What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-17 compared with 2021-11-12 · 117 added, 198 removed, 77 unchanged (80% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (All dollar amounts are rounded to thousands,

except shares and per share data)

made in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “Intellicheck,” or the

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following discussion and analysis of our financial condition and results of operations constitutes management’s review of the factors

that affected our financial and operating performance for the nine-month period ended September 30, 2021.

that affected our financial and operating performance for the three-month period ended March 31, 2022.

This discussion should be read

in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K

in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K/A

for the year ended December 31, 2021.

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.

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 21 customer implementations for the nine months ended September

are a prominent technology company that is engaged in developing, integrating and marketing identity authentication and threat identification

solutions to address challenges that include bank and retail fraud prevention, law enforcement threat identification, and mobile and

handheld access control and security for the government, military and commercial markets.

Accounting Policies and the Use of Estimates

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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 stock-based compensation plans.

Due to the inherent uncertainties involved in making estimates, actual

results reported in future periods may be different from those estimates.

of goodwill and intangible assets, deferred tax valuation allowances, allowance for doubtful accounts, revenue recognition (including

breakage revenue), and the fair value of stock options under our equity compensation plans.

Due to the inherent uncertainties

involved in making estimates, actual results reported in future periods may be different from those estimates.

believe that there are several accounting policies that are critical to understanding our historical and future performance, as these

policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates.

These significant accounting policies relate to revenue recognition, stock-based compensation, deferred taxes goodwill and intangible

asset valuation and impairment, and commitments and contingencies.

These policies and our procedures related to these policies are described

in detail below.

These significant accounting policies relate to revenue recognition, equity compensation, deferred taxes, goodwill and intangible asset

valuation and impairment, and commitments and contingencies.

These policies and our procedures related to these policies are summarized

below and described in further detail in the Notes to Financial Statements.

excess of the purchase consideration over the fair value of the assets of acquired businesses is considered goodwill.

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

We had goodwill of $8,101,661 as

of September 30, 2021.

We had goodwill of $8,102 as of

March 31, 2022.

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.

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.

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.

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.

determined that no events occurred or circumstances changed during the nine months ended September 30, 2021 that would more likely than

These entities were merged

into one company under Intellicheck on December 31, 2018.

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

Under authoritative

guidance, the Company can use industry and Company specific qualitative factors to determine whether it is more likely than not that

impairment exists before performing step one of the quantitative goodwill impairment test.

An entity is not required to calculate the

fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that

its fair value is less than its carrying amount.

Events or changes in circumstances which could trigger an impairment review include

macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and

sustained decrease in share price.

determined that no events occurred or circumstances changed during the three months ended March 31, 2022 that would more likely than

not reduce the fair value of the Company below its carrying amounts.

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We determined that no events occurred, or circumstances changed during the

nine months ended September 30, 2021 that would more likely than not reduce our intangible assets below our carrying amounts.

however, continue to monitor any potential indicators of impairment.

three months ended March 31, 2022 that would more likely than not reduce our intangible assets below our carrying amounts.

We will, however,

continue to monitor any potential indicators of impairment.

See Note 4, “Intangible Assets,” in the Notes to Financial Statements

for details on the company’s intangible assets.

Recognition and Deferred Revenue

license fees and services revenue are generated from a combination of fixed-price and per-transaction contracts.

Under the per-transaction

revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with

license fees and service revenues are generated from a combination of fixed-price and per-scan contracts.

Under the per-scan revenue

model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with our software.

Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access

our software.

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

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.

is based on schedules established in customer contracts.

Payment terms are generally established from 30 to 60 days from the invoice

Product returns are recorded as a reduction to revenue.

account for the issuance of equity awards to employees in accordance with ASC Topic 718, which requires that the cost resulting from

all share-based payment transactions be recognized in the financial statements.

This pronouncement establishes fair value as the measurement

objective in accounting for share based payment arrangements and requires all companies to apply a fair value based measurement method

in accounting for all share based payment transactions with employees.

In certain instances, customization services are determined to be essential to the functionality of the delivered software.

