Intellicheck, Inc. 10-Q

Item 2. 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) Forward Looking Statements This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, loss from operations and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. References made in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “Intellicheck,” or the “Company,” refer to Intellicheck, Inc. The following discussion and analysis of our financial condition and results of operations constitutes management’s review of the factors that affected our financial and operating performance for the nine-month period ended September 30, 2022. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K/A for the year ended December 31, 2021. Overview We are a prominent technology company that is engaged in developing, integrating and marketing identity authentication and threat identification solutions to address challenges that include bank and retail fraud prevention, law enforcement threat identification, and mobile and handheld access control and security for the government, military and commercial markets. Critical Accounting Policies and the Use of Estimates The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, allowance for doubtful accounts, revenue recognition (including breakage revenue), and the fair value of stock options under our stock-based compensation plans. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates. We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, stock-based compensation, deferred taxes, goodwill and intangible asset valuation and impairment, and commitments and contingencies. These policies and our procedures related to these policies are summarized below and described in further detail in the Notes to Financial Statements. Goodwill The excess of the purchase consideration over the fair value of the assets of acquired businesses is considered goodwill. Under authoritative guidance, purchased goodwill is not amortized, but rather it is periodically reviewed for impairment. We had goodwill of $8,102 as of September 30, 2022. For the year ended December 31, 2021, the Company performed its annual impairment test of goodwill in the fourth quarter on December 31st. Under authoritative guidance, 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, 20 Index industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. We determined that no events occurred or circumstances changed during the nine months ended September 30, 2022 that would more likely than not reduce the fair value of the Company below its carrying amounts. We will, however, continue to monitor our stock price and operations for any potential indicators of impairment. We will conduct the 2022 annual test for goodwill impairment in the fourth quarter, or at such time where an indicator of impairment appears to exist. Intangible Assets Our intangible assets consist of patents and a software license. We determined that no events occurred, or circumstances changed during the nine months ended September 30, 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. Revenue Recognition and Deferred Revenue SaaS fees and service revenues are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with our software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business location to access our software. In certain instances, customization services are determined to be essential to the functionality of the delivered software. Under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. We measure revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. The Company adopted an additional revenue model where customers purchase a predetermined number of transactions for the term of the contract, where revenue for these transactions is recognized on a per transaction basis. The Company estimates the number of transactions that will be unused by the end of each contract period and recognized a portion of that revenue as breakage revenue each reporting period. Reference Note 2, “Significant Accounting Policies,” in the Notes to Financial Statements for additional details on the company’s recognized and deferred revenue. Stock-Based Compensation We account for the issuance of stock-based compensation awards to employees in accordance with ASC 718, “Compensation – Stock Compensation”, which requires that the cost resulting from all stock-based compensation payment transactions be recognized in the financial statements. This pronouncement establishes fair value as the measurement objective in accounting for stock-based compensation payment arrangements and requires all companies to apply a fair value-based measurement method in accounting for all stock-based compensation payment transactions with employees. Reference Note 8, “Stock-based Compensation,” in the Notes to Financial Statements for details on the company’s stock-based compensation plans. Reference Note 2, “Significant Accounting Policies,” for a discussion of the 2021 stock-based compensation accounting oversights and remediations. Deferred Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We have recorded a full valuation allowance for our net deferred tax assets as of September 30, 2022, due to the uncertainty of our ability to realize those assets. Reference Note 7, “Income Taxes,” in the Notes to Financial Statements for details on the company’s income taxes. 21 Index Commitments and Contingencies We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business. The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Results of Operations (All dollar amounts are rounded to thousands, except shares and per share data) COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2022 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2021 Revenues for the three months ended September 30, 2022 decreased $819, or 17%, to $4,012 compared to $4,831 for the same period of 2021. The decrease in revenues is primarily the result of lower equipment revenues in the current period. Excluding equipment sales, revenues for the three months ended September 30, 2022 increased $612, or 18%, compared to the same period of 2021. SaaS revenue, which consists of software licensed on a subscription basis, increased $725 or 22% to $3,970 for the three months ended September 30, 2022 compared to $3,245 for the same period of 2021. Gross profit increased $333, or 10%, to $3,654 for three months ended September 30, 2022 from $3,321 for the same period of 2021. Our gross profit, as a percentage of revenues, was 91% and 69% for the three months ended September 30, 2022 and 2021, respectively. The increase in gross profit percentage is primarily due to lower equipment revenues in the current period. Excluding equipment sales, our gross profit as a percentage of revenues were 92% and 93% for the quarters ended September 30, 2022 and 2021, respectively. Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $32, or 1%, to $4,378 for the three months ended September 30, 2022 compared to $4,346 for the same period of 2021. The increase in operating expenses was driven by higher personnel expenses, professional fees and marketing expenses. As a result of the factors noted above, the Company had a net loss of $724 for the three months ended September 30, 2022 as compared to a net loss of $1,026 for the three months ended September 30, 2021. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2022 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2021 Revenues for the nine months ended September 30, 2022 decreased $1,076, or 9% to $11,415 compared to $12,491 for the same period of 2021. The decrease in revenues in the nine months ended September 30, 2022 is primarily the result of lower equipment revenues in the nine months ended September 30, 2022 compared to the same period of 2021. Excluding equipment sales, revenues for the nine months ended September 30, 2022 increased $1,701 or 14%, compared to the same period of 2021. SaaS revenue increased $1,994 or 22% to $11,249 for the nine months ended September 30, 2022 compared to $9,255 for the same period of 2021. Gross profit increased by $1,086, or 12%, to $10,377 for nine months ended September 30, 2022 from $9,291 for same period of 2021.Our gross profit, as a percentage of revenues, was 91% and 74% for the nine months ended September 30, 2022 and 2021, respectively. The increase in gross profit as a percentage of revenues was due to the lower sales of equipment, which have lower gross profit margins, in the first nine months of 2021. Excluding equipment sales, our gross profit as a percentage was 92% and 93% for the nine months ended September 30, 2022 and 2021, respectively. Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $2,126 or 13% to $13,667 for the nine months ended September 30, 2022 compared to $15,793 for the nine months ended September 30, 2021. This decrease is primarily due to lower stock-based compensation expenses in the current period, driven by the liability award reclassification adjustments recorded during the first nine months of 2021. 22 Index During the nine months ended September 30, 2021, the Company recorded a $10 gain on the forgiveness of an unsecured promissory note. As a result of the factors noted above, the Company incurred a net loss of $3,290 for the nine months ended September 30, 2022 compared to a net loss of $6,486 for the nine months ended September 30, 2021. Liquidity and Capital Resources As of September 30, 2022, we had cash and cash equivalents of $11,775, working capital (defined as current assets minus current liabilities) of $9,153, total assets of $24,058 and stockholders’ equity of $18,332. During the nine months ended September 30, 2022, we used net cash of $1,711 in operating activities as compared to net cash provided of $407 in the nine months ended September 30, 2021. Cash used in investing activities was $165 for the nine months ended September 30, 2022 compared to cash used in investing activities of $339 for the nine months ended September 30, 2021. Cash generated by financing activities was zero for the nine months ended September 30, 2022 compared to cash generated by financing activities of $76 for the nine months ended September 30, 2021. We currently anticipate that our available cash, expected cash from operations and availability under the revolving line of credit, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months from the date of filing. Reference Note 5, “Debt,” in the Notes to Financial Statements for details on the Company’s revolving line of credit. We keep the option open to raise additional funds to respond to business contingencies which may include the need to fund more rapid expansion, fund additional marketing expenditures, develop new markets for our technology, enhance our operating infrastructure, respond to competitive pressures, or acquire complementary businesses or necessary technologies. There can be no assurance that we will be able to secure the additional funds when needed or obtain such on terms satisfactory to us, if at all. The specific terms of any future offering, including the prices and use of proceeds, will be determined at the time of any such offering and will be described in detail in a prospectus supplement which will be filed with the SEC at the time of the offering. We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material effect on our business. Net Operating Loss Carry Forwards Our available net operating loss ("NOL") as of December 31, 2021 was approximately $23.4 million, of which $10.9 million expires between 2035 and 2037. In accordance with the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), U.S. NOLs arising in a tax year ending after 2017 will not expire.Our available net operating loss (“NOL”) at December 31, 2021 was approximately $18.0 million. The federal and state NOLs are available to offset future taxable income and begin to expire in 2021. Adjusted EBITDA and Use of a Non-GAAP Measure We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adjusting net loss for certain items such gains on debt forgiveness and other income and certain addbacks such as income taxes, depreciation, amortization and stock-based compensation expenses. Adjusted EBITDA is 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. We consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful measure of our historical operating trends. However, there are significant limitations to the use of 23 Index Adjusted EBITDA since it excludes gains on debt forgiveness, other income, impairments of long-lived assets and goodwill, and stock-based compensation, all of which impact our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit multiple periods. We believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net loss presented in accordance with GAAP. Adjusted EBITDA as defined by us may not be comparable with similarly named measures provided by other entities. A reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA follows: (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net loss $ (724) $ (1,026) $ (3,290) $ (6,486) Reconciling items: Gain on forgiveness of unsecured promissory note — — — (10) Interest and other income — — — (5) Depreciation and amortization 70 42 209 126 Stock-based compensation including liability classified awards 729 712 1,768 6,006 Adjusted EBITDA $ 75 $ (272) $ (1,313) $ (369) Off-Balance Sheet Arrangements We have never entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. Item 3. Quantitative and Qualitative Disclosures About Market Risk Financial instruments, which subject us to concentrations of credit risk, consist primarily of cash and cash equivalents. We maintain cash and cash equivalents in two financial institutions and perform periodic evaluations of the relative credit standing of these institutions.