, the Company had goodwill of approximately $8.1 million. As described in Notes 2 and 4 to the financial statements, the Company performs its impairment test of goodwill annually, or whenever events or changes in circumstances indicate that the carrying value of the Company exceeds its fair value. The Company performed its annual impairment test of goodwill in the fourth quarter of 2021. The Company operates as one reporting segment, operating segment and reporting unit. The Company’s goodwill impairment test involves comparing the Company’s carrying value to its estimated fair value. 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 Company’s fair value estimates require management to make significant estimates and assumptions including discount rates, projected revenue growth rates, operating margins and guideline public company multiples. We identified the impairment test of goodwill as a critical audit matter due to the significant judgement by management in the estimates and assumptions used in developing the fair value estimate of the Company. This in turn led to a high degree of auditor judgement, subjectivity, and effort in performing procedures to evaluate the reasonableness of management’s significant estimates and assumptions related to discount rates, projected revenue growth rates, operating margins and guideline public company multiples. Additionally, the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls over the Company’s impairment test of goodwill, including developing the estimate of fair value. Our procedures included, among others: evaluated the forecasted revenue growth rates and operating margins to the Company’s underlying business strategies and growth plans and considered if they were consistent with evidence obtained in other areas of the audit; evaluated management’s ability to accurately forecast revenue growth rates and operating margins by comparing actual results to management’s historical forecasts; and performed sensitivity analyses over significant estimates and assumptions including discount rates and projected revenue growth rates when assessing the overall impact on the estimate of fair value compared to the carrying value. In addition, we utilized our valuation specialists with specialized skills and knowledge, in evaluating the reasonableness of the Company’s methodology for estimating fair value including both the income and market approaches; evaluating the discount rates used by management by comparing it to a range of discount rates developed using existing market information for comparable entities; evaluating market approaches including selected guideline company multiples for reasonableness and evaluating the mathematical accuracy of the calculations included in both the income and market approaches. We have served as the Company’s auditor since 2010. /s/ EisnerAmper LLP EISNERAMPER LLP Iselin, New Jersey March 24, 2022, except for the effects of the restatement discussed in Note 2 to the financial statements, as to which the date is June 9, 2022 F- 3 INTELLICHECK, INC. BALANCE SHEETS DECEMBER 31, 2021 and 2020 2021 (As Restated) 2020 (As Restated) (in thousands except share amounts) ASSETS CURRENT ASSETS: Cash $ 13,651 $ 13,121 Accounts receivable, net of allowance of $ 3 and $ 43 as of December 31, 2021, and 2020, respectively 2,192 2,120 Other current assets 643 341 Total current assets 16,486 15,582 PROPERTY AND EQUIPMENT, net 737 139 GOODWILL 8,102 8,102 INTANGIBLE ASSETS, net 378 483 OPERATING LEASE RIGHT-OF-USE ASSET - 31 OTHER ASSETS 8 4 Total assets $ 25,711 $ 24,341 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 368 $ 46 Accrued expenses 2,870 1,639 Operating lease liability, current portion - 33 Equity awards liability 378 - Liability for shares surrendered 1,244 - Deferred revenue, current portion 1,266 403 Total current liabilities 6,126 2,121 NONCURRENT LIABILITIES Deferred revenue, long-term portion 8 9 Total liabilities 6,134 2,130 COMMITMENTS AND CONTINGENCIES (Note 10) - - STOCKHOLDERS’ EQUITY: Common stock – $ .001 par value; 40,000,000 shares authorized; 18,660,369 and 18,410,458 shares issued and outstanding as of December 31, 2021 and 2020, respectively 19 18 Additional paid-in capital 146,455 141,612 Accumulated deficit ( 126,897 ) ( 119,419 ) Total stockholders’ equity 19,577 22,211 Total liabilities and stockholders’ equity $ 25,711 $ 24,341 The accompanying notes are an integral part of these financial statements. F- 4 INTELLICHECK, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 2021 (As Restated) 2020 (As Restated) (in thousands except share and per share amounts) REVENUES $ 16,393 $ 10,735 COST OF REVENUES ( 3,511 ) ( 1,426 ) Gross profit 12,882 9,309 OPERATING EXPENSES Selling, general and administrative 14,895 8,936 Research and development 5,480 3,675 Total operating expenses 20,375 12,611 Loss from operations ( 7,493 ) ( 3,302 ) OTHER INCOME Gain on forgiveness of unsecured promissory note 10 796 Interest and other income 5 22 Total other income 15 818 Net loss $ ( 7,478 ) $ ( 2,484 ) PER SHARE INFORMATION: Loss per common share - Basic $ ( 0.40 ) $ ( 0.14 ) Diluted $ ( 0.40 ) $ ( 0.14 ) Weighted average common shares used in computing per share amounts - Basic 18,598,410 17,324,150 Diluted 18,598,410 17,324,150 The accompanying notes are an integral part of these financial statements. F- 5 INTELLICHECK, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (in thousands, except number of shares) (As Restated) Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity BALANCE, December 31, 2019 16,041,650 $ 16 $ 128,669 $ ( 116,935 ) $ 11,750 Equity compensation - - 409 - 409 Issuance of common stock, net of costs 1,769,230 2 10,567 - 10,569 Exercise of stock options, net of cashless exercise of 93,840 shares 689,901 - 203 - 203 Shares withheld for withholding taxes ( 180,844 ) - ( 1,475 ) - ( 1,475 ) Issuance of shares for vested restricted stock grants 24,778 - - - - Exercise of warrants 50,750 - 112 - 112 Settlement of executive bonuses with issuance of restricted stock units 14,993 - 85 - 85 Exercise of liability awards - - 3,042 - 3,042 Net loss - - - ( 2,484 ) ( 2,484 ) BALANCE, December 31, 2020 18,410,458 $ 18 $ 141,612 $ ( 119,419 ) $ 22,211 Equity compensation - - 3,068 - 3,068 Exercise of stock options, net of cashless exercise of 58,926 shares and 92,634 shares withheld 208,741 1 1,756 - 1,757 Exercise of stock options, net of cashless exercise shares 208,741 1 1,756 - 1,757 Issuance of shares for vested restricted stock grants 32,170 - - - - Exercise of warrants 9,000 - 19 - 19 Net loss - - - ( 7,478 ) ( 7,478 ) BALANCE, December 31, 2021 18,660,369 $ 19 $ 146,455 $ ( 126,897 ) $ 19,577 The accompanying notes are an integral part of these financial statements. F- 6 INTELLICHECK, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 2021 (As Restated) 2020 (As Restated) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 7,478 ) $ ( 2,484 ) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 169 180 Equity compensation 6,400 3,451 Gain on forgiveness of unsecured promissory note ( 10 ) ( 796 ) Changes in assets and liabilities: Increase in accounts receivable ( 72 ) ( 445 ) Increase in other current assets ( 302 ) ( 15 ) (Increase) decrease in other assets ( 4 ) 3 Increase in accounts payable and accrued expenses 1,551 261 Increase (decrease) in deferred revenue 862 ( 174 ) Net cash provided by (used in) operating activities 1,116 ( 19 ) CASH FLOWS FROM INVESTING activities: Purchases of software license - ( 400 ) Capital expenditures ( 662 ) ( 45 ) Collection on note receivable - 29 Net cash used in investing activities ( 662 ) ( 416 ) CASH FLOWS FROM FINANCING ACTIVITIES: Return of repayment of unsecured promissory note 10 - Net proceeds from issuance of common stock - 10,569 Loan proceeds on unsecured promissory note under Paycheck Protection Program - 796 Loan proceeds on unsecured promissory note under Economic Injury Disaster Loan program - 10 Net proceeds from issuance of common stock from exercise of stock options 47 203 Proceeds from issuance of common stock from exercise of warrants 19 112 Withholding taxes paid on exercise of stock options and vesting of restricted stock units - ( 1,475 ) Loan payments on unsecured promissory note - ( 10 ) Net cash provided by financing activities 76 10,205 Net increase in cash 530 9,770 CASH, beginning of year 13,121 3,351 CASH, end of year $ 13,651 $ 13,121 Supplemental disclosure of noncash investing and financing activities: Settlement of executive bonuses with restricted stock units $ - $ 85 Reclassification of stock option awards $ 1,411 $ - The accompanying notes are an integral part of these financial statements. F- 7 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) 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 eighteen (18) U.S. and one Canadian patents, as well as two patents pending. Liquidity For the year ended December 31, 2021, the Company incurred a net loss of $ ( 7,478 ) and had cash provided by operating activities of $ 1,116 . As of December 31, 2021, the Company had cash of $ 13,651 , working capital (defined as current assets minus current liabilities) of $ 10,360 and an accumulated deficit of $ 126,897 . Based on the Company’s business plan and cash resources, Intellicheck expects its existing and future resources and revenues generated from operations to satisfy its working capital requirements for at least the next 12 months from the date of filing. As of the filing of this Form 10-K, 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. Though the Company has had an increase in SaaS revenues for the year ended December 31, 2021 compared to the same period of 2020, the COVID-19 pandemic may continue to impact our business directly and/or indirectly for the foreseeable future. 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 the outbreak together with any potential statewide closures if cases increase, the spread of COVID-19 variants, including the Delta and Omicron variants, and the widespread adoption of vaccination measures including booster regimens. 2. SIGNIFICANT ACCOUNTING POLICIES Restatement of Previously Issued Financial Statements 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 as of and for the years ended December 31, 2021 and 2020, and included in the Company’s annual report on Form 10-K for the year ended December 31, 2021, should no longer be relied upon due to errors in accounting for certain option awards. Accordingly, we are restating our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, Statements of Cash Flows and the related notes 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, due to an administrative error, failed to sell the shares surrendered in 2021 and did not remit the equivalent amount of funds to the tax authorities. To date, the Company has not returned the shares or otherwise reimbursed the effected individuals for the shares withheld. The Company is currently in the process of arranging payment to individuals, which is expected to be completed during the quarter ending June 30, 2022. F- 8 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) These errors resulted in misstatements to our Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity, and Statements of Cash