Under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” revenue is recognized

when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in

exchange for those goods or services.

We measure revenue based on the consideration specified in a customer arrangement, and revenue

is recognized when the performance obligations in an arrangement are satisfied.

Reference Note 2, “Significant Accounting Policies,”

in the Notes to Financial Statements for additional details on the company’s recognized and deferred revenue.

account for the issuance of equity awards to employees in accordance with ASC 718, “Compensation – Stock Compensation”,

which requires that the cost resulting from all equity payment transactions be recognized in the financial statements.

This pronouncement

establishes fair value as the measurement objective in accounting for equity payment arrangements and requires all companies to

apply a fair value-based measurement method in accounting for all equity payment transactions with employees.

Reference Note 8,

“Equity Compensation,” in the Notes to Financial Statements for details on the company’s equity compensation plans.

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

tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial

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to be recovered or settled.

We have recorded a full valuation allowance for our net deferred tax assets as of September 30, 2021, due

to the uncertainty of our ability to realize those assets.

We have recorded a full valuation allowance for our net deferred tax assets as of March 31, 2022, due to

the uncertainty of our ability to realize those assets.

Reference Note 7, “Income Taxes,” in the Notes to Financial Statements

for details on the company’s income taxes.

and Contingencies

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a materially different result.

of Operations (All figures have been rounded to the nearest $1,000)

of the three months ended September 30, 2021 to the three months ended September 30, 2020

for the three months ended September 30, 2021 increased $2,132,000, or 79%, to $4,831,000 compared to $2,699,000 for the previous year.

The increase in revenues in the three months ended September 30, 2021 is primarily the result of higher commercial SaaS revenues as well

as higher equipment sales.

Software as a Service (“SaaS”) revenue, which consists of software licensed on a subscription

basis, increased $794,000 or 32% to $3,245,000 for the three months ended September 30, 2021 compared to $2,451,000 for the three months

ended September 30, 2020.

profit increased by $916,000, or 38.1%, to $3,321,000 for three months ended September 30, 2021 from $2,405,000 for the three months

ended September 30, 2020.

Our gross profit, as a percentage of revenues, was 68.7% and 89.1% for the three months ended September 30,

2021 and 2020, respectively.

The decrease in percentage is primarily due to an increase in hardware sales which contain lower margins.

of Operations

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

OF THE THREE MONTHS ENDED MARCH 31, 2022

THE THREE MONTHS ENDED MARCH 31, 2021

for the three months ended March 31, 2022 increased 19% to $3,395 compared to $2,863 for the three months ended March 31, 2021.

in revenues for the three months ended March 31, 2022 is primarily the result of higher commercial Software as a Service (“SaaS”)

SaaS revenue, which consists of software licensed on a subscription basis, increased $577 or 21% to $3,353 for the three months

ended March 31, 2022 compared to $2,776 for the three months ended March 31, 2021.

profit increased by $437 to $3,079 for three months ended March 31, 2022 from $2,642 for the three months ended March 31, 2021.

profit, as a percentage of revenues, was 90.7% and 92.3% for the three months ended March 31, 2022 and 2021, respectively.

in gross profit percentage is primarily due to increased costs for cloud and other web-based support services in the current period.

Excluding hardware sales and related costs, our gross profit as a percentage was 91.7% and 93.0%

for the three months ended September 30, 2021 and 2020, respectively.

The increase in percentage is primarily due to continued growth

of our SaaS revenue.

expenses, which consist of selling, general and administrative and research and development expenses, increased $1,892,000, or

79.5%, to $4,272,000 for the three months ended September 30, 2021 compared to $2,380,000 for the three months ended September 30, 2020.

This increase is primarily due to higher stock-based compensation costs, increased headcount, and related accrued incentives along with

expanded marketing costs.

and other income (expense) was insignificant in the three month periods ended September 30, 2021 and 2020.

have incurred net losses to date;

therefore, we have paid nominal income taxes.

a result of the factors noted above, the Company generated a net loss of $952,000 for the three months ended September 30, 2021 compared

to net income of $32,000 for the three months ended September 30, 2020.

of the nine months ended September 30, 2021 to the nine months ended September 30, 2020

for the nine months ended September 30, 2021 increased $4,835,000, or 63%, to $12,491,000 compared to $7,656,000 for the previous year.

The increase in revenues during the nine months ended September 30, 2021 is primarily the result of higher commercial SaaS revenues and

higher hardware sales.

SaaS revenue increased $2,894,000 or 46% to $9,255,000 for the nine months ended September 30, 2021 compared to

$6,361,000 for the nine months ended September 30, 2020.

profit increased by $2,831,000, or 44%, to $9,291,000 for nine months ended September 30, 2021 from $6,460,000 for the nine months ended

September 30, 2020.

Our gross profit, as a percentage of revenues, was 74.4% and 84.4% for the nine months ended September 30, 2021 and

2020, respectively.

The decrease in percentage is primarily due to an increase in hardware sales which contain lower margins.

hardware sales and related costs, our gross profit as a percentage was 93.1% and 91.6% for the nine months ended September 30, 2021 and

2020, respectively.

The increase in percentage is primarily due to continued growth of our SaaS revenue.

expenses, which consist of selling, general and administrative and research and development expenses, increased $4,878,000, or 68%, to

$12,057,000 for the nine months ended September 30, 2021 compared to $7,179,000 for the nine months ended September 30, 2020.

This increase

is primarily due to higher stock-based compensation costs, increased headcount, and related accrued incentives along with expanded marketing

and other income was insignificant in the nine month periods ended September 30, 2021 and 2020.

have incurred net losses to date;

therefore, we have paid nominal income taxes.

a result of the factors noted above, the Company generated a net loss of $2,750,000 for the nine months ended September 30, 2021 compared

to a net loss of $701,000 for the nine months ended September 30, 2020.

and Capital Resources (All figures have been rounded to the nearest $1,000)

of September 30, 2021, we had cash of $13,266,000, working capital (defined as current assets minus current liabilities) of $12,863,000,

total assets of $25,857,000 and stockholders’ equity of $21,798,000.

the nine months ended September 30, 2021, net cash provided by operating activities was $407,000 compared to net cash used in

operating activities of $311,000 in the nine months ended September 30, 2020.

Cash used in investing activities was $339,000 for the

nine months ended September 30, 2021 compared to cash used in investing activities was $408,000 for the nine months ended September 30,

Cash provided by financing activities was $76,000 for the nine months ended September 30, 2021 compared to cash provided by financing

activities of $10,180,000 for the nine months ended September 30, 2020.

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.

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.

net proceeds from this offering were approximately $10,710,000 after deducting underwriting discounts and commissions paid by us.

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.

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.

facility bears interest at a rate consistent of Citibank’s Base Rate (4.75% at September 30, 2021) minus 2%.

Interest is payable

monthly and as of September 30, 2021, there were no amounts outstanding and unused availability under this facility was $2,000,000.

for the three months ended March 31, 2022 and 2021, respectively.

Operating expenses,

which consist of selling, general and administrative and research and development expenses, decreased $2,734 or 38% to

$4,547 for the three months ended March 31, 2022 compared to $7,281 for the three months ended March 31, 2021.

This decrease

is primarily due to higher equity compensation costs in the prior period.

income was insignificant in the three-month periods ended March 31, 2022 and 2021.

a result of the factors noted above, the Company had a net loss of $1,468 for the three months ended March 31, 2022 as compared

to a net loss of $4,624 for the three months ended March 31, 2021.

and Capital Resources

of March 31, 2022, we had cash of $11,123, working capital (defined as current assets minus current liabilities) of $9,657, total

assets of $23,450 and stockholders’ equity of $18,938.

the three months ended March 31, 2022, we used net cash of $2,397 in operating activities as compared to net cash used of $471 in the

three months ended March 31, 2021.

Cash used in investing activities was $131 for the three months ended March 31, 2022 compared to cash

used in investing activities of $48 for the three months ended March 31, 2021.