Flows as of and for the years ended December 31, 2021 and 2020, as follows: SCHEDULE OF ERRORS RESULTED IN MISSTATEMENTS As of December 31, 2021 As Previously Restatement As Reported Adjustment Restated BALANCE SHEET Equity awards liability $ - 378 $ 378 Liability for shares withheld $ - 1,244 $ 1,244 Total current liabilities $ 4,504 1,622 $ 6,126 Total liabilities $ 4,512 1,622 $ 6,134 Additional paid-in capital $ 141,703 4,752 $ 146,455 Accumulated deficit $ ( 120,523 ) ( 6,374 ) $ ( 126,897 ) Total stockholders’ equity $ 21,199 ( 1,622 ) $ 19,577 Common stock (shares) 18,753,003 ( 92,634 ) 18,660,369 As of December 31, 2020 As Previously Reported Restatement Adjustment As Restated BALANCE SHEET Additional paid-in capital $ 138,570 3,042 $ 141,612 Accumulated deficit $ ( 116,377 ) ( 3,042 ) $ ( 119,419 ) Total stockholders’ equity $ 22,211 - $ 22,211 For the Year Ended December 31, 2021 As Previously Reported Restatement Adjustment As Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 11,564 3,331 $ 14,895 Total operating expenses $ 17,044 3,331 $ 20,375 Loss from operations $ ( 4,162 ) ( 3,331 ) $ ( 7,493 ) Interest and other income $ 6 ( 1 ) $ 5 Total other income $ 16 ( 1 ) $ 15 Net loss $ ( 4,146 ) ( 3,332 ) $ ( 7,478 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ ( 0.22 ) ( 0.18 ) $ ( 0.40 ) Weighted average common shares used in computing per share amounts (Basic and Diluted) 18,676,965 ( 78,555 ) 18,598,410 F- 9 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) For the year ended December 31, 2020 As Previously Reported Restatement Adjustment As Restated STATEMENT OF OPERATIONS Selling, general and administrative expenses $ 5,894 3,042 $ 8,936 Total operating expenses $ 9,569 3,042 $ 12,611 Loss from operations $ ( 260 ) ( 3,042 ) $ ( 3,302 ) Net income (loss) $ 558 ( 3,042 ) $ ( 2,484 ) PER SHARE INFORMATION Loss per common share Basic and Diluted $ 0.03 ( 0.17 ) $ ( 0.14 ) Weighted average common shares used in computing per share amounts Basic 17,324,150 - 17,324,150 Diluted 18,020,866 ( 696,716 ) 17,324,150 For the year ended December 31, 2021 As Previously Restatement As Reported Adjustment Restated STATEMENT OF STOCKHOLDERS’ EQUITY Exercise of stock options, net of cashless exercise of 58,926 shares and 92,634 shares withheld $ 47 1,710 $ 1,757 Net loss $ ( 4,146 ) ( 3,332 ) $ ( 7,478 ) Accumulated deficit $ ( 120,523 ) ( 6,374 ) $ ( 126,897 ) Additional paid-in capital $ 141,703 4,752 $ 146,455 Total Stockholders’ Equity $ 21,199 ( 1,622 ) $ 19,577 Common stock (shares) 18,753,003 ( 92,634 ) $ 18,660,369 F- 10 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) For the year ended December 31, 2020 As Previously Restatement As Reported Adjustment Restated STATEMENT OF STOCKHOLDERS’ EQUITY Exercise of liability awards $ - 3,042 $ 3,042 Net income (loss) $ 558 ( 3,042 ) $ ( 2,484 ) Accumulated deficit $ ( 116,377 ) ( 3,042 ) $ ( 119,419 ) Additional paid-in capital $ 138,570 3,042 $ 141,612 Ending balance, value $ 138,570 3,042 $ 141,612 For the year ended December 31, 2021 As Previously Restatement As Reported Adjustment Restated STATEMENT OF CASH FLOWS Net loss $ ( 4,146 ) ( 3,332 ) $ ( 7,478 ) Equity compensation $ 3,068 3,332 $ 6,400 Supplemental disclosure of noncash investing and financing activities: Reclassification of stock option awards $ - 1,411 $ 1,411 For the year ended December 31, 2020 As Previously Restatement As Reported Adjustment Restated STATEMENT OF CASH FLOWS Net income (loss) $ 558 ( 3,042 ) $ ( 2,484 ) Equity compensation $ 409 3,042 $ 3,451 The correction of the errors had no effect on net cash provided by (used in) operating activities for either period. 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 granted 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. As discussed above, certain option awards no longer qualify as equity awards and instead are being classified as liability awards. ASC 718 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. The Company determined the fair value of these awards utilizing a Black-Scholes option pricing model. F- 11 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) 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. ● 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 $ 378 worth of Level 2 liabilities as of December 31, 2021 for liability classified stock options. ● 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 December 31, 2021 and 2020. 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. Long-Lived Assets and Impairment of Long-Lived Assets The Company’s long-lived assets include property and equipment, goodwill, and intangible assets. F- 12 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) 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 Accounting Standards Codification (“ASC”) 350 (“Intangibles – Goodwill and Other”) and ASC 360 (“Property, Plant and Equipment”) 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. Impairment is measured at fair value. Property and Equipment Property and equipment are recorded at cost and are depreciated over their estimated useful lives ranging from three to ten-years using the straight-line method. Leasehold improvements are amortized utilizing the straight-line method over the lesser of the term of the lease or estimated useful life of the asset. See Note 3. 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 years ended December 31, 2021 and 2020. For the years ended December 31, 2021 and 2020, the Company determined no impairment charge was required. See Note 4. 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 for the years ended December 31, 2021 and 2020. See Note 4. 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. F- 13 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) 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 are recognized on a per transaction basis. The Company estimates the amount of unused transactions at 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. 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. 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. Other Subscription and Support Services The Company also recognizes revenues from other subscription and support services, which 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. 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. Non-Recurring Services Revenue The 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. F- 14 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) Extended Warranty 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. The table also includes a reconciliation of the disaggregated revenue. SCHEDULE OF DISAGGREGATION OF REVENUE 2021 2020 For the Years Ended December 31, 2021 2020 Products and services Software as a Service (SaaS) $ 12,970 $ 9,373 Other subscription and support services 35 199 Equipment 3,056 1,045 Non-recurring services 114 78 Extended warranties on equipment 8 21 Other 210 19 Revenues $ 16,393 $ 10,735 Timing of revenue recognition Products transferred at a point in time $ 3,266 $ 1,064 Services transferred over time 13,127 9,671 Revenues $ 16,393 $ 10,735 Contract balances The current portion of deferred revenue at December 31, 2021 and December 31, 2020 was $ 1,266 and $ 403 , respectively, and primarily consists of revenue that is recognized over time for software license contracts and hosted subscription services. The changes in these balances are related to the satisfaction or partial satisfaction of these contracts. The entire December 31, 2020, current deferred revenue balance was recognized as revenue in the year ended December 31, 2021. The noncurrent deferred revenue balances were $ 8 and $ 9 as of December 31, 2021, and December 31, 2020, respectively. The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods. 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: SCHEDULE OF REVENUE PERFORMANCE OBLIGATION 2022 2023 2024 Total Software as a Service (SaaS) $ 1,256 $ 3 $ - $ 1,259 Other subscription and support services 8 3 1 12 Extended warranties on equipment 2 1 - 3 $ 1,266 $ 7 $ 1 $ 1,274 All consideration from contracts with customers is included in the amounts presented above. F- 15 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) Advertising Costs. Advertising costs, which are charged to expense as incurred, were $ 745 and $ 227 for the years ended December 31, 2021 and 2020, respectively. Shipping Costs The Company’s shipping and handling costs are included in cost of revenues for all periods presented. Income Taxes The Company accounts for income taxes in accordance with ASC 740, “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. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. The Company has recorded a full valuation allowance for its net deferred tax assets as of December 31, 2021 and 2020, due to the uncertainty of the realizability of those assets. See Note 7. 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, accounts receivable, other current assets, accounts payable and accrued expenses. At December 31, 2021 and 2020, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature. All of the Company’s financial instruments are categorized as Level 1 within the fair value hierarchy. Business Concentration and Credit Risk Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash. The Company maintains cash with two financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. The Company’s sales are principally made to large retail customers, financial institutions concentrated in the United States of America and to U.S. government entities. The Company performs ongoing credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends, and other information. During the year ended December 31, 2021, the Company made sales to two customers that accounted for approximately 55 % of revenue. The revenue was associated with commercial identity sales customers. These two customers, in addition to one other customer, represented 65 % of the Company’s December 31, 2021 accounts receivable balance. During the year ended December 31, 2020, the Company had two customers that accounted for 41 % of revenue and 52 % of its December 31, 2020 accounts receivable balance. F- 16 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) As of December 31, 2021, the Company had four suppliers to produce its input devices. The Company has modified its software to operate in windows-based systems and can integrate with different hardware platforms that are readily available in the marketplace. The Company does not maintain a manufacturing facility of its own and is not dependent on maintaining its production relationships due to the flexibility of its software to run on multiple existing platforms. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (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 these common stock equivalents comprising 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 income (loss) per share excludes all anti-dilutive shares. In a period of net loss, all common stock equivalents are considered anti-dilutive. SCHEDULE OF EARNINGS PER SHARE BASIC AND DILUTED 2021 2020 Years Ended December 31, 2021 2020 Numerator: Net Loss $ ( 7,478 ) $ ( 2,484 ) Denominator: Weighted average common shares – Basic 18,598,410 17,324,150 Weighted average common shares - Diluted 18,598,410 17,324,150 Net Loss per share – Basic $ ( 0.40 ) $ ( 0.14 ) Diluted $ ( 0.40 ) $ ( 0.14 ) The following table summarizes the common stock equivalents excluded from the 2021 loss per diluted share because their effect would be anti-dilutive: SUMMARY OF COMMON STOCK EQUIVALENTS EXCLUDED FROM LOSS PER DILUTED SHARE 2021 2020 Stock options 496,424 637,882 Restricted stock 408,376 1,754 Performance stock units 228,498 265,942 Total 1,133,298 905,578 Equity Compensation The Company accounts for the issuance of equity awards to employees in accordance ASC 718 (“Stock Compensation”) and ASC 505 (“Equity”), 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 expenses are included in operating expenses. The Company recognizes compensation expense related to stock option grants on a straight-line basis over the vesting period. See Note 8. F- 17 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) Comprehensive Loss The Company’s comprehensive loss is equal to its net loss for the years ended December 31, 2021 and 2020. Segment Information The Company adheres to the provisions of ASC 280 (“Segment Reporting”), which establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial statements issued to shareholders. Management has determined that it has only one reporting segment. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s 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. The Company does not expect this standard will have a material impact on its financial statements. F- 18 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) 3. PROPERTY AND EQUIPMENT Property and equipment are comprised of the following as of December 31, 2021 and 2020: SCHEDULE OF PROPERTY AND EQUIPMENT 2021 2020 Computer equipment and software $ 1,708 $ 1,065 Furniture and fixtures 139 137 Leasehold improvements 55 41 Office equipment 599 596 2,501 1,839 Less – Accumulated depreciation ( 1,764 ) ( 1,700 ) $ 737 $ 139 Depreciation expense for the years ended December 31, 2021 and 2020 amounted to $ 64 and $ 88 respectively. 4. GOODWILL AND INTANGIBLE ASSETS Identifiable intangible assets The following tables set forth the components of intangible assets as of December 31, 2021 and 2020: SCHEDULE OF INTANGIBLE ASSETS AND GOODWILL As of December 31, 2021 Estimated Adjusted Useful Carrying Accumulated Life Amount Amortization Net Patents and copyrights 2 - 17 years $ 375 $ ( 250 ) $ 125 Developed technology 5 years 400 ( 147 ) 253 $ 775 $ ( 397 ) $ 378 As of December 31, 2020 Estimated Adjusted Useful Carrying Accumulated Life Amount Amortization Net Patents and copyrights 2 - 17 years $ 481 $ ( 331 ) $ 150 Developed technology 5 years 400 ( 67 ) 333 $ 881 $ ( 398 ) $ 483 The following summarizes amortization of acquisition related intangible assets included in the statement of operations: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS AMORTIZATION EXPENSE Years Ended December 31, 2021 2020 Cost of revenues $ 95 $ 81 General and administrative 10 10 Amortization of intangible assets $ 105 $ 91 F- 19 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) The Company expects amortization expense for the next five succeeding years, and thereafter, will be as follows: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE 2022 $ 105 2023 105 2024 105 2025 39 2026 20 Thereafter 4 Finite-lived intangible assets, net $ 378 These amounts are subject to change based upon the review of recoverability and useful lives that are performed at least annually. Goodwill Goodwill represents the excess of purchase price over the fair value of the assets acquired in businesses combinations. Under ASC 350, purchased goodwill is not amortized, but rather is tested for impairment. The Company’s goodwill balance was $ 8,102 as of December 31, 2021 and 2020. This goodwill resulted from the acquisitions of Mobilisa, Inc. and Positive Access Corporation. For the years ended December 31, 2021 and 2020, 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. The Company performed the first step of the goodwill impairment test to identify potential impairment by comparing fair value of the Company to its 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, an analysis of similar public company financial information, and an analysis of our market capitalization, which is sensitive to the volatility of the Company’s stock price. Although the Company believes 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. For the years ended December 31, 2021 and 2020, the Company determined that the fair value of the Company was greater than its carrying amount and therefore the second step of the goodwill impairment test was not required. 5. DEBT Promissory Note On April 9, 2020 the Company entered into an unsecured promissory note in the amount of $ 796 (the “Note”) with First Bank (the “Loan Servicer”) under the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) and established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company received these proceeds on April 14, 2020. Under the terms of the Note, the Company can apply for forgiveness on this Note with the Loan Servicer if certain conditions including the use of the Note proceeds are met over a 24-week period commencing from the date of the Note. The Note has an interest rate of 1 %. The Company has not imputed interest on the Note as the rate is determined to be a below-market rate due to the scope exception in ASC 835-30-15-3(e) for government-mandated interest rates. In November 2020, the Company received notification from the Loan Servicer that the Note was fully forgiven and recorded income from the extinguishment of its obligation as the Company was legally released from being the primary obligor in accordance with ASC 405-20-40-1. F- 20 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) On April 15, 2020, the Company received a $ 10 advance from the U.S. Small Business Administration (“SBA”) as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company repaid this EIDL advance on December 7, 2020. The Company had not imputed 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 the Company and included in Other Income on the Statements of Operations. Revolving Line of Credit On February 6, 2019, the Company entered into a revolving credit facility with Citibank that allows for borrowings up to the lesser of (i) $ 2,000 or (ii) the collateralized balance in the Company’s 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 December 31, 2021) minus 2%. Interest is payable monthly and as of December 31, 2021 and 2020, there were no amounts outstanding under this facility and unused availability under this facility was $ 2,000 . 6. ACCRUED EXPENSES Accrued expenses are comprised of the following as of December 31, 2021 and 2020: SCHEDULE OF ACCRUED EXPENSES 2021 2020 Professional fees $ 127 $ 124 Payroll and related 1,100 604 Incentive bonuses 1,565 835 Other 78 76 Accrued expenses $ 2,870 $ 1,639 7. INCOME TAXES The Company’s deferred tax assets and liabilities are measured using the enacted tax rates that the Company believes will apply in the years in which temporary differences are expected to be recovered or paid. The Company is subject to federal and state income taxes as a Subchapter C corporation. As a result of continuing losses for tax purposes, the Company has historically not paid income taxes and has recorded a full valuation allowance against its net deferred tax asset. The Company’s deferred tax assets are primarily the result of net operating losses (or NOLs). The Company has recorded a valuation allowance against its net deferred tax assets at December 31, 2021 as it is more likely than not that not all of the deferred tax assets will be realized. The valuation is based on management’s assessment that it is more likely than not the NOL carryforwards may not be realized in the foreseeable future due to objective negative evidence that the Company would not generate sufficient taxable income to realize the deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes as of December 31, 2021 and 2020 are as follows: SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 5,708 $ 5,015 Payroll related accruals 194 235 Equity compensation 298 89 Intangible assets 89 89 Reserves 1 11 Research and development tax credits 511 411 Total deferred tax assets 6,801 5,850 Deferred tax liabilities: Depreciation ( 84 ) ( 24 ) Total deferred tax liabilities ( 84 ) ( 24 ) Net deferred tax assets 6,717 5,826 Less: Valuation allowance ( 6,717 ) ( 5,826 ) Deferred tax assets, net of allowance $ - $ - F- 21 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) There were no tax interest or penalties recorded in the financial statements for the years ended December 31, 2021 and 2020. The Company’s available NOL at December 31, 2021 was approximately $ 18.0 million . The federal and state NOL’s are available to offset future taxable income and began to expire in 2021. The Company files numerous tax returns in various jurisdictions. The Company is not currently under examination by any taxing authority, nor has the Company signed any waiver of the statute of limitations with any taxing authority. The Company remains open to examination by major taxing jurisdictions from 2018 to date. ASC 740 requires evaluation of uncertain tax positions and as of December 31, 2021, the Company has no material uncertain tax positions. The effective tax rate for the years ended December 31, 2021 and 2020 is different from the tax benefit that would result from applying the statutory tax rates primarily due to the recognition of valuation allowances. In 2021, the valuation allowance increased approximately $ 891 primarily related to an increase of the Company’s NOLs. The Company had book loss in 2021 and a tax NOL was generated primarily due to permanent differences that occurred during the year. 8. STOCKHOLDERS’ EQUITY Series A Convertible Preferred Stock In January 1997, the Board of Directors authorized the creation of a class of Series A Convertible Preferred Stock with a par value of $ .01 . The Series A Convertible Preferred Stock is convertible into an equal number of common shares at the holder’s option, subject to adjustment for anti-dilution. The holders of Series A Convertible Preferred Stock are entitled to receive dividends as and if declared by the Board of Directors. In the event of liquidation or dissolution of the Company, the holders of Series A Convertible Preferred Stock are entitled to receive all accrued dividends, if applicable, plus the liquidation price of $ 1.00 per share. As of December 31, 2021, and 2020, there were no outstanding shares of Series A Convertible Preferred Stock. Equity Compensation To retain and attract qualified personnel necessary for the success of the Company, the Company adopted the 2015 Omnibus Incentive Plan (the “Plan”) covering up to 4,000,000 of the Company’s common shares, pursuant to which officers, directors, key employees and consultants to the Company are eligible to receive incentive stock options, nonqualified stock options and restricted stock units. All the equity compensation plans prior to Company’s 2015 Omnibus Incentive Plan have been closed. The Compensation Committee of the Board of Directors administers this Plan and determines the terms and conditions of stock options granted, including the exercise price. This Plan generally provides that all stock options will expire within ten years of the date of grant. Incentive stock options granted under this Plan must be granted at an exercise price that is not less than the fair market value per share at the date of the grant and the exercise price must not be less than 110 % of the fair market value per share at the date of the grant for grants to persons owning more than 10 % of the voting stock of the Company. This Plan also entitles non-employee directors to receive grants of non-qualified stock options as approved by the Board of Directors. The Company uses the Black-Scholes option pricing model to value the options on the grant date. The table below presents the weighted average expected life of the stock options in years. The expected life computation is based on the time to stock option expiration. 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 vest from one to four years. As discussed above, certain option awards no longer qualify as equity awards and instead are classified as liability awards. The fair values 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 recorded $ 3,331 of additional compensation expense in the year ended December 31, 2021 as a result of this award reclassification. The fair value of the Company’s stock options granted in 2021 that are being classified as equity awards were estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values: SCHEDULE OF FAIR VALUE OF SHARE BASED PAYMENT Year Ended December 31, 2021 Valuation assumptions: Grant price $ 7.78 – $ 11.50 Exercise price $ 7.78 – $ 11.50 Expected dividend yield 0 % Expected volatility 84.24 % – 90.94 % Expected life (in years) 5 Risk-free interest rate 0.80 % – 0.89 % F- 22 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) The fair value of the Company’s stock options granted in the years ended December 31, 2016, December 31, 2018 and December 31, 2019, that no longer qualify as equity awards and instead are being classified as liability awards were marked-to-market using the Black-Scholes option pricing model with the following assumptions and weighted average fair values: SCHEDULE OF FAIR VALUE OF SHARE BASED PAYMENT Year Ended December 31, 2021 Valuation assumptions: Exercise price range $ 2.68 – $ 2.87 Expected dividend yield 0 % Expected volatility range for grants after mark-to-market adjustment 81.66 % Expected life (in years) for grants after mark-to-market adjustment 0.54 – 1.08 Risk-free interest rate range for grants after mark-to-market adjustment 0.19 % - 0.39 % Stock option activity during the periods indicated below was as follows: SCHEDULE OF STOCK OPTION ACTIVITY Number of Shares Subject to Issuance Weighted- average Exercise Price Weighted- average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2019 1,421,623 $ 1.78 1.96 years $ 8,113,777 Granted - - Forfeited - - Exercised ( 783,741 ) 1.20 Outstanding at December 31, 2020 637,882 $ 2.50 2.55 years $ 5,686,421 Granted 221,843 10.38 Forfeited ( 3,000 ) 2.79 Exercised ( 360,301 ) 2.34 Outstanding at December 31, 2021 496,424 $ 6.13 3.03 years $ 527,937 Exercisable at December 31, 2021 129,859 $ 2.72 1.98 years $ 247,176 The following is a summary of stock options as of December 31, 2021: SUMMARY OF STOCK OPTIONS Options Outstanding Options Exercisable Range of Exercise Prices Number of Options Weighted- average Remaining Life Weighted- average Exercise Price Number of Options Weighted- average Exercise Price $ 1.75 to $ 2.87 249,581 1.09 years $ 2.68 104,859 $ 2.68 $ 7.78 to $ 11.50 246,843 1.94 years $ 9.62 25,000 $ 2.87 496,424 3.03 years $ 6.13 129,859 $ 2.72 The weighted-average fair value of the options granted during the year ended December 31, 2021 is $ 7.13 . All stock options have been issued with an exercise price that is equal or above the fair market value of the Company’s Common Stock on the date of grant. Restricted Stock Units The Company periodically issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of common stock of the Company. The Company issues RSUs to certain directors as compensation which vest with the passage of time. The vesting of all RSUs is contingent on continued board 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. F- 23 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) Restricted stock unit activity during the periods indicated below is as follows: SCHEDULE OF RESTRICTED STOCK UNITS OUTSTANDING Number of Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2019 2,670 $ 7.49 Granted 38,855 5.78 Forfeited - - Vested and Settled in shares ( 39,771 ) 5.65 Outstanding at December 31, 2020 1,754 $ 11.40 Granted 443,442 10.30 Forfeited ( 4,650 ) 11.50 Vested and Settled in shares ( 32,170 ) 8.47 Outstanding December 31, 2021 408,376 $ 10.43 Performance Stock Units On August 7, 2020, the Company issued 265,942 Performance Stock Units (PSUs) to its officers and certain employees as compensation (“PSU Plan”). 50 % of the PSUs were to vest based on the Company’s market price and 50 % 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 100 % of the PSUs will vest 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. The Company recorded additional equity compensation expense of $ 164 in the fourth quarter of 2021 resulting from the amendment to the PSU Plan. 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. 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. SCHEDULE OF PERFORMANCE STOCK UNITS OUTSTANDING Number of Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2019 - $ - Granted 265,942 7.91 Forfeited - - Outstanding at December 31, 2020 265,942 $ 7.91 Forfeited ( 37,444 ) 7.91 Outstanding at December 31, 2021 228,498 $ 7.91 F- 24 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) As of December 31, 2021, there was $ 4,740 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options, restricted stock units and performance stock units. These costs are expected to be recognized as compensation expense over a weighted average period of approximately 1.86 years. Equity compensation expense for the years ended December 31, 2021 and 2020 is as follows: SCHEDULE OF EQUITY COMPENSATION EXPENSE Years Ended December 31, 2021 2020 Stock options $ 4,143 $ 3,240 Restricted stock units 1,956 140 Performance stock units 301 71 Equity Compensation, Total $ 6,400 $ 3,451 Equity compensation is included in operating expenses as follows: SCHEDULE OF EQUITY COMPENSATION Years Ended December 31, 2021 2020 Selling, general and administrative $ 5,782 $ 3,408 Research and development 618 43 $ 6,400 $ 3,451 The Company has a net operating loss carry-forward as of December 31, 2021, and no excess tax benefits for the tax deductions related to equity compensation awards were recognized in the statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in 2021 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. As of December 31, 2021, the Company had 1,456,747 shares available for future grants under the Company’s equity compensation plans. Warrants All previously granted warrants were issued with an exercise price that was equal to or above the fair market value of the Company’s common stock on the date of grant. As of December 31, 2021, the Company had no remaining warrants available to exercise. There were 9,000 warrants exercised at a price of $ 2.20 during the year ended December 31, 2021. 9. ISSUANCE OF COMMON STOCK On June 23, 2020, the Company completed a public offering of 1,769,230 shares of its common stock, offered to the public at $ 6.50 per share. Net proceeds to the Company from this offering were approximately $ 10,710 after deducting underwriting discounts and commissions paid by the Company. Direct offering costs totaling approximately $ 141 were recorded as a reduction to the net proceeds and included in additional paid-in-capital on the statement of stockholders’ equity. 10. COMMITMENTS AND CONTINGENCIES Leases The Company leases an office in Melville, New York. Rent expense, which includes utilities, was $ 79 and $ 126 for the years ended December 31, 2021 and 2020 and is included in Selling, general and administrative expenses on the Statement of Operations. F- 25 INTELLICHECK, INC. NOTES TO FINANCIAL STATEMENTS ( All dollar amounts are rounded to thousands, except share data ) The Company determines if an arrangement is a lease at lease inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. This operating lease is included in Operating Lease Right-of-Use (ROU) Asset and Operating Lease Liability, current portion on the Balance Sheets. As of December 31, 2020, the Company’s Operating Lease ROU was $ 31 and its Operating Lease liability was $ 33 . The Company did not have an Operating Lease ROU or Operating Lease Liability as of December 31, 2021, as its office lease is on a month-to-month term. The Company recognizes rent and utilities expense for this lease on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate, it uses its incremental borrowing rate of 5 % based on the commencement date in determining the present value of these lease payments. The Company considers instruments with similar characteristics when calculating this incremental borrowing rate. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Software License Agreement On February 26, 2020, the Company entered into a license agreement with a third party (the “Licensor”) to purchase certain intellectual property rights and licensed software subject to certain restrictions. The purchase price of this license totaled $ 400 . The Company has an option to pay the Licensor an annual fee of $ 35 for maintenance and updates to be distributed from the Licensor. Legal Proceedings The Company is not aware of any infringement by our 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. Cash Incentive Plans In May 2020, the Board entered into a 2020 separate executive incentive bonus plan (“the 2020 Bonus Plan”) with the Company’s executive management team. Each agreement, under the 2020 Bonus Plan, is based on certain goals achieved by the Company plus individual achievements by each executive. At December 31, 2021, this bonus liability was approximately $ 1,237 which is included in Accrued Expenses on the Balance Sheets. In June 2020, the Company’s executive management team created a 2020 Employee Incentive Plan for all the Company’s non-executives and non-sales personnel. The incentive payment is based on the Company attaining certain revenue goals for the calendar year 2021 and is based as a percentage of the employee’s salary. At December 31, 2021 this bonus liability was $ 328 and is included in Accrued Expenses on the Balance Sheets. 11. 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 35 % of compensation, subject to certain limitations. The Company has elected to contribute a matching contribution equal to 50 % of the first 6 % of an eligible employee’s deferral election. The Company may also make discretionary contributions, subject to certain conditions, as defined in the plan. The Company’s matching contributions were $ 98 and $ 70 for 2021 and 2020, respectively. The plan assets were approximately $ 3.7 million and $ 3.0 million at December 31, 2021 and 2020, respectively. F- 26