Cash generated by financing activities was zero for the

three months ended March 31, 2022 compared to cash generated by financing activities of $10 for the three months ended March 31, 2021.

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.

While we have had an increase in SaaS revenues from our customers for the three and nine months ended September

30, 2021 compared to the respective three and nine months ended September 30, 2020, we are unable to predict the impact that ongoing

effects of the 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, such as the Delta variant, coupled with the speed, adoption and effectiveness of the ongoing vaccination

roll out including recently approved booster regimens.

Such factors continue to be beyond our control.

currently anticipate that our available cash, expected cash from operations and availability under the revolving credit agreement, will

We did incur disruptions during the year ended December 31, 2021 from COVID-19 and we are unable to predict the

impact that this pandemic will have on us going forward, including our financial position, results of operations and cash flows, the

impact on our customers and the related demand for our services due to numerous uncertainties.

currently anticipate that our available cash, expected cash from operations and availability under the revolving line of credit, will

be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months from the date

Reference Note 5, “Debt,” in the Notes to Financial Statements for details on the Company’s revolving line

keep the option open to raise additional funds to respond to business contingencies which may include the need to fund more rapid expansion,

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additional funds when needed or obtain such on terms satisfactory to us, if at all.

have filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which

originally 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 most recently on June 1, 2020 and it was

declared effective June 4, 2020.

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.

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.

are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material

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Operating Loss Carry Forwards

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.

available net operating loss (“NOL”) at March 31, 2022 was approximately $18.0 million.

The federal and state NOLs

are available to offset future taxable income and begin to expire in 2021.

use Adjusted EBITDA as a non-GAAP financial performance measurement.

Adjusted EBITDA is calculated by adjusting net loss for certain

reductions such gains on debt forgiveness and interest and other income (expense) and certain addbacks such as income taxes, impairments

of long-lived assets and goodwill, depreciation, amortization and stock-based compensation expense.

Adjusted EBITDA is provided to investors

to supplement the results of operations reported in accordance with GAAP.

Management believes that Adjusted EBITDA provides an additional

tool for investors to use in comparing our financial results with other companies that also use Adjusted EBITDA in their communications

to investors.

By excluding non-cash charges such as impairments of long-lived assets and goodwill, amortization, depreciation and stock-based

compensation, as well as non-operating charges for interest and income taxes, investors can evaluate our operations and can compare the

results on a more consistent basis to the results of other companies.

In addition, Adjusted EBITDA is one of the primary measures management

uses to monitor and evaluate financial and operating results.

items such gains on debt forgiveness and other income and certain addbacks such as income taxes, depreciation, amortization and equity

compensation expenses.

Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance

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

In addition, Adjusted EBITDA is one of the primary measures management uses to monitor and evaluate financial and operating

consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful measure

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However, there are significant limitations to the use of Adjusted EBITDA since it excludes gains

on debt forgiveness, interest and other income (expense), impairments of long-lived assets and goodwill, stock-based compensation expense,

all of which impact our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit

multiple periods.

We believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly

identifying the difference between the two measures.

Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute

for net loss presented in accordance with GAAP.

Adjusted EBITDA as defined by us may not be comparable with similarly named measures

provided by other entities.

on debt forgiveness, other income, impairments of long-lived assets and goodwill, and equity compensation, all of which impact

our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit multiple periods.

believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly identifying the difference

between the two measures.

Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net loss presented

in accordance with GAAP.

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

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

Net (loss) income

$ (2,750,084 )

Three Months Ended

Reconciling items:

Gain on forgiveness of unsecured promissory

Interest and other income (expense), net

Depreciation and amortization

Stock-based compensation

Gain on forgiveness of unsecured promissory note

Depreciation and amortization expenses

Equity compensation including liability classified awards

Adjusted EBITDA

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We maintain cash in two financial institutions

We perform periodic evaluations of the relative credit standing of these institutions.

and perform periodic evaluations of the relative credit standing of these institutions.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis